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SECURE Act 2.0: Day-to-day Implications Within Your Professional and Personal Finances

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Back in 2020, the original SECURE (Setting Every Community Up for Retirement Enhancement) Act passed into law. In 2023 the Second SECURE Act (SECURE Act 2.0) became effective. It has become clear to many that the American workforce has not and is not saving a sufficient amount for retirement. As pension plans become virtually non-existent and Social Security estimates depletion by 2041, Government stepped in to enhance and expand saving capabilities for employer-sponsored plans.

At Kaplan CFO Solutions, we believe some aspects of SECURE Act 2.0 are exceedingly more important for CEOs, CFOs, and HR Directors to fully comprehend. In truth, these changes could affect many aspects of how your retirement plan is administered within the day-to-day operations of your business, as well as within your personal retirement strategy.

2023 Enacted SECURE Act 2.0: Changes and How to Execute

We believe new withdrawal opportunities, available in 2023, developed a more direct benefit to employees. Many employees avoid shoveling ‘too much’ into their retirement plan because those funds are seemingly unavailable until retirement age. 2023 updates provide more flexibility, providing employees with better financial stability and opportunity when the unexpected happens. However, as an employer, it’s important to fully understand these changes as well as how to implement them in good faith, and what records will be/are necessary to maintain when it comes to the IRS.

Required Minimum Distribution Age Increased Again from age 72 (enacted in 2020) to age 73. It’s important to note that this change took effect in January 2023, and is scheduled to change again in 2033, to age 75.

Enhanced Penalty-Free Early Withdrawals Available to Those Under Age 59 ½ (we will reiterate, penalty-free—less the typical 10% early withdrawal penalty—does NOT mean tax-free):

  • Withdrawals for Terminally Ill Employees – allows individuals with an illness or physical condition expected to result in death within 84-months to withdraw any amount up to the entire balance of the account. While this is a necessary benefit for employees to have, it’s difficult to say how this will be enacted by the employer and HR team when it comes to HIPAA and privacy guidelines.
  • Withdrawals available to Survivors of Domestic Abuse – this provides eligibility of up to $10,000 (but cannot exceed 50% of the account) and is unavailable until January 1, 2024. It’s important to note that this is a self-certifying process, with no details as to how the IRS will verify proof in the years to come. Therefore, as an employer, it may be important to clearly outline “Domestic Abuse” within your employee handbook—typically defined as physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim. What Women Need to Know About the Secure Act 2.0
  • Individuals with Long-Term Care Policies may withdraw up to $2,400 to cover annual premiums. In our years of experience, we’ve seen many individuals opt out of Long-Term Care policies due to premium expenses. Options to use tax-deferred income for premium coverage may open the door for employees, as well as employers, to take better advantage of available benefits.
  • Individuals impacted by Federally Declared Disasters may take a distribution up to $22,000 per disaster. This benefit opens the door for those impacted by disaster(s) as early as January 26, 2021, allowances for a penalty-free distribution. For those of our clients in Western North Carolina, this provides alternative restoration possibilities to both businesses and individuals who were impacted by Hurricane Fred in 2021 – Major Disaster Declaration.

529 Rollover Enhancements in 2023—For those struggling with the idea of investing in a 529 plan for your child’s (or grandchild’s) education, while also funding your retirement, the SECURE Act changes may be welcomed due to added versatility. However, like anything with legislative input, IRS limitations may be frustrating and need to be explained thoroughly. Previously, unused 529 funds were forced to be dispensed as a non-qualified distribution, subject to a 10% IRS penalty. Now, unused 529 funds can be rolled over into an IRA, up to $35,000. While that is great news, it’s important to note this limitation is a lifetime cap; not a per-account restraint.

  • Moreover, the 529 must have been in place for more than 15 years before qualifying for a rollover; and when the account is rolled over, it must be placed into the 529 BENEFICIARY’S IRA account. That’s right, once the 529 is created, the gift needs to remain in the Beneficiary’s name. It’s safe to say, we can’t help but wish these unused educational funds could be rolled back into the account creator’s own Roth account; but that is unfortunately not the case.

Contribution Changes in 2024 may get a bit more complicated, especially in daily administration. Within 401(k) plans SECURE Act 2.0 has created a new category of catch-up contributions, effective January 1, 2024. For those between the ages of 60 and 63, individuals can contribute an additional amount within their employer-sponsored plan. The IRS outlines this new, unique amount as “$10,000 or 150% of the standard catch-up contribution limit.” To be honest, we were having a hard time understanding the verbiage of this change, as 150% of the standard catch-up contribution (set at $7,500) equates to $11,250—making that $10,000 amount obsolete. So, we are advising our clients to budget their matching benefits for up to the $11,250 amount, and to check with their retirement plan advisors as soon as possible.

The Biggest Corporate Match Changes in Secure Act 2.0

Automatic Enrollment will become the new norm in 2025.

For companies that have already enacted an employer-sponsored 401(k) or 403(b), auto-enrollment will become a requirement (rather than an option), at a minimum contribution rate of 3%. This amount will automatically increase (commonly referred to as an automatic escalation) each year of employment by 1%, up to 15%. While employees will still have the option to opt out of the retirement plan or alter the contribution rate, The Retirement Plan Company reports the average participation rate is 91% with automatic enrollment, verses an average of 28% as seen with voluntary enrollment. If your company has utilized a voluntary enrollment system, it may be safe to say plan expenses are likely to increase with this change. Secondly, it will be vital that the employer administers the program correctly to prevent plan operational failure, which  may incur penalties and corrective action in the event of an IRS or DOL Plan audit.

As an employer, you may be eligible for an earned tax credit up to 100% of the administrative costs associated with establishing a retirement plan, as well as tax credit based on your employee matching and/or profit-sharing benefits. As always, there are rules in place to meet credit eligibility requirements regarding taxable benefits. Reach out to your Kaplan CFO and/or Tax Accountant to discuss your potential credit as soon as possible.

Employer Matching Available via Student Loan Payments as Contributions

The Education Data Initiative indicates the average individual’s student loan debt hovers around $40,114, bringing Nation’s Student Loan Totals to exceeding $1.75 Trillion (as of Q4 2022). The Massachusetts Institute of Technology Age Lab (through TIAA) found 84% of adults were limited in the amount they could save for retirement due to repayment of their student loans.

SECURE Act 2.0 looks to resolve this by implementing student-loan repayment employer match capabilities. What does this mean exactly? When an employee pays their student loan payment, they may become eligible for match benefits based on their employer’s retirement plan guidelines. I.e.: If an employer provides a match of 100% up to 3% of compensation, the employee does NOT have to contribute to the retirement plan to receive the matching 3%. The employee simply needs to prove he/she is paying 3% of compensation to student loan payments to receive the employer-match contributions to his/her retirement account.

While this is an incredible opportunity in theory, there is little information from the IRS regarding how this will actually be implemented. Will this be a voluntary match on the employer’s part? Will non-profits be eligible for this benefit (or excluded through 403(b) regulations)? What type of paper trail will be required by HR and payroll in case of an IRS Audit? We can’t help but hope for more guidance when looking to enact these benefits.

SECURE Act 2.0 Disappointments

Surprisingly, there were no changes from the initial SECURE Act in Stretch IRAs. In general, an inherited IRA must be paid out by December 31st of the tenth calendar year following the death of the IRA owner. Why is this disappointing? Originally (prior to 2020) inherited IRAs owners could take distributions over the course of his/her expected lifetime; meaning one could plan for a modest amount of income stretched over the rest of their lives.

There are some notable workarounds when tax planning around this legislative change: the withdrawal amount does not have be an equal amount each year. It can go out in varying percentages each year, based on income and/or need, or it could all be withdrawn in one year. This provides plenty of tax strategy flexibility and opportunity.

It’s important to note that people who inherit an IRA or 401(k) from their spouse can stretch out their required minimum distributions over the course of their lifetime. In addition, you may be able to stretch distributions if you fall into one of 3 other common types of eligible designated beneficiaries:

  • Someone less than 10 years younger than original owner
  • A minor child (not grandchild) of original owner
  • Someone who is chronically ill or disabled as defined in the Internal Revenue Code

Remember that it’s best to discuss these eligibility requirements with your Tax Accountant as well as your Financial Advisor.

What these Retirement Plan Changes Mean For You:

While we wish the SECURE Act 2.0 would magically correct the retirement crisis looming over our economy, we realize the pros and cons to reform like this. While some vital retirement elements may be corrected through this enactment, you can rest assured there will be headache when it comes to real-world implementation.

Do you need a partner in practical applications like these? Connect with Kaplan CFO Solutions to forge your corporate plan.

Do you need to connect with a Retirement Plan Advisor? Our Kaplan Network can help with that. In Retirement Planning, we have witnessed proven results through the following advisory teams:

Initial SECURE Act Changes, Implemented in 2020—A Review

The Minimum Distribution Age (RMD) increased from age 70 ½ to 72. For many of our senior business leaders, this was a welcome adjustment.

Removal of the age limit for IRA contributions. Traditional IRAs previously stopped allowing contributions at age 70 ½, which was frustrating for those continuing to work and contribute later in life. For 2020 and later, those 70 ½ and older can continue to contribute either to their Roth or Traditional IRA, based on their preference, and since the limits have now increased to $7,500, we expect more senior workers will take advantage of it.

Removal of inherited retirement account “stretch” distribution regulations. This is a difficult change to interpret, as there are several exceptions to the rule. In 2020, this regulation eliminated the ability to stretch one’s taxable distributions over his/her life expectancy, leaving three strategies to consider when withdrawing an Inherited IRA within the mandatory 10-year period:

What are the ‘Exceptions’ to the rule? Those who inherit an IRA or 401(k) from their spouse or their parent, can stretch out RMDs over the course of his/her lifetime. In addition, if the recipient is disabled or chronically ill (defined in detailed length under the IRS Tax Code), stretching distributions continues to be a viable option, better supporting the more vulnerable of our society.

Penalty-free withdrawals for new parents. At Kaplan CFO Solutions, we believe if more folks have access to their ‘nest egg’ when a major life event happens, they will be more likely to save in the Employer-Sponsored (or individual) plan. As budgets tighten amidst inflation and talk of recession, it’s important for your employees to understand all options available to them when the unexpected occurs. Furthermore, HR Team: it’s also important to clearly explain that ‘penalty-free’ does NOT equal ‘tax-free.’

Eligibility for 401(k) contribution for long-term, part-time employees. This is actually quite exciting for employees. However, organizationally, this may leave more paperwork than desired in Retirement Plan administration. This change makes the previous ERISA Section 202 (1,000 hours of service rule) completely obsolete. If there is a 401(k) employer-sponsored plan, any employee who works 500+ hours for 2 consecutive years must be allowed to enroll into the retirement plan. For those contemplating the math, this makes your part-time employees working more than 4 ½ (4.8 to be exact) hours per week eligible for the retirement plan and any subsequent match offered. When it comes to vesting and the eligibility date, this new rule is a bit out of the norm, so we found this article quite helpful, written by the National Law Review.

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