The SECURE 2.0 Act of 2022 (“SECURE 2.0” ) was signed into law in December 2022 as part of the Consolidated Appropriations Act of 2023. The legislation includes more than 90 provisions, with an overall goal of helping individuals become more secure when it comes to their retirement.
SECURE 2.0 focuses on expanding retirement plan coverage, encouraging plan participation, promoting increased savings rates, providing more flexibility for retirement plan distributions,- and clarifying plan rules and administration.
Some provisions included in SECURE Act 2.0 may be of particular interest to institutional clients.
Lesser Penalties and Extension Options for Required Minimum Distributions (RMD)
The Internal Revenue Code generally requires plan participants to begin taking qualified plan distributions by a certain age. As workers retire later and live longer, they may wish additional flexibility as to when to access their retirement assets. SECURE 2.0 increases the required start date age from age 72 to 73 in 2023 and to 75 in 2033, allowing individuals to stay invested longer. It also significantly reduces the penalty for failure to begin distributions on time.
Catch-up Contributions
Currently, individuals who reach age 50 can set aside additional dollars over the standard maximum contributions to workplace retirement plans through catch-up contributions or pre-tax deferrals. This catch-up gives participants a chance to bolster their retirement savings as they approach retirement age.
SECURE 2.0 increases the current catch-up limit. Beginning in 2025, participants aged 60-63 will be able to contribute the greater of $10,000 or 150 percent of the age 50 catch-up limit. This maximum would be indexed for inflation in future years. Separately, beginning in 2024, catch-up contributions made by highly-paid participants may only be made as designated Roth contributions.
Review of Pension Risk Transfer Fiduciary Standard
Sponsors of defined benefit plans may consider the purchase of a pension risk transfer group annuity to settle plan liabilities and transfer the plan’s payment obligations to an insurer. SECURE 2.0 directs the U.S. Department of Labor (DOL) to review the existing 30-year old guidance set forth in DOL Interpretive Bulletin 95-1 for selecting an annuity provider, determine whether any revisions are warranted, and report its findings to Congress by year-end 2023.
NQDC is a more attractive option
Beginning in 2024, highly compensated employees' catch up contributions can only be via Roth IRAs (after tax). Along with other changes, 403(b) plans are now closer to 401(k) plans. An additional option to these qualified plans is a non-qualified deferred compensation (NQDC) plan, which is becoming increasingly attractive. One of the benefits of NQDC is that it can be funded in a tax-advantaged way using corporate-owned life insurance or mutual funds.
We will continue to closely monitor Secure Act 2.0 developments and share more information as interpretations and implementation develop.
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