Three years after the Setting Every Community Up for Retirement Enhancement (SECURE) Act eliminated the ‘stretch’ inherited IRA for most beneficiaries, SECURE 2.0 brings several key changes to retirement plans. This legislation was included as part of the Consolidated Appropriations Act, 2023 that was enacted just prior to year-end 2022. SECURE 2.0 contains numerous provisions, a few of which are described here:  

Individual Planning Considerations

• Increased Age for Required Minimum Distributions (RMDs): If one did not reach age 72 by December 31, 2022, their RMD age is pushed back. Those born from 1951-1959 have an RMD age of 73. For those born in 1960 or later, the RMD is pushed back to 75.
• Roth Provisions:
  • Beginning this year:
    • Roth contributions are permitted to SEP and SIMPLE IRAs.
    • Employers are permitted to deposit matching or nonelective contributions as Roth contributions. Such amounts will be included in the employee’s income currently and are therefore not subject to a vesting schedule.
    • Realistically, plan administrators will need some time to allow for such elections.
  • Beginning in 2024:
    • Workers with wages exceeding $145,000 in the prior year (adjusted for inflation) will be required to make their catch-up contributions to employer-sponsored plans on a Roth rather than pre-tax basis. This means that there would be no current tax deduction, but the contributions plus future growth would be tax-free upon withdrawal. If the plan does not include a Roth feature, no one will be allowed to make catch-up contributions to the plan regardless of their earnings. This only applies to wages – not self-employment income.
    • RMDs from plan Roth accounts (ex., 401(k)s & 403(b)s) will be eliminated, aligning them with Roth IRAs which do not currently require RMDs during the account owner’s lifetime. Individuals who have been taking such RMDs should simply be able to stop doing so in 2024.
  • Notably, SECURE 2.0 does not include some of the Roth-related provisions previously proposed in 2021 under different iterations of Build Back Better. Backdoor Roths & Mega Roths remain permissible strategies.
• Student Loan Payments Considered for Employer Matching Contributions: Starting in 2024, employers will be permitted to consider qualified student loan payments when making matching contributions to retirement plans. Such payments may be for student loans to fund education costs for the employee, their spouse, or their dependents as of the time the loan was incurred.
• 529 to Roth Rollover: Also effective in 2024, unused 529 balances will be permitted to be transferred to a Roth IRA for the same beneficiary. The beneficiary must have earned income, and the annual transfer is limited to the IRA contribution limit for that tax year when combined with any contributions the beneficiary makes themself. Lifetime transfers are limited to a total of $35,000 per beneficiary. The 529 must have been maintained for at least 15 years, and only contributions made more than 5 years ago (and their attributable earnings) are eligible to transfer.
• Increased Catch-Up Contributions:
  • Additionally in 2024, the IRA catch-up contribution limit, which has been pegged at $1,000 since 2006, will be indexed for inflation.
  • Beginning in 2025, individuals ages 60-63 will be permitted to make higher catch-up contributions to their employer-sponsored plans. Such contributions will be limited to the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the regular catch-up contribution amount.

Business Planning Considerations

• Small Business Retirement Plan Credits:
  • Beginning this year, the retirement plan start-up credit for employers with 50 or fewer employees is increased from 50% to 100% of plan start-up costs (up to $5,000).
  • New this year, a plan start-up credit has been added of up to $1,000 per employee for employer contributions to defined contribution plans. The full credit is available to employers with 50 employees or less and phases out from 50-100 employees. Contributions for employees with wages exceeding $100,000 (indexed for inflation) make not be taken into account. The credit is 100% of contributions in year 1, 75% in year 2, 50% in year 3, & 25% in year 4.
  • Also introduced for this year, a credit of up to $500 per eligible employee is available for employers with 100 employees or less who offer non-highly compensated military spouses special benefits with respect to their retirement plans such as the ability to enroll sooner or immediate vesting of employer contributions.
• Retroactive First Year Elective Deferrals for Solo 401(k)s: Beginning with the 2023 tax year (essentially meaning for contributions in 2024), sole proprietors are permitted to establish and fund solo-401(k) plans up to the due date for filing their individual tax return without extensions.
• Starter 401(k) Plans: As of 2024, the new Starter 401(k) plan will be introduced. Such plans will require auto-enrollment at a percentage of salary from 3-15% (unless the employee opts out), allow for only employee deferrals (with no employer match), and limit deferrals to no more than the IRA contribution limit at the time. These plans can only be established by employers who have not previously established a retirement plan and will not be subject to top-heavy rules.
• SIMPLE Plan Contribution Limit Increases: Effective in 2024, the employee elective deferral limit for a SIMPLE plan maintained by employers with 25 employees or less is increased by 10%. For employers with 26-100 employees, this increase will apply if the employer makes nonelective contributions of 3% or a 4% matching contribution. That year also marks when employers can choose to make additional uniform nonelective or matching contributions up to the lesser of 10% of compensation or $5,000.
• Automatic Enrollment & Increases: Beginning in 2025, new 401(k) & 403(b) plans will be required to include auto enrollment & auto increases starting at 3-10% and increasing 1% each year up to 10-15%. Participants can opt out. Various employers are exempt from this provision including those with 10 or fewer employees, employers less than 3 years old, and church plans.
• Gain Deferral for S Corp Sales to ESOPs: Starting in 2028, S Corp owners will be eligible for gain deferral upon a sale to an Employee Stock Ownership Plan (ESOP). This benefit is currently only available for C Corps. It will be much more limited for S Corps, allowing deferring of no more than 10% of the realized gain.

SECURE 2.0 contains a litany of other provisions with implications for both individuals and businesses offering retirement plans. The Sequoia team will continue monitoring additional clarification and guidance on the provisions of SECURE 2.0, and our advisors are available to talk with you about strategies that may fit for your personal circumstances under this new law.

This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Sequoia Financial Advisors, LLC makes no representations or warranties with respect to the accuracy, reliability, or utility of information obtained from third-parties. Certain assumptions may have been made by these sources in compiling such information, and changes to assumptions may have material impact on the information presented in these materials. Sequoia Financial Advisors, LLC does not provide tax or legal advice.