SECURE Act 2.0

January 27, 2023

On December 29, 2022 President Biden signed the Consolidated Appropriations Act of 2023 into law. The bill contains all appropriations for the federal 2023 fiscal year. The Act does not include any major tax provisions or tax extenders but does include the ‘Setting Every Community Up for Retirement’ 2.0 Act of 2022 (SECURE 2.0 Act), which includes various retirement-related provisions.

The original SECURE Act of 2019 increased the minimum age when retirement savers were required to start drawing from their accounts and came up with new ways for retirement plans to pool resources to reduce costs associated with setting up and maintaining a workplace plan.

The SECURE Act 2.0 of 2022 builds on this as follows:

  • Raises the required minimum distribution (RMD) age from the current age of 72 to:
    • Age 73 for those who turn age 72 after 2022, and
    • Age 75 for those who turn age 74 after 2032.

This provision may require follow-up since an individual born in 1959 would satisfy both age categories.

  • Reduces the excise tax on taking late required minimum distributions from 50% to 25% (effective for taxable years beginning after December 29, 2022). The tax is further reduced to 10% if the taxpayer corrects the shortfall and files a tax return to reflect the tax within the ‘correction window’ which is the earlier of the following dates:
    • The date the IRS issues a notice of deficiency with respect to the excise tax
    • The date the IRS assesses the excise tax, or
    • The end of the second taxable year after the shortfall occurred.

Additional guidance may be needed from the IRS related to whether the penalty waiver procedures will change.

Previously taxpayers who failed to take their RMD could correct the error by taking their missed RMD as soon as possible and filing Form 5329 to request a penalty waiver. Penalty waivers were frequently granted and when granted, the taxpayer was not required to pay the 50% excise tax.

If the taxpayer corrects the shortfall under the new provision, the taxpayer is required to calculate and pay the reduced 10% tax on an income tax return and then later attempt to seek a refund.

  • Effective for tax years beginning after December 31, 2023, removes the required minimum distribution from employer-sponsored Roth accounts such as a Roth 401(k). Does not apply to taxpayers who are required to take their first RMD in 2023 and who elect to take that distribution by April 1, 2024.
  • Effective for calendar years beginning after December 31, 2023, a surviving spouse can elect to be treated as the employee. This means the surviving spouse must begin taking RMDs from the employer plan on the date the deceased participant would have reached the RMD age. If the spouse beneficiary who makes this election dies before they are required to start taking RMDs, the RMD rules would apply as if the spouse beneficiary is the employee.
  • Effective for calendar years beginning after December 29, 2022, clarifies the definition of a multi-beneficiary trust to the following five types of eligible designated beneficiaries:
    • Surviving spouse
    • Minor child of the decedent (under age 21)
    • A person who is not more than 10 years younger than the decedent
    • A person who is disabled (including certain trusts for the benefit of a disabled beneficiary), or
    • A person who is chronically ill

I.e. the SECURE Act 2.0 provides that a trust established for a chronically ill or disabled eligible designated beneficiary shall not be considered a multi-beneficiary trust for purposes of post-death distributions solely because the trust includes a charity as a beneficiary.

  • Effective for calendar years ending after December 29, 2022, permits purchased commercial annuities to satisfy the RMD rules even if the annuity includes provisions that increase annual payments by less than 5%. Previously regulations required annuities to be non-increasing to satisfy RMD rules.
  • Expands the penalty-free treatment of retirement distributions to include withdrawals for:
    • Qualified long-term care distributions
    • Substantially equal periodic payments
    • Domestic abuse
    • Terminal illness
    • Qualified public safety employees
    • Presidentially declared disasters
    • Emergency savings account distributions
    • Corrective distributions of excess contributions
  • Increases the 401(k) and 403(b) plan catch-up contribution limits. The annual amount that can be contributed to a retirement plan is subject to a limitation, which is generally adjusted annually for inflation. These contribution limitations (which will be indexed for inflation) will now be increased as follows:
    • For 2023 plan participants aged 50 or older who want to make additional pre-tax elective deferrals, have a contribution limit of $7,500 for most retirement plans, and $3,500 for SIMPLE plans.
    • For plan participants who obtain age 60, 61, 62 and 63 in 2025, the catch-up contribution limit is $10,000 for most retirement plans, and $5,000 for SIMPLE plans.
  • Effective for tax years after December 31, 2022, authorizes SIMPLE IRAs to accept Roth contributions. Previously SEP IRAs were funded with employer contributions and these accounts were prevented from being designated as Roth-type accounts.
  • Effective for tax year 2024, all catch-up contributions to qualified retirement plans by employees with compensation in excess of $145,000 will be subject to mandatory Roth tax treatment. This new rule does not apply to SEP or SIMPLE plans.
  • Effective for plan years beginning after December 31, 2023, employers are given the option to offer to non-highly compensated employees emergency savings accounts (treated like Roth accounts) that are linked to their employer retirement account. Employers that choose to offer an emergency savings account can auto-enroll their employees at a maximum rate of 3% of the employee’s compensation capped at $2,500. Once an employee’s account reaches the maximum cap, paycheck withdrawals will stop until a withdrawal is made from the account.

The emergency savings account allows for withdrawals without penalties.

  • Directs the IRS to amend the regulations governing qualified longevity annuity contracts (QLACs) within 18 months of December 29, 2022, to:
    • Remove the 25% retirement account limit on how much an individual can pay to purchase a QLAC
    • Increase the dollar limitation an individual can apply from their retirement account to purchase a QLAC from $155,000 (for 2023) to $200,000 beginning in 2025 (indexed for inflation)
    • Provide that if a married taxpayer purchased a QLAC with a joint and survivor annuity benefit for the taxpayer and their spouse, that a subsequent divorce that occurs before the annuity payments commence will not affect the permissibility of the joint and survivor annuity benefit calculation, and
    • Allow QLCA contracts to provide a short, free look-back period that allows an employee to rescind the purchase of a contract within 90 days from the date of purchase.
  • IRA charitable distributions permits a taxpayer to make one-time qualified charitable distributions from IRAs for up to $50,000 to be contributed into charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts, effective for taxable years ending after December 29, 2022. The $100,000 annual exclusion limit is also indexed for inflation beginning in 2024.
  • Permitting some rollovers from 529 college savings plans to Roth IRAs for individuals who have maintained 529 plan accounts for at least 15 years to be able to make a direct trustee-to-trustee rollover to the beneficiary’s Roth IRA effective for distributions made after December 31, 2023. The lifetime rollover limit is $35,000 per beneficiary.
  • Adds new provisions that benefit public safety officers (PSOs) including:
    • Expanded income exclusion for health insurance premiums of retired PSOs
    • Expanded relief from the 10% early withdrawal penalty for qualified public safety employees, and
    • Expanded definition of qualified public safety employee that includes certain corrections officers and forensic security employees.
  • Employer’s can treat an employee’s student loan repayment as an employee contribution to a 401(k) plan for purposes of calculating the employer’s matching contribution effective for plan years beginning after December 23, 2023.
  • New enrollment plan options for employees including:
    • Employers starting a standard new 401(k) or 403(b) plan must automatically enroll their employees in the plan with a minimum employee contribution rate of 4%, effective for plan years beginning after December 31, 2024.
    • A starter 401(k)/403(b) plan option for employers that have not previously offered retirement plans that would only allow employee deferral contributions (employers cannot contribute to the plan).

Gatto, Pope & Walwick, LLP
Certified Public Accountants