What does the new retirement law mean for you?

By Doug Wilson Timescale Financial

On Dec. 29, 2022, SECURE 2.0, the retirement savings reform bill, was signed into law by President Biden.

While most provisions of SECURE 2.0 will not take effect immediately, the legislation promises to alter the retirement landscape for millions of Americans and the businesses that employ them.

Why is this important? Today, more than half of all American workers are stressed about their finances – and it interferes with their ability to focus while on the job.

Six in 10 employees report that saving for the future is their number one stressor. Furthermore, 28 percent of employees say their health has been impacted by their financial worries.

The objective of Secure 2.0 is simple: help more Americans save for retirement. How that looks in practice gets a little more complicated. Secure 2.0 is made up of more than 90 provisions and addresses nearly every angle of the retirement savings journey. One major theme: increase access to retirement savings plans. Today there are 57 million Americans without access to an employer-sponsored retirement plan. Tax incentives and cost-effective solutions are a major theme to incentivize business owners to start these programs.

One of the most interesting concepts of the new retirement plan design includes matching student loan payments. Rather than leaving “free money” on the table in the form of a company match to retirement savings, this will allow employees who are focused on paying off student debt the opportunity to take advantage of the matching benefit in a way that is aligned with their goals. Additionally, plan design will now allow for the creation of an emergency savings account. This account, known as a PLESA (Pension-Linked

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Emergency Savings Account), is designed to be set up as a separate account that non-highly compensated employees can access for emergency expenses, thereby avoiding the need to dip into their retirement account to cover these types of expenses.

One of the key changes to existing rules and regulations applies to the Required Minimum Distribution (RMD) beginning dates. As of Jan. 1, 2023, the new age for RMDs is now age 73. For individuals born in 1951, this year would have been the year in which they needed to begin taking these distributions from retirement accounts. Now, they have an extra year before they need to begin taking RMDs. By the year 2033, the RMD age will be raised to 75.

For companies that have significant part-time employees, there are some adjustments to note regarding those part-time employees who have accrued significant service time. Previously, the first version of the SECURE Act (SECURE Act 1.0 effective January 1, 2020) required part-time workers who had worked 3 consecutive years for at least 500 hours per year to be eligible for participation in the retirement plan.

SECURE Act 2.0 now reduces that timeline to 2 years. That said, employers do not need to consider hours worked prior to 2021 for determining eligibility.

Another key change to existing compliance rules makes long-awaited changes to the “Top-Heavy Rules.” In top-heavy retirement plans, the owners and most highly compensated employees own more than 60 percent of the assets. Oftentimes, these plans can run into issues with IRS compliance testing that seeks to protect the non-highly compensated employees. However, these tests have been known to create unnecessary regulatory headaches for small businesses. Going forward, employees who do not satisfy minimum age and service eligibility rules - including being at least age 21 and one year of service, can be excluded from these tests in an effort to produce results that reflect the status of the plan as authentically as possible. This will be effective for plans beginning after Dec. 31, 2023.

Lastly, there are some interesting changes that were made to “Catch-Up Contribution Rules” that will require Roth treatment for these types of deferrals. A “Catch-Up Contribution” allows those who are age 50 and older to make additional deferrals into their retirement plan beyond the annual IRS limit. For 2023, this amount is $7,500, which can be contributed over and above the IRS annual limit for 2023 of $22,500. Beginning in 2024, anyone making a catch-up contribution that is earning more than $145,000 per year will have to make these deferrals on a Roth (after-income tax) basis. Additionally, upon reaching age 60, participants will be able to increase their catch-up deferrals to the greater of $10,000 or 50 percent more than the regular catchup amount, beginning in 2025.

In summary, the new provisions included in SECURE 2.0 impact both retirement plan sponsors and employees in a variety of ways. Right now, it is incredibly important that retirement plan sponsors and small businesses understand how to take advantage of and stay in compliance with the new laws. The restructuring of retirement through Secure Act 2.0 is set to help create around $40 billion dollars in retirement savings over the next decade. Complimentary plan reviews are offered by OneDigital Retirement Plan Consultants. I