January 5, 2023
Last week, President Biden signed into law a $1.7 trillion omnibus spending bill, the Consolidated Appropriations Act, 2023 (“Act”). The Act includes the SECURE 2.0 Act of 2022, (“SECURE 2.0”). SECURE 2.0 includes a series of retirement provisions designed to increase coverage and savings for both employer-sponsored and individual retirement plans. The SECURE 2.0 provisions include:
Increase in Required Minimum Distribution Age
Under current law, a retirement plan participant must generally begin receiving distributions from the plan by April 1 after the calendar year in which the participant turns age 72 (special rules apply to participants in employer-sponsored plans who continue to work past age 72). Beginning January 1, 2023, SECURE 2.0 increased the required minimum distribution age from 72 to 73 years old. Beginning January 1, 2033, the minimum distribution age will increase from 73 to 75 years old.
Reduction in Excise Tax for Failure to Make Required Minimum Distributions
Payees who receive withdrawals less than their required minimum distribution amount currently are subject to an excise tax of 50% on that shortfall. For tax years beginning after December 28, 2022, the excise tax is reduced to 25%. If the failure to distribute the required minimum distribution is corrected within two years, the excise tax may be reduced to 10%.
Increase in Catch-Up Contributions
Currently, defined contribution plan participants that are age 50 or older may make elective pre-tax “catch-up” contributions in excess of annual plan deferral limitations. For 2023, the annual limitation for catch-up contributions is $3,500 to $7,500, depending on the type of plan. For IRAs, the catch-contribution is currently $1,000.
Effective for tax years beginning after December 31, 2024, the catch-up contribution limitation will be increased to the greater of $10,000 or 50% more than the 2024 regular catch-up contribution for participants who have attained ages 60, 61, 62, and 63. However, note that catch-up contributions made by participants with compensation of $145,000 or more will be treated as Roth contributions and will not be eligible for pre-tax deferral. Special rules and limitations will apply for SIMPLE plans.
The catch-up contributions for employer plans will be indexed for inflation beginning in 2026 and for IRAs beginning in 2024.
Early Withdrawal Penalty Relief
Early withdrawals from tax deferred retirement accounts before a participant reaches age 59 ½ are subject to a 10% penalty. Several exceptions to the penalty may apply including distributions made as a result of disability, to pay certain medical expenses, to pay higher education expenses, or to make a first-time home purchase.
Effective for distributions made after December 31, 2023, SECURE 2.0 allows a new exception for a distribution of up to $1,000 that is made for unforeseen emergency expenses. The distribution is taxable but not subject to the 10% penalty. Participants may only receive one distribution per year and have the option to repay the distribution within three years. The participant may only make another emergency withdrawal in that three-year period if the previous withdrawal has been repaid.
SECURE 2.0 also provides relief from the 10% penalty for the earnings on an excess contribution to an IRA. Under current law, contributions to a traditional or Roth IRA in excess of the allowable contribution amount are subject to a 6% excise tax. If the excess contribution is withdrawn before the due date of the of the participant’s income tax return for the year of the contribution, the contribution is not subject to the excise tax. However, any earnings attributable to the excess contribution are subject to both income tax and the 10% penalty. SECURE 2.0 eliminates the 10% early withdrawal penalty on the earnings on the excess contribution for which a corrective distribution is made.
The Act also implements provisions that allow for penalty-free retirement plan withdrawals for domestic abuse victims, individuals with terminal illnesses, and distributions made in connection with qualified disasters. All of these provisions apply for distributions made after December 31, 2023.
Favorable Employer Matching Provisions
SECURE 2.0 adds favorable provisions for employer matching contributions including allowing participants to designate certain employer matching contributions as Roth contributions and allowing employers to make matching contributions for employee student loan payments as if those loan payments were elective plan deferrals.
- The sole-beneficiary surviving spouse of a plan participant who passes away before his or her required minimum distribution period has begun may elect to be treated as an employee for purposes of the required minimum distribution rules. This provision is effective for calendar years beginning after December 31, 2023.
- Subject to certain limitations, the Act permits tax-free rollovers of Section 529 savings accounts to the Section 529 plan beneficiary’s Roth IRA.
- The Act expands automatic enrollment provisions for certain defined contribution plans effective for plan years beginning after December 31, 2024.
- For tax years beginning after December 31, 2022, SECURE 2.0 enhances the small employer pension plan start-up cost credit from 50% to 100% of creditable costs for employers with up to 50 employees. Companies with 51-100 employees are eligible for a reduced credit. No credit is available for companies with over 100 employees.
- The Act implements more favorable coverage requirements for certain part-time employees for plan years beginning after December 31, 2024.
- Secure 2.0 also provides for “qualified long-term care distributions” of up to $2,500 that are used to purchase long-term care insurance.
Whitley Penn is continually monitoring tax and economic developments and will send out additional alerts in the future. In the interim, please contact your Whitley Penn tax advisor if you have any questions or require any additional information.