New Federal Law Changes Retirement Rules for Companies, Employees

• Tax strategies
• 1/9/2023

Key insights

• The massive $1.7 trillion federal spending bill President Biden signed into law at the end of December includes even more significant changes to the U.S. retirement system.
• Changes include requiring most employers to automatically enroll employees in their retirement plan at a rate of at least 3%.
• Embrace data-driven management philosophies to help reduce waste and assess program effectiveness.
• It also increases the age required minimum distributions start from 72 to 73 in 2023 and then to 75 by 2033.

Keep Abreast of Retirement Plan Requirements

Retirement reform is currently a hot topic for lawmakers as many Americans do not have enough money saved for retirement. During 2022, various bills seeking to enhance retirement savings passed through U.S. Senate committees but stopped short of becoming ratified until recently.

The massive $1.7 trillion federal spending bill President Biden signed into law at the end of December includes even more significant changes to the U.S. retirement system. These new provisions, known as SECURE 2.0 Act of 2022, are intended to build upon the original Setting Every Community Up for Retirement (SECURE) Act of 2019, which included sweeping changes intended to enhance and protect retirement security for Americans.

Some of the most significant provisions of this new legislation include:

• Requiring most employers to automatically enroll employees in their retirement plan at a rate of at least 3%, but no more than 10%. After the first year, the default automatic enrollment rate increases by 1% annually, to at least 10%, but no more than 15%. Employees can opt out of these provisions if they choose. These changes go into effect for plan years beginning after December 31, 2024.
• Increasing the age required minimum distributions (RMDs) start from 72 to 73 in 2023 and then to 75 by 2033.
• Establishing an enhanced catch-up contribution for people between 60 and 63. Under previous law, retirement plan participants over 50 could contribute an additional $6,500 per year in 2022 (increasing to $7,500 in 2023). Under the new legislation, employees between 60 and 63 can make a catch-up contribution equal to the greater of $10,000 or 150% of the standard catch-up contribution, starting in 2025. These amounts are subject to inflation adjustments annually, similar to other contribution limits.
• Connected to catch-up contributions changes noted above, employees who earn $145,000 or more (indexed for inflation) will be required to source their catch-up contributions as Roth contributions, as opposed to pre-tax, starting in 2024.
• Allowing employers to add a provision to their plan document to make matching contributions on behalf of their employees making student loan repayments, instead of matching retirement plan contributions. These changes go into effect for plan years beginning after December 31, 2023.
• Providing an option for employees to elect employer matching or nonelective contributions to be Roth contributions, provided such employer contributions are nonforfeitable.
• Requiring plan sponsors who employ part-time employees who work between 500 and 999 hours annually to become eligible to participate in the company’s retirement plan after no more than two consecutive years. The current waiting period is three years. These changes go into effect for plan years beginning after December 31, 2024.
• Allowing penalty-free access to retirement accounts for qualifying emergencies, up to $1,000 annually, starting in 2024. Participants taking such distributions are allowed to repay these amounts within three years from the date of distribution.

Other new changes include increasing incentives and credits for small business to offer retirement plans, allowing 403(b) plan sponsors to join multiple employer plans, enhancing the saver’s credit, reducing excise tax penalties for failing to take RMDs, and establishing penalty-free withdrawals for victims of domestic abuse.

How we can help

The regulatory environment seems to change constantly. Stay on top of your responsibilities as an employer or retirement plan sponsor. CLA’s employee benefit plan consulting professionals can help you navigate regulatory demands.

CLA has provided employee benefit plan audit, tax compliance, and consulting services for more than 60 years. The most recently published Department of Labor’s top 100 firms has CLA performing the most benefit plan audits in the country.