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SECURE Act 2.0: A Potpourri of Retirement Plan Changes, Less Dramatic Than Advertised

"SECURE Act 2.0", passed by Congress just before Christmas Eve, takes up 340 pages in the official print and includes a hundred or so substantive changes to the rules governing qualified plans, IRA's and other retirement savings vehicles. Many press accounts convey the impression that the effect is revolutionary. In fact, the changes are mostly small beer. This and subsequent posts will delve into the details.

  • One fairly important change, taking effect on January 1, 2023, is a redefinition of the section 401(a)(9) required beginning date (the point at which owners of IRA's and participants in qualified plans, 403(b) plans and 457(b) plans must begin receiving distributions). The first SECURE Act, passed only three years ago, upped the age component of the required beginning date from 70½ to 72. The new law moves it to 73 for anyone born after December 31, 1950. Hence, individuals who turn 72 in 2023 or later will be able to leave their accounts untouched for an extra year.

  • Also effective for 2023 is an overdue correction to the Pension Benefit Guaranty Corporation's variable rate premium, which is a percentage of covered plans' unfunded vested benefits. Originally, the percentage was 0.9 percent. In 2014, it was increased and indexed for inflation, as if it were a dollar amount. By 2022, it had reached 5.2 percent. SECURE Act 2.0 ended that species of indexing, which would eventually have raised premiums to unaffordable levels, and made 5.2 percent permanent.

  • The most dramatic change affects elective deferrals under 401(k) and 403(b) plans. Those plans will be required to include automatic contribution arrangements, under which employees who don't elect otherwise will have at least 3 percent of their pay withheld by default and contributed to the plan as elective deferrals. But all plans established before the date of enactment are exempt from this requirement. Also exempt are governmental and church plans and plans of employers that either have not been in existence for at least three years or have no more than ten employees.

  • Another change will apply, starting in 2024, to catch-up contributions under 401(k) plans, 403(b) plans and governmental 457(b) plans. Catch-ups by participants whose compensation in the preceding year exceeded $145,000 (indexed) will have to be made to Roth accounts, and plans will have to offer other participants the option of a Roth catch-up contribution. This aim is to offset revenue lost by virtue of other provisions of the Act, such as the later required beginning date. Roth contributions, being taxable, raise revenue in the short run, and the offsetting revenue losses mostly fall beyond the time horizon of Congress's budget rules. Why the draftsmen chose the $145,000 threshold, instead of adopting the one already in place for identifying highly compensated employees ($150,000 compensation in 2023) is unknown. Perhaps they guessed that the HCE threshold would rise to only $145,000 and wrote that number into the law rather than leaving it to a cross-reference.

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