The Consolidated Appropriations Act (CAA), 2023 that just passed Congress includes the retirement package, SECURE 2.0. Here are the major changes that can affect you and/or your small business:
The Saver's Credit is becoming the Saver's Match for tax years beginning after December 31, 2026
The retirement savings contributions credit (aka saver’s credit) is being repealed and replaced with a new “saver’s match.” The saver’s match will be paid in the form of a contribution to the taxpayer’s IRA or retirement plan, instead of a non-refundable tax credit as it is now.
• The match is equal to 50% of the taxpayer’s qualified contributions to a retirement plan up to $2,000
• The 50% match gradually phases out for MAGI between:
$41,000 and $71,000 for MFJ and QSS
$30,750 and $53,250 for HoH
$20,500 and $35,500 for single and MFS
There is a New Military Spouse Retirement Plan Credit for small employers starting in 2023
Eligible small employers may receive a credit up to $500 for enrolling military spouses of employees in employee retirement plans. An eligible small employer has no more than 100 employees that received at least $5,000 of compensation. Military spouses are made eligible for plan participation within two months of hiring the employee and are treated as if they had two years of service for purposes of matching or nonelective contributions. The credit is available for three years for each military spouse.
The IRA catch-up contribution limits are being indexed for inflation starting in tax year 2024
The maximum IRA catch-up contribution of $1,000 for taxpayers age 50 and over will be subject tocost-of-living adjustments. Adjustments will be in $100 increments, rounded down to the nearest $100.
There are also higher catch-up contribution limits for ages 60 through age 63 starting in tax year 2025
Retirement plan catch-up contributions for taxpayers ages 60, 61, 62, and 63 to will be increased to the greater of:
• $10,000 for 401(k)s, 403(b)s, and 457s ($5,000 for SIMPLEs), or
• 150% of the applicable 2024 (2025 for SIMPLEs) catch-up contribution
The higher catch-up contributions will be indexed for inflation starting in tax year 2026.
Student loan payments will be treated as elective deferrals for purposes of matching contributions starting in 2024
Employers may make matching contributions to retirement plans (401(k)s, 403(b)s, 457(b) plans, or SIMPLE IRAs) for employees who make qualified student loan payments. A qualified student loan is indebtedness incurred by the employee to pay the employee’s qualified higher education expenses.
Employers must establish procedures for employees to claim the matching contributions and may use an annual deadline within 3 months after the end of the plan year. Employees must certify to their employers they made qualified student loan payments.
Qualified tuition plan (§529 plan) rollovers to Roth IRAs are changing beginning in 2024
Beneficiaries may roll over up to $35,000 over the course of their lifetime from any §529 account in their name to a Roth IRA. Rollovers are subject to the annual Roth IRA contribution limits. However, annual AGI limits for Roth IRA contributions do not apply. The §529 account must have been open for more than 15 years.
Providing pension linked emergency savings accounts to employees beginning in 2024
Employers can provide pension linked emergency savings accounts to employees, either through voluntary participation or automatic enrollment. Employer and employee contributions are each generally capped at $2,500 per plan year. Participants may make at least one withdrawal from the
account per calendar month. Withdrawals will be treated as qualifying distributions from Roth retirement accounts.
The age increases again for required minimum distributions (RMDs) starting in 2023
The age 72 RMD required beginning date (RBD) is replaced with the “applicable age”
• If an individual is age 72 after December 31, 2022, and age 73 before January 1, 2033, the applicable age is 73.
• If an individual is age 74 after December 31, 2032, the applicable age is 75
The Disaster Distribution Provisions are made permanent for federally declared disasters occurring on or after January 26, 2021
Affected taxpayers may withdraw up to $22,000 penalty free from retirement plans or IRAs. Distributions are spread over three years and can be repaid at any time during the three-year period.
The Roth retirement plan RMDs is being eliminated starting in 2024
The RMD requirement for Roth retirement plans (Roth 401(k)s, e.g.) is eliminated. Thus, the Roth retirement plan RMD rules will be similar to Roth IRA rules in that mandatory distributions will not be required during the employee’s lifetime.
The excise tax reduction for failure to take RMDs is changing starting in 2023
The 50% excise tax for failure to take full RMDs is reduced to 25% of the shortfall. The 25% tax is reduced to 10% if the taxpayer corrects the shortfall within the “correction window:”
• The last day of the second tax year beginning after the year in which the tax is imposed, or
• The IRS begins an audit or demands payment of the tax.
(This was the highest tax penalty in the entire tax code and it's about time they changed it to something more reasonable.)
There is a new 72(t) exception for emergency withdrawals starting in 2024
The Act provides a new exception to the 10% additional tax for early distributions from retirement plans or IRAs. Taxpayers may withdraw up to $1,000 per calendar year for unforeseen emergency expenses or immediate financial needs related to a personal or family emergency expense. The taxpayer may repay the distribution within 3 years and no further emergency distribution are allowed during the 3-year period unless repayment is made.
There is a new 72(t) exception for individual cases of domestic abuse starting 2024
Retirement plans may allow domestic abuse survivors to withdraw penalty free up to the smaller of:
• $10,000 (indexed for inflation), or
• 50% of the participant’s account
The participant may repay the withdrawal over three years and receive an income tax refund of any income tax paid.
There is a new 72(t) exception for terminal illness starting in 2023
Terminally ill participants may take penalty free withdrawals from retirement accounts.
There is an increase in the QCD limitation starting in 2023
The maximum $100,000 annual limitation of $100,000 for QCDs from IRAs will be indexed annually for inflation.
Changes to the retirement plan automatic enrollment expansion beginning in 2025
Employers must automatically enroll employees in 401(k) and 403(b) plans upon employees meeting eligibility requirements. Initial enrollment is at least 3% but not more than 10% of compensation. The amount is increased by 1% each year until the minimum contribution is at least 10% but not more than 15%. Employees may opt out of automatic enrollment. (Current plans are not subject to the rules.) There are exceptions for businesses with fewer than 10 employees, businesses that have been open for less than 3 years, and church and governmental plans.
New small business starter 401(k) plans can be offered starting in 2024
Employers that do not currently sponsor retirement plans may offer a starter 401(k) or safe harbor 403(b). A starter plan generally requires that all employees be default enrolled in the plan at a 3% to 15% deferral rate. Annual deferral maximums would be the same as annual IRA contribution limits ($6,000 for 2022 with a $1,000 catch-up contribution).
Unlike most things Congress does that cost us more money, these are actually very reasonable changes they are making to the tax laws that will help a lot of people.