A—SECURE Act and SECURE Act 2.0

After passage of the SECURE Act of 2020, the IRS subsequently clarified that beneficiaries will implement the 10-year rule differently, determined by whether the original IRA owner had died before or after starting Required Minimum Distributions (RMD), referred to as the Required Beginning date (RBD). Beneficiaries of account owners who die before the RBD, must distribute the account balance by Dec. 31 of the tenth year following the year the IRA owner dies but are not required to distribute money in years one through nine. Beneficiaries of account owners who die on or after the RBD, must distribute the account balance by Dec. 31 of the tenth year following the year the IRA owner dies and are required to take RMDs in years one through nine. A non-designated beneficiary, such as a trust or charity, will be required to distribute the funds over a 5-year period if the account owner died before the RBD, or the remaining life expectancy of the decedent (the original IRA owner), if they died afterwards. See chart of inherited IRA distribution rules for different types of beneficiaries based on SECURE Act and the companion proposed regulations below.

2. Tax credits for small businesses. Small businesses receive a tax credit for retirement plan start-up costs up to $5,000, under the Act. An additional tax credit of $500 per year (for three years only) will be available if the plan offers automatic enrollment. To increase both plan participation and savings rates, employees will be automatically enrolled into the plan, unless they elect not to participate.

3. Allows multiple employers to share plan administration. The SECURE Act permits unrelated businesses to share in the administrative and financial burden of establishing and maintaining a retirement plan. Currently, multiple employer plans (MEPs) are only available to small employers in the same industry.

4. Expands participation for part-time employees. Currently, employers can exclude part-time employees who work fewer than 1,000 hours per year. Under The Act, part time employees can participate in the plan if they worked at least 500 hours per year for the past three years, consecutively.

5. Delays required minimum distribution (RMD) date to age 73, and to age 75 beginning in 2033. Prior to the SECURE Act, IRA owners and qualified plan participants were required to begin taking distributions from their IRAs or qualified plans no later than age 70½, with the first RMD distributed by April 1st of the following year. The first version of the SECURE Act delayed RMDs until age 72. However, the 2.0 version delays it to age 73 beginning in 2023, and then age 75 beginning in 2033, allowing funds to continue to benefit from tax deferral. Additionally, RMDs may be delayed further if the participant is still working and does not own at least 5% of the employer sponsoring the plan. See below for additional changes under SECURE 2.0.

6. IRA contributions can be made past age 70½. Prior to the Secure Acts, contributions to traditional IRA accounts could not be made past age 70½. Because many Americans are working past traditional retirement age, The Act allows ongoing contributions past age 70½.

7. Encourages employers to offer annuities with lifetime income options. The Act also allows employers to offer guaranteed lifetime income options, available from the purchase of annuities. If an annuity is included, however, the employer (plan sponsor) would be required to provide employees, who are participating in the plan, an annual disclosure that estimates the monthly payment an employee will receive at retirement. Employees would also be allowed to roll over the annuity to an IRA when they retire through an inservice withdrawal.

8. 529 Plans can be used to repay student loans. Under the SECURE Act, 529 plans used for tax-free college savings can be used to pay off student loan debt up to $10,000. Under prior rules, the 529 money could only be used for paying post-secondary education expenses and up to $10,000 to cover tuition at public, private or religious elementary or secondary schools. This provision allows students to take student loans while the 529 plan continues to benefit from tax-free growth, and also gives the funds time to potentially recover in a down market.

Congress followed the SECURE Act with SECURE 2.0 in December of 2022, which further
expanded some of the provisions of SECURE and clarified others. It should be noted that there are a number of different effective dates for the provisions, so practitioners should be careful to note the applicable date when recommending action to their clients.

1. Required minimum distribution (RMD) date further increased to age 73, as mentioned above. Effective January 1, 2023, IRA owners and qualified plan participants must take their first RMD by April 1 of the year after they reach age 73. Effective January 1, 2033, the RMD age will again be raised to 75.

2. Penalties for failure to take RMDs reduced. The 50% excise tax for failure to take timely RMDs was reduced to 25%; the percentage is reduced further to 10% in the case of a timely correction (distribution is taken before the earliest of the mailing of a notice of deficiency, or the date the 25% excise tax is assessed, or before end of second taxable year after the year when tax was imposed).

3. RMD Calculation option for partial annuitization – the taxpayer may elect to apply annuity income received from a partial annuitization to their aggregate RMD amount, calculated using the prior year 12/31 IRA account balances, including the FMV on that date of all income annuities purchased. Additional exceptions to the 10% early distribution penalty. Distributions for the following reasons are no longer subject to the 10% early withdrawal penalty under IRC §72(t):

• Terminal illness – distributions made from a qualified plan or IRA on or after the date the taxpayer is certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 84 months (7 years) or less after the date of the certification. This distibutions may be repaid within 3 years.
• Retired public safety employees – distributions from governmental plan by a qualified public safety employee if they terminate employment after attaining the earlier of age 50 or 25 years of service under the plan and includes private firefighters, government correction officers, and government forensic security employees.
• Earnings on returned excess IRA contributions – earnings attributable to an excess IRA contribution that is removed by the due date of the return for the year are no longer subject to the 10% early distribution tax.
• Qualified Disaster Recovery – Distributions taken by individuals whose principal place of residence is in a federally declared disaster area who sustained an economic loss from the disaster, up to $22,000 in aggregate distributions. Unless the taxpayer elects otherwise, the taxable amount will be included in gross income over 3 taxable years and the taxpayer will have 3 years from date of distribution to pay it back.
• Family emergencies – withdrawals up to $1,000 to meet unforeseen or immediate financial needs for personal or family emergencies, limited to one distribution per calendar year. The distribution may be repaid within 3 years and until unless a prior distribution is repaid, another cannot be taken within 3 subsequent calendar years
• Domestic Abuse Victims – may access the lesser of $10,000 or 50% of an IRA, 401(k), 403(b) or 457(b) plan (effective January 1, 2024). Plan changes will be required by retirement plan sponsors.

5. Qualified Charitable Distributions (QCDs) – In addition to QCDs of up to $100,000 per year made directly to a charitable organization, a taxpayer may make a one-time IRA distribution of up to $50,000 to a charitable gift annuity or to fund a charitable remainder trust (CRT) with income payable to the account holder or spouse (the charitable gift annuity or CRT must be funded exclusively with QCDs).

6. Qualified Longevity Annuity Contract (QLAC) premiums – The amount allowed to purchase a QLAC is no longer limited to 25% of the participant's plan balance, and the maximum premium amount allowed increased to $200,000 (adjusted for inflation beginning in 2024).

7. Increased Catch-Up Contributions allowed in a Retirement Plan or IRA – In 2024, the retirement plan catch-up contribution limit for those over 50 was $7,500. Starting in 2025, catch-up contributions for those ages 60 to 63 were increased to the greater of $10,000 or 50% more than the regular catch-up contribution amount. Catch-up contributions will be indexed for inflation starting after 2025.

8. Roth Catch-Up Contributions – For those with incomes exceeding $145,000, catch-up contributions will be designated as Roth contributions only. If the plan does not have a Roth option, catch-up contributions will not be allowed for participants who earn more than $145,000 effective for plan years after December 31, 2026.

9. Expand Roth Contributions-Roth contributions are now allowed for SIMPLE and SEP IRAs.
Employer contributions and employee elective deferrals (if permitted) can be designated as Roth.

10. Eliminate RMDs for Roth 401(k) Accounts – Starting in 2024, required distributions will no longer need to be taken from Roth 401(k) accounts.

11. 529 Plan Rollovers to Roth IRAs – Starting in 2024, beneficiaries of 529 plans may roll over up to $35,000 during their lifetime to a Roth IRA. The rollovers will be subject to annual contribution limits and the 529 plan must have been open for more than 15 years.

12. Student-Loan Matching Program – Student loan payments will be treated as Employee Elective Deferral for purposes of matching contributions.

13. Reduced RMD Excise Tax- Reduced excise tax for failure to take required distributions from 50% to 25%.

14. Emergency Savings Account – Beginning in 2024, employers can establish an emergency savings account where employees can save up to $2,500 in a Roth-style account. Distributions will be treated like a qualified distribution from a Roth account (tax-free if requirements are met).

15. Exemption from 10% Early Distribution Penalty for Withdrawals for Certain Emergency Expenses – In case of financial hardship, up to $1,000 may be withdrawn per year, penalty free, from a 401(k) or IRA. The employee has the option to repay the distribution within 3 years. No further distributions will be permitted during the repayment period unless the distribution is paid in full.

16. Annuities in 401(k) Plans – Removal of barriers to the use of annuities in qualified plans by exempting certain annuity features from actuarial tests that would otherwise prohibit their use.