The Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0) was enacted as part of the Consolidated Appropriations Act of 2023 (HR 2617), the $1.7 trillion omnibus spending bill signed by President Joe Biden in Dec. 2022. Among the long list of changes adopted in the law are some that improve how employer-sponsored defined contribution retirement plans can better deliver financial security in retirement. SECURE 2.0 moves these retirement programs closer to the defined contribution (DC) plan design best practices long promoted by Reason Foundation’s Pension Integrity Project, but it also illuminates the overly complex nature of our tax and labor laws governing these arrangements.
The major defined contribution retirement plan-related changes in SECURE 2.0 include:
Strengthening auto-enrollment and auto-savings in retirement plans
Effective for plan years beginning after 2024, all 401(k) and 403(b) plans must automatically enroll participants with a 3%-10% contribution rate and provide an auto-save increase of 1% per year until it reaches a maximum of 10-15%. The participant must be given the opportunity to opt out of the default rates under current rules governing so-called “eligible automatic contribution arrangements” (EACA).
This change is significant as it makes retirement plan participation the default position, which was not an option under current law. This will get more individuals into retirement savings plans—something very much needed in the United States. The Bureau of Labor Statistics reported in 2021 that 68% of private industry workers had access to retirement benefits through their employer, but only 51% chose to participate. In contrast, 92% percent of workers in state and local governments had access to retirement benefits, and 82% participated.
The impact of this change will not be realized immediately because it only applies to new plans established after Dec. 29, 2022. In addition, government plans, church plans, new businesses, and small businesses with 10 or fewer employees are exempt.
Refundable saver’s match tax credit
The current tax law provides a “non-refundable” tax credit for eligible individuals who contribute to IRAs or employer retirement accounts. Starting in 2027, The SECURE Act 2.0 changes the tax credit to be “refundable” in the form of a federal 50% matching contribution, up to $2,000 per year. The matching amount phases out depending on the employee’s income (e.g., $41,000-$71,000 for married filing jointly; $20,500-$35,000 for single taxpayers.
Using a federal matching contribution to provide the refundable credit will likely improve lower- and middle-income retirement savings.
Increased catch-up contribution limits for older workers
Individuals aged 50 and older under current law can make “catch-up” contributions up to $7,500 to 401(k), 403(b), and governmental 457(b) plans. The SECURE Act 2.0, effective in 2025, increases the catch-up limit for individuals ages 60-63 to $10,000 (indexed beginning in 2024). For higher-income individuals earning over $145,000 in a tax year, the contribution must be made to a Roth Account on an after-tax basis.
Lowered barriers to the use of lifetime income annuities
Beginning in 2023, the SECURE Act 2.0 further reduces tax code barriers for using annuities in defined contribution plans as recommended in Reason’s DC Personal Retirement Optimization Plan (or PRO) plan design in two ways.
Required Minimum Distribution Rules (RMD) Relaxed for Partial Annuitization: Current law requires an individual to determine RMD separately for annuitized and non-annuitized amounts. The result is a higher RMD amount than if the individual had not annuitized anything. The SECURE Act 2.0 removes this disincentive to annuitize by allowing the individual to aggregate both annuitized and non-annuitized distributions for RMD purposes.
Higher Qualified Longevity Annuity Contract (QLAC) Purchase Limits: A QLAC product allows an individual to buy an annuity with a start date that begins only if they live longer than a stated age (no later than 85) as a way to help protect against the risk of outliving their retirement assets. Under current law, an individual can purchase a QLAC product but cannot spend more than 25% of the account value up to $135,000 (as currently indexed). The SECURE Act 2.0 eliminates the 25% limitation and increases the dollar limit to $200,000 (indexed).
Other changes help portability, RMD distribution planning, and flexibility
The SECURE Act 2.0 permits retirement plan service providers to offer account portability services that automatically transfer retirement savings to an individual’s new employer’s plan. This helps preserve retirement savings instead of just cashing out of the prior employer’s plan.
The act also increases the Required Beginning Date for minimum distributions from 72 to 73, depending on the individual’s “applicable age”:
- For those who turned age 72 before 2023, the applicable age is 72 (or age 70 ½ if they were born before July 1, 1949).
- For those who turn 72 after 2022 and reach the age of 73 before 2033, the applicable age is 73.
- For employees turning 74 after 2032, the applicable age now is 75.
The onerous excise tax for RMD violations is also reduced in 2023 from 50% to 25%. The penalty tax is further reduced to 10% if the failure to take the RMD is corrected within a two-year window period.
The SECURE Act 2.0 takes important and meaningful steps toward increasing retirement plan savings participation. It reduces tax policy disincentives and tax code rules that perversely inhibit lifetime annuity solutions, which would improve retirement income security. It also provides additional flexibility for tax optimization for retirement distributions.
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