SECURE 2.0 Act Takes Retirement Savings to the Next Level

February 8, 2023

Stymied by inflation, cost increases to housing and healthcare, and even student loan payments, many workers struggle to save for retirement. Their challenge to build and preserve a nest egg is a growing concern to U.S.-based organizations that sponsor retirement plans. An organization’s bottom line can be impacted by more than $50,000 annually for every employee who can’t retire on time due to not effectively saving for retirement.1

That cost can add up to millions annually — a financial blow that’s unsustainable for most organizations. To help employees save for the future and become retirement-ready, employers must enhance retirement plan participation, education and financial wellness programs.

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To address the savings barriers Americans face today, the SECURE 2.0 Act provides more than 90 retirement provisions to modernize the retirement system, making plans more affordable and improving wealth-building opportunities for millions of Americans. Some provisions went into effect January 1, 2023, and others will be mandated in 2024, 2025 and beyond.

New Rules Support Retirement Readiness

The SECURE 2.0 Act is estimated to generate nearly $40 billion in retirement savings for new plan participants over the next 10 years. By 2025, employers who establish new retirement savings plans on or after December 29, 2022, must auto-enroll all eligible employees into the plan. Employees must be enrolled at a salary deferral rate between 3% and 10%, and the deferral will increase 1% annually until it reaches 10%. However, employees may change their deferral rate or decline participation in the plan.

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Enrolling your employees in the retirement plan is an essential first step in helping them to build nest eggs. However, to encourage employees to stay the course with their investments, you must improve financial education and communication.

Employees face numerous distractions and competing priorities, including market volatility, inflation and financial commitments such as student loans. Stopping or postponing plan contributions or making uninformed investment choices can negatively impact their retirement savings goals. This also affects employers, as workers then continue to work well past retirement age.

If your plan currently features auto-enrollment and auto-escalation, there’s still an opportunity to review your organization’s strategies for increasing plan participation and develop a robust financial wellness program. Offering educational savings tools and providing forecasts of retirement income may encourage employees to continue building their savings.

The SECURE 2.0 Act has provisions to help older Americans who may not need to take required minimum distributions (RMDs) as previously mandated. Effective January 1, 2023, the RMD starting age increased to 73, and will increase to 75 beginning January 1, 2033. In addition, the excise tax for failure to take RMDs has been reduced.

New Provisions to Boost Savings

Effective January 1, 2024:

  • New employer matching contributions on student loan payments — Employers that offer 401(k) plans, 403(b) plans, SIMPLE IRA plans and governmental 457(b) plans may provide a matching contribution based on a participant’s “qualified student loan payments.” This provision is intended to make it easier for employers to provide employer-matching contributions to employees who are paying off student loans in lieu of making retirement plan contributions. An employer can rely on employee certification of the student loan payments.
  • Roth treatment of catch-up contributions — For individuals whose wages are more than $145,000 (indexed), catch-up contributions to 401(a), 403(b) and 457(b) plans must be made on a Roth (i.e., after-tax) basis. UPDATE AS OF 8/25/23: The IRS issued Notice 2023-62, providing eagerly anticipated relief in the form of a two-year administrative transition period, meaning that plan sponsors, recordkeepers and payroll providers now have until 2026 to get systems in place to administer this change that was scheduled to take effect in 2024.

Effective January 1, 2025:

  • Increased catch-up contribution limits — For individuals 60 to 63 years old, catch-up contributions to retirement savings plans will be increased to the greater of $10,000 or 150% of the regular age 50 catch-up amount in 2024.
  • Reduced period of service requirement for long-term part-time employees — For long-term part-time workers to be able to contribute to a qualified retirement savings plan, the required service period will be reduced from three to two years. The employee needs to have worked a minimum of 500 hours of service per year and be 21 years old by the end of the two-year period.

Additional Key Provisions That May Affect Your Retirement Program:

Defined Contribution (Savings) Plans Defined Benefit (Pension) Plans
  • Tax credit increase for certain organizations setting up a new retirement savings plan: 100% for three years (up to $5,000 per year)
  • Mandatory cash out limits increased from $5,000 to $7,000
  • Under certain conditions, matching and non-elective contributions can be made on a pre-tax or Roth basis
  • Paper benefit statement is required annually (2026)
  • A “lost and found” database will be established to help identify missing retirement benefits
  • End of PBGC variable rate premium indexation
  • Additional lump sum window notices to be provided
  • Section 420 transfers will be expanded to pay for retiree health benefits
  • Annual funding notice changes must show better representations of funded status
  • Enhancements to the mortality table
  • Paper benefit statement required once every three years (2026)

1 Prudential Insurance research, 2019

2 Lincoln Financial Group, 2020 Consumer Sentiment Tracker Study

Investment Advice provided by USI Advisors, Inc. Under certain arrangements, securities offered to the Plan through USI Securities, Inc. Member FINRA/SIPC. 95 Glastonbury Blvd., Suite 102, Glastonbury, CT 06033. USI Consulting Group is an affiliate of both USI Advisors, Inc. and USI Securities, Inc.

This information is provided solely for educational purposes and is not to be construed as investment, legal or tax advice. Prior to acting on this information, we recommend that you seek independent advice specific to your situation from a qualified investment/legal/tax professional. | 1023.S0117.0003