This is the first in a series of articles covering the IRA provisions in the SECURE 2.0 Act of 2022, which was passed as part of the federal year-end spending Bill. This initial overview will be followed by more in-depth pieces on the provisions outlined below.
The $1.65 trillion spending bill signed into law by President Biden on December 29, 2022, included a section that significantly affects retirement savers, IRAs, and retirement plans. This section is named SECURE 2.0 (the Act) because its requirements build upon the enhancements made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019. SECURE 2.0 is a strongly bi-partisan compilation of several pieces of legislation that enhance retirement savings opportunities for individuals, encourage small employers to adopt retirement plans for their employees, and simplify compliance with current retirement plan rules. This initial article focuses on provisions of the new law affecting Individual Retirement Accounts (IRAs).
The law changes that directly affect organizations offering IRAs, as well as the individuals who own those accounts, include the following:
- Increase in RMD Starting Age: Currently, accountholders must begin taking annual required minimum distributions (RMDs) for the year in which they reach age 72. The RMD starting age will increase to 73 for those who had not reached age 72 by the end of 2022 – starting in 2023. (The RMD age will increase to 75 in 2033.)
- SEP and SIMPLE Roth Contributions: Employees may elect Roth treatment for both employee and employer contributions – starting in 2023.
- Automatic IRA Rollover Eligibility: Currently, if a former employee with a vested account balance under $5,000 fails to provide distribution instructions to the plan sponsor, the plan sponsor may establish an IRA for the benefit of that participant and roll over the account balance to that IRA. With the new regulation, the automatic rollover cap triggering eligibility increases to $7,000 – effective for cash-out distributions starting in 2024.
- IRA Catch–Up Contribution Limit: The IRA catch-up contribution limit for accountholders age 50 and older – currently $1,000 per year – will be indexed for inflation – starting in 2024.
- Rollover of Excess 529 Assets to a Roth IRA: The beneficiary of a 529 account will be eligible to roll over assets from a 529 account to a Roth IRA if the account has been open for at least 15 years. The rollover is limited to the Roth IRA contribution ceiling in effect for the year. Rollovers from a 529 plan to a Roth IRA are subject to a lifetime limit of $35,000 – starting in 2024.
- Nonelective Contributions Permitted in SIMPLE IRA Plans: Employers may make a nonelective (discretionary) contribution of up to 10% of a participant’s compensation, not to exceed $5,000, to the participant’s SIMPLE IRA – starting in 2024.
- Student Loan Matches to SIMPLE IRAs: Employers may consider an employee’s qualified student loan payments as deferrals for purposes of making matching contributions to a SIMPLE IRA – starting in 2024.
- SIMPLE IRA Plan Contribution Limit: An employer with up to 25 employees may, but is not required to, allow SIMPLE IRA deferrals and catch-up contributions up to 110% of the statutory limit in effect for that year. Employers with 26-100 employees may apply the increased limits only if the employer provides a 4% matching contribution or a 3% nonelective contribution – starting in 2024.
- Termination of SIMPLE IRA Plan Mid-Year: An employer will be able to terminate a SIMPLE IRA mid-year if the employer adopts a Safe Harbor 401(k) plan – starting in 2024.
- Increase in SIMPLE IRA Plan Catch-Up Contribution: Employees participating in a SIMPLE IRA plan at ages 60, 61, 62, or 63 are permitted to make a catch-up contribution up to the greater of $5,000 or 50% higher than the SIMPLE catch-up contribution limit in effect for that year. This dollar amount will be indexed for inflation – starting in 2025.
In addition to new features and savings enhancements, the Act also made some compliance changes to render corrections less onerous on the accountholders, including the following:
- Correcting IRA Violations: By the end of 2024, the IRS must expand its Employee Plans Compliance Resolution System (EPCRS) to apply to inadvertent IRA errors.
- Prohibited Transactions in IRAs: The new law clarifies that, if an accountholder owns multiple IRAs and one of their IRAs includes a prohibited transaction, only the IRA involved will be disqualified. (Note that the IRA industry has historically applied this interpretation, but now the statutory language is clear.) – starting in 2023
- Modification to IRA Making 72(t) Payments: Currently, an accountholder who is taking payments under a substantially equal periodic payment arrangement (referred to as 72(t) payments) cannot take other assets out of that The new law enables accountholders to roll over or transfer from that IRA if the receiving plan or IRA continues to make the required 72(t) payments – starting in 2024.
- Reduced RMD Failure Penalty: Currently, an accountholder who fails to take an RMD is subject to a 50% excise tax on the amount not Beginning in the 2023 tax year, that failure is reduced to 25% and if taken within 2 years of the failure is reduced to 10%.
In addition to these IRA provisions, the Act includes more than 75 other provisions affecting employer-sponsored retirement plans.
As with all new legislation, the regulatory agencies will need to create guidance to help employers, retirement savers, and service providers interpret and comply with this new law. In the meantime, questions are already surfacing regarding these changes. For example:
- Will SIMPLE IRAs be able to incorporate Roth contributions in 2023 when plan information was required to be provided to participants prior to the start of the plan year? How will SIMPLE IRA participants elect to treat contributions as Roth?
- Will SIMPLE IRA plans and SIMPLE IRAs established with IRS model documents need to be revised to allow for Roth contributions in 2023 for Roth to be incorporated in 2023?
- Do plans with Automatic IRA Rollover provisions need to amend the plan for the new limits before applying them; and would the plan sponsor agreements used to establish these arrangements with a custodian need to be changed?
Upcoming articles in the IRALOGIX Briefing series will address these and other SECURE 2.0 details and requirements for IRAs as well as provide guidance pertaining to outstanding questions, implementation of these changes, and compliance with the new regulations.
For more information about how your organization and accountholders can benefit from IRALOGIX’s guidance, email sales@iralogix.com.
Authored by:
Lowell M. Smith, Jr., Co-Founder and Chief Compliance Officer at IRALOGIX, Inc. Lowell is a nationally recognized expert on retirement financial services with proven experience in creating, leading, and running innovative, technology-focused organizations that changed the retirement services landscape.
Anissa Langhorst, Managing Editor, Sr. Consultant at Integrated Retirement, a division of IRALOGIX, Inc. Since 2001, Anissa has provided consulting services and guidance about retirement plans and IRA legislation and regulations, meeting institutional business and compliance needs in the industry.