Reed Smith In-depth

On December 29, 2022, President Biden signed into law the SECURE 2.0 Act (the Act), which is a comprehensive enhancement to the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). The Act provides sweeping changes – some, mandatory – for retirement benefit plans, expanding on many provisions in the SECURE Act. Although plan sponsors will not be required to make any changes effective in plan year 2023, plan sponsors and administrators will be required to take action to comply over the next few years.

Mandatory changes

Below are a few of the key mandatory changes in the Act affecting retirement plans:

A. Automatic enrollment for new 401(k) and 403(b) plans

The Act requires all new 401(k) and 403(b) plans established after December 31, 2024 to automatically enroll employees in the plan upon becoming eligible, unless the participant specifically elects not to participate. For the initial year of participation, the automatic default deferral must be at least 3% (but not more than 10%) of compensation. Each year thereafter, the employee’s automatic deferral amount must increase by at least 1% until it reaches at least 10%, but not more than 15%, of compensation.

B. Required minimum distributions (RMDs)

The Act once again increases the required beginning date for mandatory distributions. Under the Act, individuals turning age 72 during 2023 or later will not be required to start their RMDs until age 73. For those reaching age 74 after December 31, 2032, their required beginning date is age 75. These changes are effective for distributions made after December 31, 2022 with respect to individuals who attain age 72 after that date.

In addition to the delayed required beginning date, the Act also made the following changes to RMDs: (i) a spousal beneficiary is permitted to elect to be treated as the employee for RMD purposes beginning in 2024; (ii) the excise tax for failure to take RMDs is reduced from 50% of the shortfall to 25%, beginning in 2023, and is further reduced to 10% if the individual corrects the shortfall during a two-year correction window; and (iii) RMDs are no longer required (prior to the participant’s death) from Roth accounts beginning after 2023. Plan administrators will need to adjust their RMD procedures to ensure that RMDs are being distributed appropriately from the plan.