How the SECURE Act 2.0 Impacts Millennials and Gen-Z

As the US heads toward the modern retirement crisis of 2040+, the SECURE Act 2.0 will help shift our trajectory. Similar to the 2023 retirement age increase protest in France, governments are looking ahead. The social contract can no longer sustain an aging population. As such, the SECURE Act 2.0 expands access to retirement savings for individuals and businesses and greatly bolsters your Financial Plan.

The law is designed to make it easier for people to save for retirement, including:

Introducing automatic enrollment in employer-sponsored retirement plans,
Increasing the “required minimum distributions” age,
Allowing employers to consider student loan payments as elective retirement contributions,
Creating a new tax-free growth Roth 401(k) option,
Expanding the availability of annuities for easier retirement withdrawals, and
Providing tax credits for small businesses that offer retirement plans.

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Expected Changes from The SECURE Act Enhancements

The SECURE Act 2.0 will have a significant impact on retirement savings in the US. More so for Millennials and Genz generations that have been priced out of wealth for the last decade. The law will increase access to retirement plans for more than 10 million workers. It will also increase retirement savings by $1 trillion over the next decade.

In addition, the SECURE Act 2.0 will have a positive impact on the economy. Through market investments, the law will create jobs, boost economic growth, and reduce income inequality.

The Biggest Change – Automatic Enrollment

Employers starting new retirement plans (after December 29, 2022) will, beginning in 2025, be required to automatically enroll employees. This auto-enrollment starts at a minimum of three percent, but not more than 10 percent of eligible wages.

Employees may opt out. However, most employees don’t opt out if they were already in there. This applies to either:

New companies (in business for less than three years) and
companies with 10 or fewer workers are excluded from this requirement.

An Automatic Enrollment plan must allow employees to withdraw automatic contributions. Any earnings within no more than 90 days of the first contribution without being subject to the 10% penalty on early withdrawals.

Automatic Escalation

Additionally, new 2025 retirement plans started after December 29, 2022, will be subjected to automatic escalation. By that it means, contribution percentages MUST automatically increase by one percent on the first day of each plan year. This is applicable the following the completion of a year of service until the contribution is at least 10 percent. However, it will not automatically exceed 15 percent of eligible wages.

Some exceptions apply:

governmental and church plans,
businesses with 10 or fewer employees, and
employers that have been in business for less than three years.

Catch-Up Contributions Increased in ROTH Options

In 2023, participants age 50 and older can contribute an extra $7,500 per year annually into their 401(k) account. This amount will increase to $10,000 per year (indexed for inflation) starting in 2025 for participants aged 60 to 63.

All catch-up contributions for participants earning over $145,000 annually must be made on a ROTH basis.

Effective immediately, employers may amend their plans to permit employees to elect that employer matching and non-elective contributions are made as Roth (after-tax) contributions, as long as they are 100 percent vested when contributed to the plan.

Additional guidance is expected.

Expanded Eligibility for Long-Term, Part-Time Employees

Currently, employees who work between 500 and 999 hours for three consecutive years MUST be allowed to participate in their company’s retirement plan. SECURE 2.0 reduces the time period to two years, effective in 2025.

This does not apply to employees who participate in collectively bargained plans, or to nonresident aliens.

Treatment of Student Loan Payments for Matching Contributions.

Beginning in 2024, student loan payments can be treated as retirement contributions for the purpose of qualifying for matching contributions in a workplace retirement account. Employers will be able to make contributions to their company retirement plan on behalf of employees who are paying student loans instead of saving for retirement.

Employers may rely on the employee to certify annually the amount of their qualifying student loan payments.

SECURE Your Emergency Savings Accounts by Linking them to Your Retirement Plans

Beginning in 2024, retirement plans may offer linked emergency savings accounts that permit non-highly compensated employees to make Roth contributions to a savings account within the retirement plan.

Balances in an emergency savings account must be eligible for distribution at least once per month. Withdrawal transactions are penalty-free and do not need to be substantiated, e.g., to show a qualifying emergency cause.

Employers may automatically opt employees into these accounts at no more than three percent of eligible wages.

Employees can opt out of participation. No further contributions can be made if the savings account has reached $2,500 (indexed), or a lesser limit established by the employer.

Once the cap is reached, additional contributions can be directed to the employee’s Roth-defined contribution plan (if they have one) or stopped until the balance falls below the limit. No employer contributions are permitted.

Employee contributions to an emergency savings account must be eligible for the same matching contributions that apply for elective deferrals. Matching contributions are made to the retirement plan – not to the emergency savings account. Upon termination of employment, any emergency savings account can be converted to another Roth account within the plan or can be distributed to the participant.

This provision addresses a common objection to participation in retirement savings. For instance, if an employee fears that they may need any retirement contributions for unforeseen emergencies. The Department of Labor and/or the Treasury Department may issue guidance on these provisions.

Withdrawals for Certain Emergency Expenses

Generally, an additional 10 percent tax applies to early distributions from tax-preferred retirement accounts, such as 401(k) plans. In addition to the emergency savings account option described above, beginning in 2024, the Act provides an exception for certain distributions for emergency expenses. For unforeseen immediate financial needs relating to personal or family emergency expenses, this can help. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within three years.

No further emergency distributions may be made during the three-year repayment period until any amounts previously taken are repaid.

The employer will rely on an employee’s written certification that the employee is facing a qualifying emergency personal expense, absent actual knowledge to the contrary. Further guidance is expected on this provision.

Don’t Miss Out on the Saver’s Match

Beginning in 2027, lower-income employees will be eligible to receive a federal matching contribution of up to $2,000 per year that would be deposited into their retirement savings account. The matching contribution is 50 percent of the employee’s contributions but is phased out as income increases (for example, between $41,000 and $71,000 for married, filing jointly; $20,500 to $35,500 for single taxpayers, etc.).

This match replaces the current Saver’s Credit.

Required Minimum Distributions (RMDs)

The requirement to begin taking RMDs will increase from age 72 to age 73 in 2023, and then age 75 in 2033. In addition, the penalty for not taking an RMD is reduced from 50 percent of the amount required to be withdrawn currently to 25 percent, and to 10 percent if corrected within two years.

Immediate Incentives for Participation

Currently, employers can only provide matching contributions as an incentive to participate in a retirement savings plan. Effective for plan years beginning after 2022, employers may offer modest financial incentives, such as gift cards, which may help increase participation. However, any financial incentives should be of de minimis amounts and cannot be paid with plan assets.

Expanded Credit for Retirement Plan Administrative Costs

Currently, employers with less than 100 employees may be eligible for a three-year start-up tax credit of up to 50 percent of administrative costs. However the annual limit of $5,000.

SECURE Act 2.0 increases this credit to 100 percent of qualified start-up costs for employers with up to 50 employees. An additional credit of up to $1,000 per employee for eligible employer contributions may apply to employers with up to 50 employees, but phase out from 51 to 100 employees.

Retirement Savings “Lost and Found”

The Act will establish an online searchable database within two years. This will allow a participant or beneficiary to search for contact information for plan administrators of plans in which the participant or beneficiary may have a benefit.

Plans will be required to share data with the Department of Labor to be included in the database.

Facilitation of Error Corrections.

The Act expands the self-correction system known as the Employee Plans Compliance Resolution System (“EPCRS”). This allows more types of errors to be corrected internally. Additionally, it exempts certain failures to make required minimum distributions from the excise tax. There are also new rules for correcting overpayments.

These enhancements were effective upon enactment.