Skyrocketing inflation, stagnant job sectors, and a steep rise in the costs of living are slowly eating away at retirement plans for many Americans. These unstable economic factors have made it difficult for Americans to gain a tangible sense of financial security, especially in the wake of the 2020 COVID-19 pandemic. An AARP report from mid-2022 revealed that a little more than 50% of Americans ages 18 to 64 are not able to get retirement funding through their employers. This limited access to benefits is not limited to small and medium-sized businesses. The same report showed that employer-sponsored retirement benefits are still inaccessible to about 1/3 of Americans who work for large companies.
Before the end of 2022, Congress passed the Secure 2.0 Act, an updated and expanded version of the 2019 Secure Act, which sought to ensure that retirement benefits are accessible and affordable for everyday people. The bill itself is complex, with more than 92 expansions and provisions. However, the key takeaway is to steadily offer more retirement plan options to employees, including incentives and tax breaks, and increase the number of employees eligible for them. With accessibility and affordability being the biggest barrier to retirement plans for employers and employees alike, the bill seeks to address these issues with their latest expansions. Here are key changes coming in 2023 and beyond.
Delay Mandatory Withdraw from Accounts
Because Americans are living longer and retiring much later in life than previous generations, the age of mandatory withdraws from an employer-sponsored retirement fund has been increased. The previous version of the Secure Act made it mandatory for retirement plan participants to withdraw a required minimum distribution (RMD) of an IRA or 401(k) around the age of 72. The amount of such distributions is calculated by a number of factors beyond age of the plan holder, including longevity of the account and its value.
In 2023, however, this age limit will be raised to 73, effective January 1, 2023. It will cover the following tax-advantaged accounts: IRA SEP, traditional IRA, and SIMPLE IRA. By 2033, the RMD age limit will be raised again, this time to 75, effective January 1, 2033. This will give Americans an additional three years of tax-free retirement savings. The penalty for failing to withdraw by the age limit will also be adjusted, slashed from 50% to 25%.
Expansion: Part Time Employee Coverage
In the past, it was uncommon for part time employees to be offered benefits by the employer. In fact, employers have the power define what is “part time” and “full time” work—not the Federal Government, as many assume—making it easy for part time workers to fall to the wayside, in terms of receiving benefits. This has made it difficult for millions of Americans—particularly those who are caregivers, freelance, gig workers, independent contractors, and part time workers—to invest in a retirement plan and save for the future.
With the Secure 2.0 Act, however, it would be mandatory for employers to offer a 401(k)-retirement plan to all employees, regardless of full or part time status. Part time employees who put in at least 500 hours/year for two years (approximately 10 hours/week) will be able to invest in the same retirement plans as their fulltime coworkers. This provision of the act will go into effect December 31, 2024.
Savings Through Student Loans
Student loan debt has been crippling the United States for years, making it near impossible for many employees to invest in retirement plans or other much-needed benefits. To address this gap in coverage, the Secure 2.0 Act has made revolutionary provisions that will allow employers to match employee student loan payments with 401(k), 403(b), or SIMPLE IRA contributions. Government employees will also be able to match student debt payments with their 457(b) or similar retirement plan donations.
What does this mean? Starting in 2025, employees with student debt—even significantly high amounts of debt—will be able to save for retirement just by making their monthly student loan payments. Payments rolled into one, with no need for a separate retirement plan account. It’s important to note that employer-sponsored retirement plans are beholden to annual contribution caps ($22,500 as of 2023), which will limit the employees use of this particular benefit.
Pension-Linked Emergency Savings Account
In the wake of COVID-19 and a series of natural disasters over the years, new regulations have been admitted into the Secure 2.0 Act to allow savings and withdrawals for emergencies. Employers will now be able to enroll their employees in an emergency savings account, contributing up to a max of 3% of their total salary and capped at $2,500/year.
In the event of an emergency (or series of emergencies), employees will be able to withdrawal funds up to four times per year without suffering additional taxes or penalties. This pension-linked emergency savings account provides employees with an accessible rainy-day fund, one that is employee matchable and portable, should they leave the company.
The Automatic-Enrollment Process
Effective in 2023, all new employer-sponsored retirement plans—including 401(k) and 403(b)—will be required to automatically enroll eligible employees. Contribution amounts will be set at a minimum of 3%, which will increase yearly by 1% and have a max contribution of 10-15%, depending on the type of plan. Employees will, of course, be allowed to opt out of the plan at any time. This new rule is an effort to get more employees enrolled in retirement programs, and it will go into effect sometime in 2025.
Accessibility Is the Key Takeaway
The Secure 2.0 Act will no doubt bring about significant changes for savings and retirement options in America. With a conscious effort to bridge the gap between employees and their future needs, the Department of Labor eventually aims to bring all national retirement plan options to peoples’ fingertips, searchable via an extensive database much like the Marketplace. This is just one of the 92 provisional changes made to the Secure 2.0 Act, all of which work to make benefit accessibility easier for employees and businesses alike. These new regulations will slowly roll out this year (2023) through 2025.
To learn more about retirement, plan options, and need-to-know terms, speak with an expert or your employer today. New to all this jargon? Check out this easy to read and extensive list of terms!
The above content is purely informational and is not comprehensive.
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