Compliance December 20, 2022

SECURE 2.0 Bill Delivers on Most Supported Provisions

The final bill contains measures on student loan matching, 403(b) improvements, tax credit incentives, emergency savings and a plan lost and found.

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Updated with clarification

The widely anticipated legislation known as SECURE 2.0 was attached to the omnibus spending package released by the Senate Appropriations Committee on Tuesday. The bill does not contain any huge surprises for those following its three component bills through Congress, and its most popular provisions survived intact into the final bill.

The spending bill must now be passed by both the Senate and the House of Representatives and then signed by President Joe Biden for the federal government to be funded for fiscal year 2023, through September 30, 2023, and SECURE 2.0 to be law.

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Among other items, the final version of SECURE 2.0 would do the following:

  1. Auto-enrollment and escalation: New 401(k) and 403(b) plans would have to start enrolling participants with a salary deferral of at least 3% of salary, no higher than 10%, and escalate at 1% per year of service up to a minimum of 10% and maximum of 15%. An employee can opt out of the auto-enrollment and escalation. Small businesses, new businesses and church and government plans are exempted from this provision.
  2. Increased tax credits for low-income savers: Starting in 2027, low-income savers could receive a tax credit of 50% of their retirement contributions, up to $2,000.
  3. 403(b) Improvements: 403(b) plans could participate in multiple and pooled employer plans. Permission to use CITs was included in an early House bill but not included in the final measure.
  4. Required Minimum Distributions: The age for required minimum distributions is 72. It would be increased to 73 in 2023 and 75 in 2033.
  5. Catch-up Contributions: For those aged 60 through 63, catch-up contribution maximums would be increased to $10,000 or 150% of the regular catch-up amount for those aged 50 and older, whichever is greater.
  6. Student Loan Matching: Starting in 2024, employers could match student loan payments with plan contributions. The provision would not be limited to governmental debt and could be applied to any loan taken for higher education expenses.
  7. Emergency Savings: Participants would be permitted to withdraw up to $1,000 in one withdrawal per year without an early-withdrawal tax penalty. They would have the option to repay this amount in three years and could not withdraw in this fashion again for three years unless the earlier withdrawal has been repaid. Employers could also offer a retirement plan-linked emergency savings account that would allow four penalty-free withdrawals per year. Employees could contribute a maximum of $2,500 to such an account.
  8. Hardship Withdrawals: Participants could withdraw up to $22,000 to pay for expenses related to a natural disaster, which would be taxed as gross income over three years without additional penalty. Survivors of domestic abuse could also withdraw the lesser of $10,000 or 50% of their retirement account without penalty upon self-certifying as a survivor of domestic abuse.
  9. Lost and Found: The Department of Labor would have two years to create an online database of plans so that employees and employers could find missing retirement accounts and match them to their corresponding sponsor and participant.
  10. College-Savings Account Rollover: Leftover 529 account savings could be rolled over into a Roth IRA without penalty, provided the rollover amounts fall within IRA limits and the 529 is at least 15 years old.
  11. Part-time employees: Part-timers would have to be enrolled in their employer’s 401(k) after two years, instead of the current three.
  12. Auto-portability: A plan provider could transfer a participant’s retirement savings from a previous employer to their new one, unless the participant elects otherwise.
  13. Qualified Longevity Annuity Contracts. Under current rules, the lesser of 25% of a retirement account or $135,000 can be allocated to a QLAC. Under SECURE 2.0, the 25% consideration would be repealed and the cap raised to $200,000. The bill also clarifies that QLACs with spousal survivor rights can still be paid in case of divorce.
Ask the Experts December 20, 2022

What Are The Maximum Deferral Limits When Both A 403(b) and 457(b) Plan Are In Place?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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I recently read your 2021 Ask the Experts column on the maximum deferral limit when both a 403(b) and 457(b) plan are in place. Is it possible that the Experts can update that column with the 2023 figures? Thanks!

Kimberly Boberg, Taylor Costanzo, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Absolutely, and it is quite appropriate to do so given the significant increase in the dollar limits due to inflation.

The 2023 limit is quite a bit of money, with the ultimate answer dependent on which catch-up contributions a plan sponsor offers and an employee’s eligibility for those provisions. Eligible employees who elect to make deferrals to both plans will generally be able to make up to $22,500 in deferrals to the 403(b) plan and another $22,500 in deferrals to the 457(b) plan in 2023, for a total of $45,000, provided that the employee has at least $45,000 in compensation to defer. (Note: If an employee received EMPLOYER contributions to the 457(b) plan, the $22,500 limit for that plan would be reduced by those contributions.)

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If an employee is age 50 or older by the end of 2023, and both the 403(b) and 457(b) plans permit the use of the age-50 catch-up election (only permitted under the 457(b) plan if it is a governmental plan), that total deferral limit would increase to $60,000 ($22,500 + $7,500 catch-up to each plan for 2023). If the 457(b) plan is a private tax-exempt plan, there is no age-50 catchup, and the combined limit is $52,500 ($22,500 + $7,500 catch-up to 403(b), plus $22,500 to 457(b)).

There are some more obscure elections which a small number of employees may use to further increase their contribution limits, provided the plan offers them. The first is the 457(b) three-year catch-up election, which allows the employee to contribute the lesser of twice the 457(b) limit or the 457(b) limit plus any unused limitations in prior years. If the plan offers the election and the employee qualifies, that could increase the maximum dollar deferral limit in the 457(b) plan to $45,000, making it possible for an employee to defer a total of $75,000 ($22,500 in deferrals + $7,500 in catch-up to the 403(b) plan and $22,500 in deferrals + $22,500 in three-year catch-up to the 457(b) plan) to both plans if he/she is older than 50 (note: the three-year catch-up and the age-50 catch up cannot be used in the same year in the 457(b) plan, or else this limit would be even higher in a governmental 457(b) plan).

The second election is the 403(b) plan 15-year catch-up election, which would allow for up to an additional $3,000 to be deferred to the 403(b) plan (for a total of $78,000 when added to the scenario described above), if the plan permits the election, and the employee qualified. However, this particular election is so difficult for plan sponsors to administer that many have opted not to offer it.

Keep in mind that as an employee’s deferrals increase, the section 415(c) limits may come into play, depending on the 403(b) plan’s level of employer contribution.

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice. 

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.

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