Late last week Congress passed the Consolidated Appropriations Act, 2023 (CAA 2023), the long debated and expected changes to employer-sponsored benefit programs known as Setting Every Community Up for Retirement Enhancement (SECURE) 2.0. The SECURE 2.0 Act of 2022 appears as Division T about halfway through the Senate Appropriations document.
There are over 90 provisions addressed in the new law, expanding coverage and increasing retirement savings, preserving income, simplifying and clarifying retirement plan rules, making technical amendments to the original SECURE Act of 2019, and changing certain other administrative, revenue, and tax court retirement provisions. As with early versions from the House and Senate, many or perhaps most provisions affect defined contribution (DC) plans and IRAs. There are several provisions for defined benefit (DB) plans, and there are a number of ERISA compliance and disclosure items affected. Here are some key provisions of the new law with the Section of Division T in parentheses:
- Starting in 2025 automatic enrollment becomes mainstream, as most new 401(k) and 403(b) plans must include automatic enrollment and automatic escalation, with an initial automatic enrollment deferral contribution amount upon participation of at least 3% but not more than 10% (unless the participant opts out or elects a different percentage). After the first year, the automatic enrollment rate must increase by 1% each year up to at least 10% but not more than 15% (unless the participant opts out or elects a different percentage). (Section 101)
- The required minimum distribution (RMD) age increases to age 73 in 2023, then rises to age 75 beginning in 2033. (Section 107)
- The annual limit on catch-up contributions will increase beginning in 2025 for those who are ages 60 through 63 (inclusive) up to $10,000 (or, if greater, 150% of the regular catch-up amount for 2024). That dollar amount will be indexed for cost-of-living increases after 2025. (Section 109)
- In order to generate federal tax revenue for the increased catch-up contribution limits in item 3 above, starting one year earlier, i.e., in 2024, if a participant earns over $145,000 from the plan sponsor in the prior year, then all catch-up contributions must be made as Roth after-tax contributions. The $145,000 is defined in Internal Revenue Code (IRC) section 3121(a), which does not have to be the same as the plan’s compensation definition, and is indexed for cost-of-living adjustments. (Section 603)
- Another federal tax revenue-raising provision is for participants to choose to receive employer matching or nonelective contributions as Roth after-tax contributions. (Section 604)
- Future mortality improvements in the applicable mortality table cannot exceed 0.78% for the actuary’s life expectancy assumption. (Section 335)
- The projected interest crediting rate for a cash balance (statutory hybrid) plan that uses a variable interest crediting rate is capped at 6%. (Section 348)
- The indexing on the Pension Benefit Guaranty Corporation (PBGC) variable rate premium rate is eliminated, fixing the rate at $52 per $1,000 (5.2%) of unfunded vested benefits (UVB) starting immediately. (Section 349)
This Benefits Alert is not intended to be a comprehensive review of the new law, but rather highlights some of the key provisions that employers, their advisors, and plan administrators will need to consider for their plans. For those provisions that are implemented, additional consideration should be made to account for any required changes to administrative systems and communications to plan participants before the effective date of the change.
Stay tuned for future Client Action Bulletins, which will dive deeper into the SECURE 2.0 provisions and discuss how they may impact retirement plans.
Please contact your Milliman consultant for additional information that affects your employer benefit programs.
The SECURE 2.0 Act of 2022 requires many fiduciary committee decisions and administrative committee actions to be discussed and implemented.
We break down key provisions of the new retirement legislation, including automatic enrollment and higher limits on catch-up contributions.