SECURE 2.0 developments and guidance for 2024

The SECURE 2.0 Act¹ is an extensive piece of retirement plan legislation passed on Dec. 29, 2022. Its stated goals are to expand and increase retirement savings and to simplify and clarify retirement plan rules. Its passage affects virtually all forms of retirement plans and increases conformity across different types of plans. The legislation expands and builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019,² which was known for increasing the age for required minimum distributions (RMDs) and eliminating age requirements for traditional IRA contributions.

A behemoth, SECURE 2.0 contains over 90 changes to retirement plan and tax law (versus the 30 or so in the SECURE Act) and myriad effective dates.³ Not surprisingly, further guidance is expected regarding its implementation, and calls for technical corrections and delayed effective dates are surfacing and being considered by congressional leaders and Treasury as of this writing.

SECURE 2.0 was organized in seven titles:

• Title I — Expanding Coverage and Increasing Retirement Savings (Sections 101–128);
• Title II — Preservation of Income (Sections 201–204);
• Title III — Simplification and Clarification of Retirement Plan Rules (Sections 301–350);
• Title IV — Technical Amendments (Section 401);
• Title V — Administrative Provisions (Section 501);
• Title VI — Revenue Provisions (Sections 601–606); and
• Title VII — Tax Court Retirement Provisions (Sections 701–702).

This article focuses on selected provisions in the first six titles of the act with effective dates in 2023 and 2024, including anticipated technical corrections, potential delayed effective dates, and guidance issued by Treasury and the IRS as of this writing.

SECURE 2.0 provisions taking effect in 2023 and 2024

Student loan payment matching

SECURE 2.0 Act Section 110⁴ provides that employers may make matching contributions to a retirement plan when employees make qualified student loan payments, for defined contribution plans in years beginning after Dec. 31, 2023. “Qualified student loan payments” are defined as the repayment by an employee of a qualified education loan incurred by the employee and used to pay qualified higher education expenses. These matching retirement contributions must vest under the same schedule as other matching retirement contributions under the plan, and annual employee certification of student loan payment is required. Thus, where plans allow, employees need no longer forgo employer matching retirement contributions because they elect to pay off student loans instead of investing in retirement.

Expansion of penalty-free withdrawals

An early withdrawal penalty is imposed on distributions from tax-deferred retirement accounts received before age 59½. SECURE 2.0 expanded the avenues for exemption from this early withdrawal penalty in several ways and attempted to conform the hardship distribution rules for Sec. 403(b) plans to those of Sec. 401(k) plans.

Emergency personal expense distributions: Beginning in 2024, penalty-free distributions of up to $1,000 are allowed by act Section 115⁵ as “emergency personal expense distributions” for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” Only one distribution may be made every three calendar years, or one per year if any previous emergency personal expense distribution within the three-year period has been repaid.

Distribution in case of domestic abuse: Penalty-free withdrawals are also allowed by act Section 314,⁶ beginning in 2024, for certain amounts for individuals who need the funds in cases of domestic abuse. Victims of domestic abuse may receive the lesser of (1) $10,000 (adjusted for inflation after 2024) or (2) 50% of their account value without penalty. Domestic abuse is defined to include physical, psychological, sexual, emotional, or economic abuse by a spouse or domestic partner and includes efforts to control, isolate, humiliate, or intimidate the victim by means of abuse of others — the victim’s child or other family members — living in the household. The participant may repay withdrawn amounts over a three-year period and recoup income taxes paid on distributions that are repaid.

Individuals with a terminal illness: Act Section 326⁷ allows an exception for terminal illness (effective for distributions made after Dec. 29, 2022).⁸ For a taxpayer to qualify for this penalty waiver, a physician’s certification is required, and death must be reasonably expected within 84 months of the date of certification.

Qualified disaster recovery: Act Section 331,⁹ also effective in 2023, exempts from penalties distributions of up to $22,000 made due to qualified disasters.¹⁰ A 180-day window for receiving such qualified disaster distributions is specified,¹¹ and these distributions are to be included in taxable income ratably over a three-year period. The participant may repay withdrawn amounts over a three-year period.

Other notable provisions: Beginning in December 2025, retirement plans will be permitted to distribute up to $2,500 per year to pay premiums for specified long-term-care insurance contracts, under act Section 334. The distributions will be penalty-free.¹² Act Section 312,¹³ effective in 2023, allows employees to self-certify that they have had an event that constitutes a hardship for purposes of hardship withdrawal certification.

SIMPLE plan changes

SIMPLE IRAs and simplified employee pension plans (SEPs) can allow employees to treat contributions as nondeductible Roth contributions under act Section 601, which repealed Sec. 408A(f), effective for tax years beginning in 2023.¹⁴ Act Sections 116, 117, and 332 make other changes to SIMPLE plans that are effective in 2024.

SIMPLE plans previously required employer contributions of either (1) a nonelective 2% of compensation or (2) 100% of employee elective deferral contributions, up to 3% of compensation. Act Section 116 eases those limitations and allows an employer with a SIMPLE plan to make additional contributions to each employee of the plan in a uniform manner, provided that the contributions do not exceed the lesser of (1) up to 10% of compensation or (2) $5,000, indexed for inflation after 2024.

In 2023, the annual contribution limit for employee elective deferrals was $15,500, and the catch-up contribution limit was $3,500 (for those 50 and older). Act Section 117 increases the annual SIMPLE IRA and SIMPLE 401(k) deferral limit and the catch-up contribution limit by 10% to 110% of the 2024 deferral/catch-up contribution limits (indexed for inflation after 2024), in the case of an employer with no more than 25 employees. An employer with 26 to 100 employees is permitted to provide these higher deferral limits if the employer provides either a (1) 4% matching contribution or (2) 3% employer contribution. Act Section 332 allows an employer to replace a SIMPLE IRA plan with a SIMPLE 401(k) plan or other 401(k) plan that requires mandatory employer contributions during a plan year.

‘Starter’ 401(k) plans for employers with no retirement plan

Effective in 2024, act Section 121 allows employers with no retirement plan to create “starter” 401(k) wage deferral plans (and 403(b) safe-harbor plans).¹⁵ The plans allow employees to save up to $6,000 per year (indexed for inflation, with a $1,000 catch-up for those 50 and older) in a tax-preferred retirement account, without the administrative burden or expense of a traditional 401(k) plan for the employer. The qualified percentage of compensation, between 3% and 15%, must be applied uniformly. The plans do not permit employer contributions or require complex testing. All employees must be eligible to participate if age and service requirements are met, but they may opt out.

For employers subject to retirement plan coverage requirements in certain states, these plans provide a route to meet that state mandate. Employee contributions to these plans were intended to have the same limits as IRAs, the likely alternative investment. As passed, however, the starter 401(k) and 403(b) plan contribution limit ($6,000) will be less than the IRA limit in 2024 ($7,000, after indexing) when the provision first becomes effective. A change to conform the limits of starter plans to those of IRAs seems a likely target for technical corrections.

529-plan-to-Roth-IRA rollovers

For distributions in 2024 and later, act Section 126 allows beneficiaries of 529 college savings plans to roll over up to an aggregate of $35,000 of excess 529 plan funds to Roth IRAs throughout their lifetime. The 529 plan must have been open for at least 15 years, and the rollovers are subject to the annual Roth IRA contribution limit.¹⁶

Emergency savings accounts linked to retirement plans

Uncertainty surrounding the possible need to tap into retirement savings for urgent financial needs often discourages retirement plan participation, because of the penalties associated with early fund withdrawals. To mitigate this employee hesitation, act Section 127 introduces emergency savings accounts linked to an employer’s retirement plan. Employers may automatically enroll non–highly compensated employees (defined in 2023 as those earning up to $150,000) at no more than 3% of their salary, limited to $2,500. The employee’s first four withdrawals each plan year may not be subject to any withdrawal fees. Contributions to these accounts, together with any excess contributions, must all be made on an after-tax (Roth) basis and treated as employee elective deferrals for purposes of matching contributions. Any excess contributions are funneled into any other Roth designated account the employee has. Upon separation from service, employees have options to roll over into another Roth plan or Roth IRA or receive the cash balance in their account. These provisions are effective for plan years beginning after 2023.

Provisions affecting RMDs

Several important changes were made to RMDs. Act Section 107 increased the applicable age for RMDs to 73, effective Jan. 1, 2023, and to age 75 on Jan. 1, 2033, for certain individuals. An ambiguity regarding the 2033 change may require technical correction; this will be discussed later in this article. Also, act Section 327, effective in 2024, allows surviving spouses to be treated as the deceased employee for RMD purposes where the spouse is designated as the sole beneficiary and RMDs have not yet begun. This provision effectively negates the need under prior law to roll the deceased spouse’s plan interest into an IRA to receive a more favorable distribution period. Distributions are not required to begin earlier than the applicable age date of the deceased employee.

In addition, act Section 325 specifies that, as of Jan. 1, 2024, Roth accounts in employer retirement plans will no longer have RMDs.

Other provisions

Some other noteworthy provisions of the SECURE 2.0 Act are described below in connection with the discussion of anticipated technical corrections.

Anticipated technical corrections and potential delayed effective dates

As of this writing, the House Ways and Means Committee and Senate Finance Committee leaders plan to introduce legislation to clarify congressional intent with respect to certain aspects of SECURE 2.0, as indicated in a letter to Treasury.¹⁷

Specifically, the congressional tax leaders’ letter highlighted the following four provisions as needing technical clarification or correction:

• The availability of catch-up contributions (act Section 603);
• The age at which RMDs should begin (act Section 107);
• Roth contributions to SIMPLE IRAs and SEPs (act Section 601); and
• Tax credits for small employer startup retirement plans (act Section 102).

The availability of catch-up contributions

The SECURE 2.0 Act contains several provisions affecting catch-up contributions. Act Section 108 increases the $1,000 IRA catch-up contribution available to taxpayers 50 and older by indexing the amount to inflation.¹⁸

¹⁹

Also, act Section 109 provides for a larger catch-up contribution amount for those 60 to 63 years old, effective for tax years beginning after 2024. For most plans, the 2025 catch-up amount increases to the greater of (1) $10,000 ($5,000 for SIMPLE plans) or (2) 50% more than the usual, or standard, catch-up amount. Beginning in 2026, the amount will be indexed for inflation. The year reference for SIMPLE plans is 2025 when computing this limit. Conformity in these provision date references may be an item for the technical corrections list.

In addition, act Section 603 requires any catch-up contributions to be characterized as Roth contributions if made by participants in 401(k), 403(b), or 457(b) plans earning wages exceeding $145,000 in the preceding year, beginning in tax year 2024. This means that employers who allow catch-up contributions must begin offering Roth plans in addition to their pretax retirement plans, if not offered already. This could pose a significant problem for those government plans not offering a Roth option, because changes in state laws and/or union contracts may be required to allow compliance with act Section 603.

Some technical corrections to these provisions are expected. As written, the SECURE 2.0 Act mistakenly eliminates catch-up contributions entirely (due to the inadvertent deletion of Sec. 402(g)(1)(C), which states that catch-up contributions are excludable from gross income). The anticipated technical correction legislation will clarify that there was no congressional intent to eliminate catch-up contributions. According to the congressional tax leaders’ letter to Treasury:

Congress did not intend to disallow catch-up contributions nor to modify how the catch-up contribution rules apply to employees who participate in plans of unrelated employers. Rather, Congress’s intent was to require catchup contributions for participants whose wages from the employer sponsoring the plan exceeded $145,000 for the preceding year [highly paid participants] to be made on a Roth basis and to permit other participants to make catch-up contributions on either a pretax or a Roth basis.

The IRS has addressed this administratively in Notice 2023-62, issued in August 2023, by indicating it will ignore the drafting error that eliminates catch-up contributions entirely.

Separately, another potential oversight is apparent because the high-earnings provision is based upon $145,000 of FICA¹⁹ wages, thereby excluding sole proprietors and partners. Their exclusion presumably allows sole proprietors and partners to make pretax catch-up contributions without regard to the level of earned income, which appears inconsistent with the spirit of the law. Act Section 603 was introduced and passed as a revenue raiser rather than to distinguish between taxpayers as to status based upon business form. Thus, technical corrections or future guidance may indicate conformity of the treatment of sole proprietors and partners with other taxpayers. In the interim, the IRS has indicated in Notice 2023-62 that it intends to issue guidance that individuals with self-employment income and no Social Security wages, such as partners in a partnership, are not subject to the requirement that their catch-up contributions must be characterized as Roth contributions.

On June 29, 2023, over 200 organizations — including large retirement plan employers, advocacy organizations, and retirement plan investment vendors — lobbied the leaders of the House Ways and Means Committee and the Senate Finance Committee via a letter to delay the effective date of this revenue raiser provision for two years.²⁰ Another similar letter was sent to Treasury and IRS officials on July 19, 2023.²¹ The gist of this effort is that the organizations do not expect to be able to comply with the increased recordkeeping and systems burdens imposed by this provision by its current effective date. Thus, affected employers will be forced to disallow all catch-up contributions if relief is not forthcoming in the interim period before updated systems are in place to ensure compliance. The letter urges Congress to act but alternatively exhorts Treasury to provide transitional relief in the event Congress does not act soon.

In response to taxpayer feedback, the IRS has also postponed the implementation of the high-earnings provision in Notice 2023-62. Although the high-earnings provision is technically still effective on Jan. 1, 2024, the IRS announced a two-year administrative transition period, thereby effectively extending the effective date to Jan. 1, 2026. During the transition period, plans may continue to allow pretax catch-up contributions by highly paid participants, and plans that do not have Roth features may continue to allow catchup contributions. Thus, through 2025, a plan that does not provide for designated Roth contributions will be deemed to have satisfied the Sec. 414(v)(7)(B) requirements.

The age at which RMDs should begin

Another provision highlighted by the congressional tax leaders’ letter to Treasury as needing technical clarification involves the RMD applicable age. As noted earlier, SECURE 2.0 Act Section 107 increased the applicable age for RMDs to 73, effective Jan. 1, 2023, and to age 75 on Jan. 1, 2033, for certain individuals, but there was some ambiguity in the law as written. Specifically, it increased the applicable age to 73 for those individuals who turn age 72 after Dec. 31, 2022 (and 73 by Dec. 31, 2032), and to age 75 for those individuals turning 74 after Dec. 31, 2032. Technical corrections are expected to indicate that the RMD age will be 75 for taxpayers turning 73 (rather than 74) after Dec. 31, 2032.

Roth contributions to SIMPLE IRAs and SEPs

Under former Sec. 408A(f), SIMPLE IRAs and SEP plans could not have Roth accounts, and a specific rule stated that contributions to SIMPLE IRAs or SEP plans did not count against the annual limit on contributions to a Roth IRA. As passed, act Section 601 repealed Sec. 408A(f), thus permitting SIMPLE IRAs and SEPs to include Roth IRAs. As a result, however, act Section 601 might be read as requiring SIMPLE and SEP contributions to now be included in determining whether an individual has exceeded the Roth IRA contribution limits. The congressional letter clarifies that this was not the intent of SECURE 2.0.

That is, Roth IRA contribution limits should not be reduced by amounts contributed to SIMPLE IRAs or SEP plans:

Congress intended to retain the result under the law as it existed before SECURE 2.0 was enacted regarding SIMPLE IRA and SEP contributions. … Thus, Congress intended that no contributions to a SIMPLE IRA or SEP plan (including Roth contributions) be taken into account for purposes of the otherwise applicable Roth IRA contribution limit.

Tax credits for small employer startup retirement plans

Another ambiguity in SECURE 2.0 involves tax incentives for small employers to create startup retirement plans. The act expanded an existing credit and created a new and separate one, but the drafting left some confusion. As background, the Code provides a tax credit of up to $5,000 for 50% of qualified startup costs, defined as costs to set up and administer plans and educate employees about the plan, incurred by employers having 100 or fewer employees that earned at least $5,000 in compensation in the prior year.²²

Act Section 102(a), effective in 2023, expands this credit for startup costs for smaller employers.²³ The new credit rate is 100% of eligible startup costs for employers with up to 50 employees but remains 50% of eligible costs for employers with 51–100 employees. An eligible employer may elect that the first credit year be the year prior to the year the plan is effective. The credit is available to small employers that currently do not, and in the past three years have not, maintained a Sec. 401(a), 403, SIMPLE, or SEP plan. The minimum credit is $500; the employer is eligible for the credit for up to three tax years.

Additionally, act Section 102(b)²⁴ created a new and separate tax credit for employer contributions for the first five years of a qualified new plan (excluding defined benefit plans), of up to $1,000 per employee. The maximum credit for employers with 50 or fewer employees is the lesser of the actual employer contribution, or $1,000 per employee earning $100,000 (or less) in FICA wages. The tax credit is 100% of eligible employer contributions for the first two years, decreasing thereafter by 25% each year to 25% in the fourth tax year after the tax year of the plan’s adoption. For employers with more than 50 employees, the credit is subject to a phasein, under which it is reduced by an amount equal to the product of the credit as determined before the phase-in, multiplied by a percentage equal to 2 percentage points for each employee of the employer for the preceding tax year over 50 employees. Drafting ambiguity in Section 102 has given rise to concern that the legislation could be read as limiting the new employer contribution credit to the existing $5,000 limit on the credit for costs associated with establishing new plans. Accordingly, congressional tax leaders clarified in their letter that Congress intended the new credit for employer contributions to be available in addition to the startup credit otherwise available to the employer.

Selected guidance issued to date

Notices 2023-23 and 2023-54

These two notices granted transition relief related to 2023 RMDs. As a result of the brief amount of time to implement the change in the RMD onset age, financial institutions may have notified some plan participants and IRA owners of a required 2023 RMD based on prior law. In addition, plan participants may have received distributions in 2023 mischaracterized as RMDs (ineligible for rollover) due to delayed changes in employer systems necessary to comply with the age changes in SECURE 2.0. The notices provided transition relief.

Notice 2023-43

Act Section 305 provided for the expansion of the Employee Plans Compliance Resolution System and directed Treasury to revise Rev. Proc. 2021-30 within two years of enactment of SECURE 2.0. Notice 2023-43 provides interim guidance until this revision takes place. The guidance allows plan sponsors to self-correct an eligible inadvertent failure (as defined in act Section 305(e)), disallows selfcorrection by IRA custodians, and provides interpretive guidance that applies with respect to corrections of eligible inadvertent failures.

The notice identifies IRS enforcement positions regarding self-corrections in 11 questions and answers.

Notice 2023-62

In Notice 2023-62, besides granting the previously noted relief regarding catch-up contributions, the IRS indicated its intention to provide additional guidance. That expected guidance will specify that a plan sponsor may treat a pretax contribution election by a highly paid participant as an election to make Roth catch-up contributions and that separate employers in a plan maintained by unrelated employers are not required to aggregate wages with unrelated employers in the plan for purposes of determining whether an employee is highly paid.

SECURE 2.0’s expansive reach

SECURE 2.0 was heralded as simplifying and clarifying retirement plan law as well as facilitating retirement savings. The provisions that went into force Jan. 1, 2024, are a subset of its reach, with other provisions having taken effect in 2023, and an additional slate of provisions to become effective in years 2025 and beyond. Partly because of the sheer breadth and farreaching influence of the act, uncertainty has arisen in applying several of its key provisions, which has spawned calls by employers and financial institutions to postpone implementation.

The act will provide fruitful ground for analyses by CPAs and other retirement specialists and may require further congressional action to clarify certain new rules in the years to come.

¹ SECURE 2.0 Act, Division T of the Consolidated Appropriations Act, 2023, P.L. 117-328.

² Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Division O of the Further Consolidated Appropriations Act, 2020, P.L. 116-94.

³For a discussion of major provisions of the act, see Nevius, “Key Tax and Retirement Provisions in the SECURE 2.0 Act,” The Tax Adviser (Jan. 4, 2023).

⁴Amending Sec. 401(m)(4).

⁵Amending Sec. 72(t)(2).

⁶Adding Sec. 72(t)(2)(K).

⁷Adding Sec. 72(t)(2)(L).

⁸The date of enactment of SECURE 2.0.

⁹Adding Sec. 72(t)(2)(M) and Sec. 72(t)(11).

¹⁰Generally, any major disaster, as declared by the president under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Sec. 72(t)(11)(E)).

¹¹Beginning on the first day of the “incident period” specified by the Federal Emergency Management Agency or the date of a federal disaster declaration with respect to the qualified disaster.

¹²Adding Sec. 401(a)(39). The $2,500 maximum distribution is adjusted for inflation for tax years beginning after 2024.

¹³ Adding Sec. 401(k)(14)(C).

¹⁴Employers can provide a similar option in defined contribution plans under act Section 604, also effective in 2023.

¹⁵Adding Secs. 401(k)(16) and 403(b)(16) and amending Sec. 416(g)(4).

¹⁶See also Demosthenes, “529 Plans and Education Funding,” 54-9 The Tax Adviser 50 (September 2023), and Toolson, “The Unique Benefits of 529 College Savings Plans,” 54-5 The Tax Adviser 30 (May 2023).

¹⁷Letter from Reps. Jason Smith, R-Mo., and Richard E. Neal, D-Mass., and Sens. Ron Wyden, D-Ore., and Mike Crapo, R-Idaho, to Treasury Secretary Janet Yellen and IRS Commissioner Daniel Werfel (May 23, 2023).

¹⁸Sec. 219(b)(5).

¹⁹Federal Insurance Contributions Act.

²⁰Letter to Reps. Jason Smith, R-Mo., and Richard E. Neal, D-Mass., and Sens. Ron Wyden, D-Ore., and Mike Crapo, R-Idaho (June 29, 2023).

²¹Letter to Carol Weiser, Benefits Tax Counsel, Treasury, and Rachel Leiser Levy, Associate Chief Counsel, IRS (July 19, 2023).

²²Sec. 45E.

²³Adding Sec. 45E(e)(4).

²⁴Adding Sec. 45E(f).

Contributors

Nell Adkins, CPA, Ph.D., is an associate professor at the University of Southern Mississippi in Hattiesburg, Miss. B. Charlene Henderson, CPA, Ph.D., is an instructor at Louisiana State University in Baton Rouge, La. For more information about this article, contact thetaxadviser@aicpa.org.