SECURE 2.0 (pt 2)

January 24, 2023

Our second blog post on this new retirement savings legislation focuses on provisions most applicable to the 403(b) and educators. You can read our first post which focused on items applicable to educators and the 403(b) but likely not game changing here. Podcast on these topics can be found below. 

Provisions Most Applicable to 403(b) and Educators

Catch-Up Contributions Increase — Effective 2025. Participants turning (key word) 60, 61, 62 and 63 can contribute an additional amount as a catch up that is the higher of $10,000 or “(II) an amount equal to 150 percent of the dollar amount which would be in effect under such clause for 2024 for eligible participants not described in the parenthetical in such clause” - basically 150% of the regular catch-up amount. For example, the catch-up in 2023 is $7,500. Thus 150% of $7,500 is $11,250. Note: 457(b) participants cannot use this in addition to the three-year catch-up.

High Wage Earner "Roth"-ified Catch-Up — Effective 2024. If wages in prior year were greater than $145,000, all catch-ups must be made as Roth. This appears to be employer specific, meaning you can make more than $145,000 and not be affected as long as it wasn’t with a single employer.

IRA and Roth IRA Catch-up Limits Begin Indexing to Inflation — Effective 2024. 

403(b) Hardship Withdrawals — Effective now. Currently, 403(b) plan hardship distributions are available from limited sources (i.e., only employee contributions without earnings). The act will conform 403(b) hardship criteria with 401(k) criteria.

Roth 403(b)/457(b)/401(k) No Longer Subject to Required Minimum Distributions (RMDs) — Effective 2024. 

Elimination of the “First Day of the Month” Requirement for 457(b) Plans — Effective now. Previously, 457(b) plan participants had to make a deferral election in the month prior to the compensation being paid. The act eliminates this requirement and aligns the deferral timing with 401(k) and 403(b) plans.

Employee Self-Certification on Hardship and Unforeseeable Emergency Withdrawals — Effective now. A plan administrator may rely on an employee certification that a hardship withdrawal is based upon an immediate and heavy financial need, as described in the Treasury regulations, and that the amount requested is no more than is necessary to satisfy the financial need. Similar rules apply to the administrator of a governmental 457(b) plan with respect to unforeseeable emergency withdrawals.

CITs Now Allowed in 403(b), Except They Aren’t, Except They Are — Effective now. The Act made the necessary Internal Revenue Code changes to permit 403(b) plan investments in CIT’s, but the corresponding security law changes were not made (e.g., exemptions from registration). Accordingly, these changes will need to be made before CITs are a viable option for 403(b) plans.

RMD 50% Excise Tax Reduced — Effective now. Penalties on missed RMDs will drop significantly. The excise tax imposed on participants for failing to take an RMD will decrease from 50% to 25%, with a further reduction to 10% if corrected within a two-year correction window.

New Penalty-Free Withdrawal Provisions — Effective 2024. Available for domestic abuse, qualified disaster, terminal illness, free emergency withdrawal (must be paid back within 3 years; all plans and IRA eligible), and available retroactively since January 26, 2021: Federally declared disaster withdrawals.  

New Exception for Qualified Long-Term Care Distributions — Effective in 2026. Section 334 of SECURE Act 2.0 allows retirement account owners to take penalty-free “Qualified Long-Term Care Distributions” of up to the lesser of 10% of their vested balance, or $2,500 (adjusted for inflation) annually to pay for long-term care insurance. To qualify for the exception, individuals must have either paid, or have been assessed, long-term care insurance premiums equal to or greater than their distribution in the year the distribution is made. Additionally they must provide their plan with a “Long-Term Care Premium Statement” containing details, such as the name and Tax ID number of the insurance company, identification of the account owner as the owner of the long-term care insurance, a statement that the coverage is certified long-term care insurance, the premiums owed for the calendar year, and the name of the insured individual and their relationship to the retirement account owner.

Stay wise and well (and let's all advocate for simpler saving for retirement solutions)

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