SECURE Act 2.0 Impact on Self-Directed Retirement Plans

Important IRA and 401(k) plan rules are moving forward in Congress. On March 29, the House overwhelmingly approved the bipartisan Securing a Strong Retirement Act by a vote of 414 to 5. The Act, also known as SECURE Act 2.0, contains some significant IRA and 401(k) changes, including new RMD age, expand and ‘Roth-ify’ Catch-up contributions, higher IRA catch-up contributions for those from age 62-65, and much more.

SECURE Act 2.0 is almost twice as big as the first SECURE Act, which was passed in December 2019.  Below is a breakdown of the relevant IRA and 401(k) provisions that can impact Self-Directed IRA and Solo 401(k) plans.

SECURE Act 2.0 Highlights

RMD Age to 75

The Act would increase the required minimum distribution (RMD) age to 73 starting on January 1, 2023 (for individuals who attain age 72 after December 31, 2022, and age 73 before January 1, 2030); to 74 starting on January 1, 2030 (for individuals who attain age 73 after December 31, 2029, and age 74 before January 1, 2033); and to 75 starting on January 1, 2033 (for individuals who attain age 74 after December 31, 2032).

The section would apply to distributions required to be made after December 31, 2022, with respect to individuals who attain age 72 after such date.

Enhancements to ages 62-64 for retirement plan catch-up limit

The current $1,000 catch-up IRA contribution allowed for people aged 50 and over would be indexed for inflation. This section would apply to tax years beginning after December 31, 2023.

Currently catch-up contributions to a retirement plan (currently $6,500, except in the case of SIMPLE plans for which the limit is $3,000 for 2022) would be increased to $10,000 ($5,000 for SIMPLE plans, both to be indexed for inflation), for individuals who have attained ages 62, 63, and 64, but not age 65. This would apply to tax years beginning after December 31, 2023. (Bill section 108. Amending IRC Sec. 414(v)).

SIMPLE and SEP Roth IRA Contributions

The Act would allow SIMPLE IRAs to accept Roth contributions. In addition, the provision would also allow employers to offer employees the ability to treat employee and employer SEP contributions as Roth (in whole or in part).

This section would apply to tax years beginning after December 31, 2022. (Bill section 601. Amending IRC Sec. 408A)

All Plan Catch-up Contributions Required to be Roth

Currently, all plan catch-up contributions can be made on a pretax or Roth basis (if permitted by the plan sponsor). The Act would provide that effective January 1, 2023, all catch-up contributions to qualified retirement plans would be subject to Roth tax treatment.

This section would apply to tax years beginning after December 31, 2022

Allow for Employer Matching Roth Contributions

Currently, qualified retirement plan sponsors are not permitted to provide employer matching contributions in their 401(k), 403(b) and governmental 457(b) plans on a Roth basis. Matching contributions must be on a pretax basis only. The Act would allow defined contribution plans to provide participants with the option of receiving matching contributions on a Roth basis.

Expand Automatic Enrollment

The Act would require 401(k) and 403(b) plans to automatically enroll participants in the plans upon becoming eligible (and the employees may opt out of coverage). The initial automatic enrollment amount is at least 3% but no more than 10%. And then each year that amount is increased by 1% until it reaches 10%. All current 401(k) and 403(b) plans are grandfathered.

This section would apply for plan years beginning after December 31, 2023.

Part-Time Employee 401(k) Plan Eligibility

The SECURE Act requires employers to allow long-term, part-time workers to participate in their 401(k) plans. The SECURE Act provision provides that except in the case of collectively bargained plans, employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. The Act would reduce the three-year rule to two years.

This provision can have a dramatic impact on Solo 401(k) plan eligibility requirements.  This provision will make it easier for part-time employees to become eligible participants of a 401(k) plan potentially turning a Solo 401(k) plan into an ERISA-governed 401(k) plan.

Student Loan Relief

The Act would permit an employer to make contributions under a 401(k) plan, 403(b) plan or SIMPLE IRA, with respect to “qualified student loan payments.” Qualified student loan payment is broadly defined under the bill as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. In other words, employers would be permitted to match student loan payments as contributions to retirement and receive a tax deduction for the payment.

This section would apply to contributions made for plan years beginning after December 31, 2022

Enhanced 401(k) Plan Start-up Credit

The Act would make changes to the three-year small employer start up credit by:

• Increasing the startup credit from 50% to 100% for employers with up to 100 employees (up from previous 50 employee limit).
• The amount of the credit is increased by the applicable percentage of employer contributions on behalf of its employees, up to a per-employee cap of $1,000. 

This provision is not expected to cover Solo 401(k) plans.

Enhancement of Saver’s Credit

The Act would set the applicable percentage of the saver’s credit at 50%, rather than having the percentage decline as income increases. The Act would also make the credit available to taxpayers with higher levels of adjusted gross income than under current law—via changes to the adjusted-gross-income-based phaseout of the credit.”

Retirement Savings National Lost & Found

The Act would create a national, online, lost and found for Americans’ retirement plans.

Fixing Inadvertent IRA Errors

The Act would expand the Employee Plans Compliance Resolution System (EPCRS) to (1) allow more types of errors to be corrected internally through self-correction, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make required minimum distributions from the otherwise applicable excise tax.

Next Steps

SECURE Act 2.0 will now head to the Senate. The Senate is considering its own version of SECURE Act 2.0, which shares many comparable provisions as the House bill. However, the Senate bill is expected to have its own features, such as allowing Roth IRA funds to be rolled into a 401(k) plan. If the Senate passes a SECURE Act 2.0 measure, both chambers would likely move to reconcile their separate versions.