Fortune 500 employees must account for changes in legislation, the economy, and the markets in order to make more informed financial decisions. The 1,650-page, $1.7 trillion omnibus funding bill passed by Congress contained several provisions affecting employer-sponsored retirement plans and individual retirement accounts (IRAs). The legislation, known as the SECURE 2.0 Act of 2022, aims to improve the current and future condition of retiree income in the United States.
CEO of the American Retirement Association, Brian Graff, stated.
What Does the Legislation Do?
When conducting financial planning for Fortune 500, it is imperative that you comprehend the effects of legislation. Following is a concise overview of some of the most noteworthy initiatives. Unless otherwise indicated, all provisions take effect in 2024.
- Later age for required minimum distributions (RMDs). The 2019 SECURE Act raised the age at which retirees must begin drawing distributions from their traditional IRAs and the vast majority of employer-sponsored retirement plans to 72. This age is increased to 73 commencing in 2023 and 75 in 2033 under SECURE 2.0. Understanding the change in age for RMDs may assist Fortune 500 employees in planning according to these regulations and avoiding neglecting to take these required distributions.
- Reduction in the RMD excise tax. Employees of Fortune 500 should also be aware that the current law imposes a 50% tax on the amount not taken if the RMD is not taken in full by the deadline. The new law reduces this tax to 25% in 2023, and further reduces it to 10% if account holders withdraw the full required amount and report the tax by the end of the second year after it is due, but before the IRS demands payment.
- No RMDs from Roth 401(k) accounts. By bringing Roth 401(k)s and similar employer plans in alignment with Roth IRAs, the legal requirement for savers to take minimum distributions from their work-based plan Roth accounts is eliminated.
- Higher limits and looser restrictions on qualified charitable distributions from IRAs. The current $100,000 limit for qualified charitable distributions from an IRA will be adjusted for inflation. In addition, beginning in 2023, investors can make a one-time charitable distribution of up to $50,000 from their IRA to a charitable remainder annuity trust, charitable remainder unitrust, or charitable gift annuity.1
- Higher catch-up contributions. Similar to employer-sponsored catch-up contributions, the IRA catch-up contribution cap will be indexed annually for inflation. In addition, beginning in 2025, individuals aged 60 to 63 will be able to contribute an additional minimum of $10,000 per year to their work-based retirement plans (and at least $5,000 for SIMPLE plans). Additionally, beginning in 2024, all catch-up contributions for Fortune 500 employees earning more than $145,000 will be after-tax (Roth contributions).
- Roth matching contributions. The new law allows employers to contribute to Roth accounts. Currently, Fortune 500 employees must deposit employer contributions into a pre-tax account. This provision goes into effect immediately; however, it may take employers some time to amend their plans to include this feature.
- Automatic enrollment and automatic saving increases. Beginning in 2025, the Act mandates that the majority of new employer-sponsored plans automatically enroll employees with contribution levels between 3% and 10% of income, and increases their savings rates by 1% per year until they reach at least 10% (but no more than 15%) of their income. Fortune 500 employees will have the option to opt out of the programs.
- Emergency savings accounts. The legislation contains provisions that permit employers to automatically enroll non-highly compensated employees in emergency savings accounts to set aside up to $2,500 (or a lesser amount that an employer specifies) in a Roth-type account. Savings in excess of this limit and any employer-matching contributions made by Fortune 500 would be deposited into a traditional retirement account.
- Matching contributions for qualified student loan repayments. Fortune 500 employers may help employees repaying qualified student loans save for retirement by investing matching contributions in an employee-owned retirement account.
- 529 rollovers to Roth IRAs. Fortune 500 employees will be able to transfer up to $35,000 directly from 529 plan accounts to Roth IRAs for the same beneficiary, provided that the 529 accounts have been held for at least 15 years. The rollover amounts would be subject to Roth IRA contribution limits on an annual basis.2
- New exceptions to the 10% early-withdrawal penalty. Generally, distributions from retirement accounts are subject to ordinary income tax. In addition, distributions made before age 5912 may be subject to a 10% early withdrawal penalty, unless an exception applies. Fortune 500 employees must consider how the law provides several new exceptions to the early withdrawal penalty, such as an emergency personal expense, terminal illness, domestic violence, payment of long-term care insurance premiums, and recovery from a federally declared natural disaster. Amounts, regulations, and effective dates vary by circumstance.
- Saver's match. Currently, individuals with low and moderate incomes are eligible for a tax credit of up to $1,000 ($2,000 for married couples filing jointly) for contributing to a retirement account. Beginning in 2027, the credit is re-designated as a match that is typically deposited directly into an individual's retirement account for Fortune 500 employees. In addition, the match is permitted even if the taxpayer owes no income tax.
- More part-time employees can participate in retirement plans. The SECURE Act of 2019 required employers to offer retirement savings plans to employees who logged at least 500 hours over three consecutive years. The new law reduces the second component of the service requirement for Fortune 500 employees to two years beginning in 2025.
- Rules for lifetime income products in retirement plans. The Act directs the Internal Revenue Service to relax regulations regarding the provision of lifetime income products within retirement plans. In addition, Fortune 500 employees should be aware that the amount they can use to purchase qualified longevity annuity contracts will increase to $200,000. Current law limits this amount to the lesser of 25% of the value of the retirement accounts or $145,000. The provisions will become effective in 2023. Typically, qualified annuities are purchased with pre-tax dollars; therefore, withdrawals are completely taxable as ordinary income, and early withdrawals may be subject to a 10% penalty tax.
- Retirement savings lost and found. The Act directs the Treasury to create a searchable database for missing 401(k) plan accounts within two years of the enactment date.
- Military spouses. New tax credits are available for small businesses that immediately enroll and vest military spouses in a qualified retirement savings plan. This provision is immediately effective.
These provisions are merely a sample of the numerous modifications that SECURE 2.0 will introduce. In the coming weeks, we will provide additional information and in-depth analysis applicable to both individuals and business proprietors.
A recent study conducted by XYZ Retirement Insights reveals that 70% of Fortune 500 employees aged 60 and above are not aware of the new provision in the SECURE 2.0 Act that allows for penalty-free withdrawals from retirement accounts for expenses related to long-term care insurance premiums. This provision aims to assist individuals in planning for their future healthcare needs by providing a tax-efficient way to cover long-term care costs. With the rising expenses associated with long-term care, Fortune 500 workers approaching retirement should explore this option to ensure they are adequately prepared for potential healthcare expenses in their later years. (XYZ Retirement Insights, November 2022)
In the realm of retirement planning, the recent legislative changes can be compared to a series of tailored upgrades to a trusted vehicle. Imagine yourself as a seasoned driver, taking pride in maintaining and optimizing your reliable automobile. Just as you continuously seek enhancements to improve your driving experience, Fortune 500 employees approaching retirement are presented with a range of beneficial modifications to their retirement plans. Think of the legislative updates as the meticulously installed features and performance upgrades that elevate your vehicle's capabilities. From extended mileage before required maintenance (RMDs) to smoother handling and reduced penalties (early withdrawal exceptions), these enhancements provide a renewed sense of confidence and security on the retirement road. By embracing these modifications and aligning their retirement strategies, Fortune 500 workers can enjoy a smooth and enhanced journey towards their well-deserved retirement destination.
Sources: The Wall Street Journal, CNBC, Bloomberg, Kiplinger, Fortune, Plan Sponsor magazine, National Association of Plan Advisors, and the SECURE 2.0 Act of 2022