A New Look at SECURE Act 2.0 Issues

The Setting Every Community Up for Retirement Enhancement Act 2.0 (SECURE Act 2.0) has a new provision that speaks to the nature of auto-enrollment for new 401(k) plans. All eligible hires will be required to enroll at a pretax rate of three percent at the minimum. Furthermore, mandatory enrollment will come with an auto-escalation of one percent annually, but this is only effective until the salary reduction reaches 10 percent at a minimum and 15 percent at most. The goal is to incentivize the people who participate in retirement savings accounts.

The SECURE Act 2.0 is part of the Consolidated Appropriations Act of 2023, but the majority of the provisions won’t be put into effect until 2024 or 2025, if not later, so there is still a lot of time to work out the concepts of these provisions and then implement them.

As part of the mandatory auto-enrollment aspect of new retirement savings plans, employers are permitted to provide employees with the option to choose which contribution level they want to opt in to, but they must let them know that the default contribution level is three percent pretax, which they will be enrolled in if they do not specify otherwise. These details are effective for new retirement savings plans that are established after Dec. 31, 2024.

What else is happening with the new provisions? 

To start, catch-up contributions will be enhanced. As of now, the current mandates permit employees over the age of 50 to make catch-up contributions with the goal of increasing the size of their retirement savings plans as they inch closer to retirement age.

Currently, there is a catch-up contribution limit of $7,500 per person for those between the ages of 50 and 59. However, with the new catch-up contributions in mind, people ages 60 to 63 can make catch-up contributions of either $10,000 or 150 percent of the regular catch-up contribution value for 2024.

The higher catch-up contribution value will be applicable to people who either already are 60, 61, 62 or 63 or will turn one of these ages within the applicable tax year. Required Roth catch-up contributions for high-income earners—those who are making more than $145,000 per year—have to be contributed on a Roth basis, meaning post-tax.

This is required for all plans that offer the option to make catch-up contributions. Also, this detail will go into effect for tax years that follow Dec. 31.

There are other provisions, including the Saver’s Match, that will go into effect sometime in 2027 and is intended for lower-income individuals. The Saver’s Match provision will replace the Saver’s Credit, which is the current standard for lower-income individuals who contribute to retirement savings accounts.

Those who contribute are eligible for a government-funded match to their contributions to an IRA or employer-sponsored retirement plan, with the value of the match being 50 percent and up to $2,000 per person. These matching contributions are considered to be income increases, ranging between $41,000 and $71,000 for those who file jointly.

Consult qualified legal and financial experts to see how these rules will affect you.