Editor’s note: Change is in the air. Change brings challenges, and change brings opportunities. Throughout 2024, the Horsesmouth articles you read reflected your efforts to educate yourself about our changing world and to equip yourself to help your clients navigate it and to grow your practice. Our Member’s Choice lists of this year’s most-read stories show that you worked to stay abreast of tax laws, how to position client portfolios and to provide more effective service. Of the more than 600 articles we published this year, these were among the most frequently read.
This is the second in a two-part series looking at provisions of the SECURE Act that you can put to work for your clients.
With more than 90 provisions that are being phased in over the next 10 years from the SECURE Act 2.0 (Act or 2.0), I could write about 90 different articles on the many changes to come.
However, thus far I have only written one other article in 2024 on these provisions (just give me time 😉).
By reading that article and this current article, you should gain a solid grasp on the main items to know about the SECURE Act 2.0 for 2024.
1. RMD options for surviving spouses grow
Special rules currently exist for determining when a surviving spouse must start taking RMDs from an inherited retirement account. One of those rules states that, if an account holder dies before RMDs are required and his or her surviving spouse is the beneficiary (and doesn’t change that status), RMDs from the inherited account aren’t required until the year in which the deceased account holder would have reached age 72.
The SECURE 2.0 Act tweaks this rule by also allowing the surviving spouse to be treated as the deceased account owner for RMD purposes starting in 2024. In some cases, this will allow the surviving spouse to delay taking RMDs from the inherited account—for example, if the surviving spouse is older than the deceased spouse.
The surviving spouse will have to elect this treatment according to procedures the IRS will have to establish, and the election will be irrevocable. The surviving spouse will also have to notify the account administrator.
Once RMDs begin (the year the decedent would have reached RMD age, had they lived), the surviving spouse will use the Uniform Lifetime Table that is used by account owners, rather than the Single Lifetime Table that applies to beneficiaries. Additionally, if the surviving spouse dies before RMDs begin, the surviving spouse’s beneficiaries will be treated as though they were the original beneficiaries of the account.
This favorable treatment allows the Eligible Designated Beneficiaries to “stretch” distributions over their life expectancy instead of being stuck with the 10-year rule that would otherwise apply.
Why is this so exciting?
Any time the government allows more flexibility with the starting age for an RMD, we are receptive. Especially when the beneficiary is the surviving spouse and will likely need the account to grow as much as possible during her life.
2. 10% penalty exception for emergency expenses
Generally, an additional 10% tax applies to early distributions from tax-preferred retirement accounts, such as 401(k) plans and IRAs, unless an exception applies. For distributions after December 31, 2023, a person with “unforeseeable or immediate financial needs relating to personal or family emergency expenses” may generally take one distribution per year of up to $1,000 without incurring a 10% tax penalty, with payback within three years. There is no penalty even though the person can be under the age of 59½.
Only one distribution is permissible per year of up to $1,000, and a participant has the option to repay the distribution within three years. No further emergency distributions are permissible during the three-year repayment period unless repayment occurs.
3. In-plan emergency savings accounts are now allowed
SECURE 2.0 allows employers to offer emergency savings accounts alongside employer-sponsored retirement plans. Those emergency savings accounts (which must originally be made into Roth accounts) would be limited to non-highly compensated employees and capped at $2,500 (employers may set lower limits and may limit withdrawals to one per month), with extra funds going to an employer-sponsored retirement account.
Employers who provide matching contributions for employer-sponsored retirement plans are now also required to match employee emergency savings accounts at the same rate.
4. Employers can match student loan debt payments
Employers can offer student debt relief through workplace retirement plans by making matching contributions tied to a participant’s student loan payments. The Act permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, governmental 457(b) plan or SIMPLE IRA with respect to “qualified student loan payments.”
A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. For purposes of the nondiscrimination test applicable to elective contributions, the plan may separately test the employees who receive matching contributions on student loan repayments.
5. 10% penalty exception for withdrawals relating to domestic abuse
The Act allows retirement plans to permit participants to self-certify that they experienced domestic abuse and withdraw the lesser of $10,000 (indexed for inflation) or 50% of the participant’s account. The distribution is not subject to the 10% tax on early distributions.
Additionally, the participant may re-contribute the withdrawn money over three years and will be entitled to a refund for income taxes on money that is repaid.
6. Hardship distributions allowed in 403(b) plans
The Act conforms the hardship distribution rules for Section 403(b) plans to those of Section 401(k) plans. As such, a 403(b) plan may distribute qualified nonelective contributions, qualified matching contributions, and earnings on any of these contributions (including elective deferrals).
Also, distributions from a 403(b) plan are not treated as failing to be made upon hardship solely because the employee does not take available loans. This change is effective for plan years beginning after December 31, 2023.
Pro tip: Depending on the form of the plan, many of the changes described above relating to employer plans will likely require a plan amendment. Employers should check with their plan document provider regarding potential amendments. They should also check with their third-party administrators regarding implementation of the changes as third-party administrators may not be able to implement all optional changes in 2024.
7. Mandatory distributions from employer plans when an employee leaves
Previously, employers could transfer former employees’ retirement accounts from a retirement plan to an individual retirement account (IRA) if their balances were greater than $1,000 but not greater than $5,000. The Act increases the limit from $5,000 to $7,000, effective for distributions made after December 31, 2023.
Bottom line:
employees can be forced to transfer funds from an employer plan if they have less than $7,000 in the plan upon separation of service.
And what didn’t happen for 2024 but was supposed to…
Making catch-up contributions to a Roth account for high earners is delayed until 2026.
In an apparent attempt to raise tax revenue to offset the costs (i.e., the lost tax revenue) of other provisions, SECURE Act 2.0 provided for certain catch-up contributions to be made on a Roth (i.e., after-tax) basis. It was due to go into effect for tax years beginning after 2023, but the start date has been delayed until 2026.
In short, catch-up contributions to 401(k), 403(b) and governmental 457(b) plans by employees whose wages exceed $145,000 (as indexed) will NOT be made on a Roth basis until 2026. Although anything can happen between now and then, the controversial Roth treatment of catch-up contributions would be mandatory for any plan that makes catch-up contributions available.
Most of the provisions of Secure Act 2.0 seem to be a confusing web of new rules.
Having said that, you should dedicate time to understanding the provisions that are available to your clients so that you can provide proper guidance and planning for 2024 and beyond.