Background 

The SECURE 2.0 Act (“SECURE 2.0” or “the Act”) contains a host of recent changes intended to make sure employers, the federal government, and the retirement plan industry are helping Americans save more for retirement. Enacted on December 29, 2022, SECURE 2.0 is an extension of the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) and continues its mission of expanding access to, and increasing participation in, employer-offered retirement plans. 

But now, over four years after the SECURE Act and a full year after SECURE 2.0, the question must be asked whether either Act has made a noticeable difference in the retirement savings of Americans. In the wake of a global pandemic, rising interest rates and frenzied inflation, retirement savings have become arguably more important than ever. As people continue to live longer and continue rising, the SECURE promises to make a real difference in the lives of ordinary Americans—but does it? 

Significant Changes under SECURE 2.0

To properly assess the Act, it is important to examine its key proposals. The Act includes a variety of fresh rules for new and existing retirement plans which are designed to combat the underlying causes of retirement savings deficiencies. Because these rules impact so many types of plans, it is critical for both employees and employers to understand the Act and the changes it entails. Several of the most important of these changes are set forth below.

Requires Automatic Enrollment for Certain Plans

To increase employee participation in retirement savings plans, SECURE 2.0 requires certain plans to include an auto-enrollment feature. Prior to SECURE 2.0, employees were typically required to “opt in” to participate in employer-offered retirement plans (such as 401(k) plans and 403(b) plans). According to lawmakers, this manual enrollment feature led to decreased plan participation and lower retirement savings. To remedy this, SECURE 2.0 requires that all 401(k) and 403(b) plans adopted after December 29, 2022, include an auto-enrollment feature. Rather than having to opt in, eligible employees now default to automatic enrollment in their employer’s retirement plans.  Such plans must also provide participants the ability to opt out of the automatic enrollment feature and to change their deferral elections. 

Certain plans which would otherwise be subject to the auto-enrollment rule may nevertheless be exempt if they fall into any of the following categories:

• a church plan
• a government-sponsored retirement plan
• an employer-sponsored retirement plan with fewer than ten employees 
• an employer-sponsored retirement plan that has existed for less than three years 

If a plan does not meet one of these exemptions, it will need to implement an auto-enrollment feature in the plan year that begins on or after January 1, 2025. 

Requires Automatic Escalation of Employer Contributions 

The new rules also require plans adopted on or after December 29, 2022, to contain an “auto-escalation” feature. Under SECURE 2.0, employers must initially contribute no less than 3% (and no more than 10%) of pre-tax earnings into eligible employees’ individual retirement accounts. Thereafter, the plan must increase the employer contribution by 1% each year until the contribution percentage reaches at least 10% (but no more than 15%). Participants must be given the opportunity to opt out of auto-escalation, and a participant’s election of a specific deferral percentage should be treated as an opting out of both the auto-enrollment and auto-escalation features of the plan.  

Not all plans are subject to the auto-escalation requirement. Similar to the rules for auto-enrollment, a plan that falls into any of the following categories is exempt from the auto-enrollment rule:  

• a church plan
• a government-sponsored retirement plan
• an employer-sponsored retirement plan with fewer than ten employees 
• an employer-sponsored retirement plan that has existed for less than three years. 

If a plan does not meet one of these exemptions, it will need to implement an auto-enrollment feature in the plan year that begins on or after January 1, 2025.

Updates Rules for 403(b) Plans

SECURE 2.0 contains several updates to the rules regarding 403(b) plans. These updates include: 

• allowing 403(b) plans to participate in multiple employer plans and pooled employer plans;
• getting rid of the unified plan rule (also referred to as the “one bad apple rule”) for multiple employer 403(b) plans so that violations by one employer do not affect the tax-qualified status of other employers who remain compliant;
• permitting 403(b) plan investments (which have traditionally been limited to annuity contracts and publicly traded mutual funds) to participate in collective investment trusts with other tax-preferred savings plans and IRAs; and
• changing the hardship withdrawal rules for 403(b) plans (which limit hardship distributions to funds representing employee contributions, rather than earnings) to reflect the 401(k) rules.

Allows Participants to Elect Roth Contributions

In the past, employees with a Roth account would receive employer contributions in a separate, pre-tax account (such as a traditional 401(k)). But under SECURE 2.0, employers may now permit employees to elect that employer matching and non-elective contributions be made directly into their Roth account.  Since Roth contributions are treated as earned income, they are taxed when contributed and their earnings continue to grow tax free while in the plan. 

Expands Plan Eligibility for Part-Time Employees

Historically, most retirement plans required that employees perform at least 1,000 hours of service within a 12-month period to participate in retirement plans. The obvious effect of this threshold was to exclude many part-time employees from retirement savings plans.

In response, the original SECURE Act required that, for plan years beginning on or after January 1, 2021, 401(k) plans must offer all “long-term part-time employees” (defined as non-union employees who (a) perform at least 500 hours of service in three consecutive 12-month periods and (b) are at least 21 years old at the end of the third consecutive year of service) the ability to participate in the 401(k) plan or another employer-offered retirement plan. Only those services performed on or after January 1, 2021, are considered for eligibility purposes; pre-2021 service is disregarded. 

SECURE 2.0 furthers the SECURE Act’s goal of increased participation among part-time employees. For plan years beginning on or after January 1, 2025, the Act reduces the minimum service eligibility requirement from three years to two years. The Act also extends the long-term part-time coverage rules to 403(b) plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”).

Relaxes Required Minimum Distributions Rules

SECURE 2.0 makes important changes to the rules on required minimum distributions (“RMDs”). 

To begin with, SECURE 2.0 increases the age at which owners of retirement accounts must begin taking RMDs. For participants who turn 72 after December 31, 2022, the Act raises the RMD from 72 to 73, giving participants an extra year to delay taking a mandatory withdrawal of deferred savings from their retirement accounts. The Act further stipulates that the RMD age will increase again to 75 starting in 2033. 

Additionally, the Act decreased the penalty for failing to take RMDs. Prior to 2023, the penalty for not taking required distributions was 50% of the RMD amount. Under SECURE 2.0, that penalty was reduced to 25%, and as of 2024, the RMD requirements do not apply at all to Roth accounts. 

Includes More Forgiving Self-Correction Procedures 

SECURE 2.0 also involves significant efforts to expand the retirement plan correction procedures under the Employee Plans Compliance Resolution System (“EPCRS”). Historically, Internal Revenue Service (“IRS”) guidance has limited those plans which are eligible to correct operational failures under EPCRS to tax-qualified retirement plans and 403(b) plans. But under SECURE 2.0, this group has been expanded to include individual retirement accounts (“IRAs”), SIMPLE IRAs, and Simplified Employee Pension Plans. The Act also increases the types of failures that can be self-corrected by specifying that a plan may correct certain inadvertent failures at any time, even during an audit, so long as its sponsor demonstrates “a specific commitment to implement a self-correction” before the IRS identifies the failure. Additional reforms to the EPCRS correction process include: 

• the ability to self-correct loan failures without having to report the correction as a deemed distribution on Form 1099-R;
• the ability to treat loan failure corrections as satisfying the Department of Labor’s voluntary fiduciary correction program; and 
• updates to the correction of inadvertent overpayments of benefits, including (a) confirmation that fiduciaries will often not have to recover such overpayments, (b) clarification that, generally speaking, such overpayments can be treated as eligible rollover distributions, and (c) specific rules and limitations for fiduciaries attempting to recover overpayments. 

Increases Small Employer Tax Credit for New Retirement Plans

Small employers can qualify for a three-year small business startup credit when they adopt a new retirement plan. Prior to SECURE 2.0, the startup credit was limited to 50% of administrative costs, up to a $5,000 annual cap. The Act increases this credit from 50% to 100% for employers with 50 or fewer employees. 

The Act provides an additional tax credit (except in the case of defined benefit plans) for certain employers. To qualify for the credit an employer must (a) employ 50 or fewer employees, (b) adopt a defined contribution plan or join a pooled employer plan or multiple employer plan, (c) adopt or join such plan after December 31, 2019, and (d) provide matching contributions. If the employer qualifies, it can receive a credit equal to a percentage of employer contributions (capped at $1,000 per employee) that diminishes over time. The percentage starts at 100% of employer matches for the first two years after plan adoption, then decreases to 75% in the third year, 50% in the fourth year, 25% in the fifth year, and 0% thereafter. The full additional credit is limited to employers with 50 or fewer employees and is phased out for employers with between 51 and 100 employees. 

Increases Involuntary Cash-Out Amount 

SECURE 2.0 also increases the amount of a participant’s benefit that employers can distribute involuntarily. Prior to 2024, employers were only allowed to distribute such cash-out amounts without a participant’s consent if the present value of the participant’s vested benefit was $5,000 or less. Under SECURE 2.0, however, that amount increased to $7,000. 

Allows Student Loan Repayments to be Treated as Elective Deferrals

Student loan debt often forces employees to choose between funding their retirement account and paying down their existing debt, resulting in missed opportunities to receive matching contributions from their employers. To alleviate this hardship, SECURE 2.0 gives employers the option—for plan years beginning in 2024—to treat participants’ student loan payments as elective contributions to a 401(k) plan, a 403(b) plan, or a SIMPLE IRA for purposes of their employer match. The definition of student debt under the Act is broad, encompassing any indebtedness (not just tuition) incurred by an employee to pay for higher education expenses. 

Allows Participants to Self-Certify Hardship Eligibility

Tax-qualified retirement plans often permit participants to take early distributions from their individual accounts where it can be determined that a participant has suffered a qualifying financial hardship. These “hardship withdrawals” require plan sponsors to certify that a participant has provided sufficient evidence of a qualifying hardship—a determination that is often difficult to make. 

SECURE 2.0 simplifies this determination by allowing employees, in certain situations, to self-certify that they have experienced a qualifying hardship event. Instead of struggling to determine whether sufficient documentation exists to prove hardship, plan sponsors may now rely on an employee’s own assertion of hardship. 

Adds Exceptions for Special Hardship Withdrawals and Loan Amounts for Federal Disasters

SECURE 2.0 creates a new exception to early withdrawal penalties for retirement funds used in connection with qualified federally declared disasters. Generally, participants in tax-preferred retirement accounts (such as 401(k) plans and IRAs) incur an additional 10% tax if they attempt to withdraw funds before reaching retirement age. Under SECURE 2.0, however, up to $22,000 may be prematurely withdrawn from tax-qualified retirement plans by individuals affected by qualifying federal disasters. As long as such distributions are made within 180 days of a qualifying disaster, they will be exempt from the additional 10% early withdrawal tax and may be repaid to the plan without tax consequences over the subsequent three years. In the event of a qualifying disaster, the Act also gives employers the option to (a) allow affected participants to borrow larger-than-normal amounts from plans and (b) provide additional time for repayment of such loans. 

Allows Penalty-Free Withdrawals for Certain Emergency Expenses 

SECURE 2.0 also adds a new exception from the 10% early withdrawal tax for distributions used for certain emergency expenses. To qualify, a distribution must cover unforeseeable or immediate financial needs relating to personal or family emergency expenses. Assuming the expenses qualify, eligible participants may receive distributions of up to $1,000 once per year. Participants may then repay the emergency distribution within three years, with such repayment amounts treated as tax-free rollover distributions. Participants who fail to repay an emergency distribution will be disallowed from taking any further emergency distributions during the three-year repayment period. 

Allows Domestic Abuse Victims to Make Penalty-Free Withdrawals

The Act provides victims of domestic abuse the ability to make penalty-free early withdrawals. The drafters of the Act believed that early withdrawal penalties were keeping individuals from accessing retirement funds which could otherwise help them escape abusive environments. The alleviate this, SECURE 2.0 allows plans to permit participants experiencing domestic abuse to withdraw $10,000 (indexed for inflation) or 50% of the individual account, whichever is less, without having to pay early withdrawal penalties. Like other hardship withdrawals under the Act, the participant may repay the distribution over three years, and the decision of whether to allow such distributions ultimately rests with the employer.  

Allows Plans to Include Personal Savings Account

Recognizing that hardship distributions are often brought on by a lack of savings, effective July 1, 2024, the Act allows plans to include a personal savings account feature. Should a sponsor choose to do so, it can include a personal savings account in its 401(k), 403(b), or 457(b) plan. The Act stipulates, however, that highly compensated employees are not eligible for a personal savings account. Employees may contribute up to $2,500 (or such lower amount as determined by the sponsor) of after-tax earnings to their personal savings account through a payroll deduction, and sponsors can automatically enroll participants into the program for up to 3% of their compensation. These contributions are treated as employee contributions for purposes of employer matching. 

Fixes the Variable Rate Premium

Finally, the Act removes the “applicable dollar amount” language from the rules used to determine the premium fund target for purposes of unfunded vested benefits in single employer plans. Instead of indexing the rate for inflation (as was traditionally the case) the Act fixes it at a flat $52 for each $1,000 of unfunded vested benefits. 

So . . . Has the Act Helped Americans Save for Retirement? 

While many of SECURE 2.0’s changes have yet to take effect, statistics appear to show that the Act’s new rules are working. 

According to the Employee Benefit Research Institute, the percent of American workers participating in employment-based retirement plans has increased from around 31.6% in 2018 to around 48.9 percent in 2022. And according to statistics from the Bureau of Labor, the number of civilian workers with access to defined contributions plans (which form the bulk of employer-offered retirement accounts) rose from 60% in 2019 to 63% in 2023. The Federal Reserve’s Survey of Consumer Finances shows that in 2019, the average American’s retirement account balance was around $255,000; by 2022, this amount had risen to $333,000. On the whole, therefore, more Americans appear to be participating in retirement savings, and those savings appear to be increasing. 

Add to that the fact that many of SECURE 2.0’s changes have yet to take effect, and a very strong case can be made that the Act and its predecessor are putting Americans on a path toward a better retirement. 

Sam Sturgis is an associate at Gunster, where he works as a member of the firm’s Tax and Private Wealth Services practice groups.