Sweeping changes to retirement benefits create automatic enrollment in 401(k) plans and push back age for required minimum distributions
At the end of 2022, President Biden signed into law the SECURE 2.0 Act of 2022 (the Act), enacted as part of the Consolidated Appropriations Act, 2023. The Act aims to increase retirement savings, facilitate access to retirement savings, encourage employees to save for retirement, and lower employers’ costs of offering and funding retirement savings plans, among other things.
While the Act’s provisions are numerous, we focus on two key provisions that will affect large numbers of workers: automatic enrollment into 401(k) plans and an increase to the age for required minimum distributions from qualified retirement plans.
Automatic enrollment into 401(k) plans
For plan years beginning after December 31, 2024, the law impacts employers with more than 10 employees that have been in existence for at least three years and are offering a new 401(k) or 403(b) plan in two significant ways, per Section 101 of the Act. These employers must: (1) automatically enroll new employees and (2) automatically escalate the amount of an employee’s deferral.
Under the law, new employees will start with a salary reduction of at least 3 percent of compensation (but electable up to 10 percent). The rate of salary reductions increases annually by 1 percent of compensation until reaching at least 10 percent (but electable up to 15 percent).
An employee may opt out of either or both of auto enrollment and auto escalations.
As a result of this change, a larger segment of the workforce will automatically be enrolled in 401(k) plans starting in 2025.
Increased age for required minimum distributions from retirement plans
Second, Section 107 of the Act pushes back the beginning date of an increase in the age for required minimum distributions (“RMD”) from qualified plans. The age to start RMDs increases to age 73 in 2023 and to 75 in 2033.
Previously, the SECURE Act of 2019 increased the required minimum distribution age to 72. Under SECURE 2.0, individuals turning age 72 during 2023 or later will start their RMD at age 73. For those reaching age 74 after December 31, 2032, their RMD start date is age 75.
Delaying when retirees are required to take minimum distributions may result in tax benefits by delaying taxes that become due on withdrawals of pretax monies. Delaying may also help to keep retiree Medicare premiums lower by delaying when minimum distributions will be treated as income for Medicare purposes.
Please contact your employee benefits attorney if you have any questions.
By Hugo Garcia