SECURE 2.0 Act: New rules for advisors and plan sponsors in 2023

Congress and President Biden gave financial advisors a long-awaited gift by enacting SECURE 2.0 Act legislation late last month.

“They like to pass legislation at the holiday season so you get to spend time reading dry things like that instead of spending time with your family,” said Kevin Gaston, director of plan design for Vestwell. Gaston helped advisors unpack that present during a January 12 webinar, “What You Should Know About SECURE 2.0.”

Although the act encompasses 77 individual sections related to retirement, he focused on the ones most relevant in the coming year, beginning with later required minimum distributions. The age increases from 72 to 73 this year and eventually will be 75 in 2033. “This really pertains to business owners or people who left the company and would need to take a required minimum distribution,” he said.

The act may help advisors boost attendance at informational meetings. “For all of you who have come out and spoken to a group of people, you couldn’t give anyone anything as an inducement to get in a plan,” Gaston said. “It’s unbelievable the number of people who will do something for a $5 gift card to Dunkin’. Health plans have done it for years. Token gifts are now allowed. It’s a small thing, but it gives folks another reason to meet with you. It does beat doughnuts.”

Other provisions are more complex. The new long-term part-time rule has shortened the time requirement to join a plan The old rule was three consecutive years of 500 hours or more to join. That rule hasn’t changed, but it will start sunsetting. The new rule, which takes effect on January 1, 2025, will be two years of 500 hours. The rule applies to deferrals only, not matching, vesting or profit sharing.

“The feedback was `this was a long time, so let’s make it a little shorter,’” he said. “It also applies to 403(b)s now, but I don’t think that will be as big of a deal, because they already had universal availability and are more likely to have people eligible for the plan anyway.”

The act also allows 403(b) plans to offer better investment choices, including variable and life insurance products.

Less paperwork on hardship withdrawals

The hardship process has become easier for everyone involved. Employees now can self-certify hardships based on plan rules, and sponsors can rely on this information unless they know something to the contrary. This reduces the paperwork burden to verify a hardship, which helps employees access funds more quickly.

“This is one you definitely are going to be able to talk to sponsors about,” Gaston said. “This is a good lift, because it takes that burden and pain point from an HR person having to get proof from a participant to approve or deny. If they self-certify, it’s considered good enough.”

Another timesaving rule allows sponsors, after participants have been made aware of the plan, to provide a single document annually to remind them of the benefits and how to enroll.

“I am sure there will be a lot of people out there cheering quietly,” he said. “It’s a big lift for sponsors who are physically having to mail out notices, because they also can be delivered electronically. As they wrote this bill, they wanted to make it easier to run retirement plans.”

Roth IRAs now an option

For advisors who work with SIMPLE IRAs, SEP and SARSEPs, Roth is now an option. “The only consideration I would give you is that it is unclear, because SECURE 2.0 is so new, whether it has the Roth IRA rules with income phaseouts about who can use Roth features,” says Gaston.

Related: SECURE 2.0: Guidance for retirement plan sponsors for 2023, 2024 and beyond

The act contains another significant change to Roth IRAs, beginning on Jan. 1, 2024.

“If you earn $145,000 or more year, indexed, any catch-up contributions you make have to be on a Roth basis,” he said. “Going forward, you have to switch from traditional to Roth to put that money into the plan.

“Here is why it matters a lot. If you have a plan that fails ADP testing on an annual basis and they end up moving money over to catch up, it now becomes Roth. That will require figuring out the tax implications, because you have done an in-plan conversion from pretax to Roth. If you are meeting with a client that doesn’t have a Roth provision, I would say that it now is a table stake going forward.”

Advisors can expect a great deal of interest in the student debt provisions of SECURE 2.0.

“For example, if a participant makes $100,000 a year and is paying back a student loan of $5,000 a year, the sponsor can say, `we know you are paying 5% of your salary on your loan, so we are going to give you a 5% match in your 401(k),” Gaston said. “That’s a challenge from a logistics standpoint, but it’s a great feature, especially if you have high-tech or high-educational burden companies where employees come in with a lot of student loan debt. This is a big provision that a lot of employers are going to be excited about offering.