Secure Act 2.0: It’s a New Day in Retirement Plan Design

Secure Act 2.0 and a digital rendering of the US capital building
The SECURE 2.0 Act of 2022 implemented new retirement plan policy changes that can benefit veterinary practices, such as the option to match contributions to workers’ qualified student loan payments. slowgogo/DigitalVision Vectors via Getty Images

For practice owners, the recruitment, development and retention of professional staff as well as lay staff are some of the biggest challenges. Retirement plan offerings can be a differentiator between practices, and the design and implementation of tax-advantaged retirement plans are changing rapidly. On December 29, 2022, the SECURE 2.0 Act of 2022 was signed into law. This act builds on improvements made in the rules governing retirement plans that were enacted in the SECURE Act of 2019. These changes and enhancements affect qualified retirement plans, IRAs, SIMPLEs, SEPs, ABLEs and 529 plans. 

In 2019, the SECURE Act changed retirement planning by raising the age to begin taking Required Minimum Distributions (RMD) from age 70½ to 72. It also made significant changes to the rules for payout of benefits from retirement plans. Furthermore, it enabled part-time workers to be eligible for retirement plan participation.

The Secure 2.0 Act is legislation designed to continue improving retirement security for Americans. It contains 92 provisions and has been a welcome area of bipartisan cooperation in the U.S. Congress. Among other things, the act includes significant expansion of startup tax credits and increases in catch-up contributions and retirement plan limits. It also introduces new RMD regulations. The tax credits are particularly noteworthy given that many small business owners have viewed retirement plans as too costly in the past.

Some provisions are effective immediately, while others will take effect in the coming years. Below are some of the highlights from Secure 2.0 that employers who either have an existing retirement plan or are considering creating a retirement plan should consider:

Immediate Implementation 2023:

Significant expansion of startup tax credits – The SECURE Act expanded the startup plan tax credit for recordkeeping, third-party administration, and financial professional expenses paid out of plan assets. SECURE 2.0 strengthened the existing tax credit by removing its percentage limitation and, even more significantly, created a new tax credit that reimburses small businesses for a portion of the amount of employer contributions made. The tax credit starts at 100% of employer contributions made for each employee earning less than $100,000 a year up to $1,000 and phases down over 5 years from plan adoption (100%, 100%, 75%, 50%, 25%). Together, these two tax credits could make plan adoption extremely cost-effective and potentially help reimburse employer contributions in the early years of a plan. Practice owners considering adopting a plan should work with consultants who can help them maximize these credits.

SIMPLE and SEP Roth IRAs – SIMPLE and SEP IRAs are now allowed to accept Roth contributions. Plans can also allow employees the ability to treat employee and employer SEP contributions as Roth.

Many business owners have adopted SIMPLE IRA plans due to the additional costs associated with 401(k)s and other more robust plans. One of the downsides of the SIMPLE IRA plan (or SEP IRAs) was that you could only make pre-tax contributions. With this change, the plan can accept Roth contributions much like 401(k) plans can.

Roth option available for employer contributions – Previously available only as pre-tax, employers now have the option to allow employees to decide whether to take employer matching and nonelective contributions on a Roth after-tax or pre-tax basis. The employer may deduct Roth contributions, but employees take Roth contributions as income, and contributions and earnings would be subject to normal Roth rules thereafter. For those participants wanting to build their “tax-free” bucket of retirement assets, this provision allows you to take advantage through your employer’s plan. 

Hardship withdrawals related to natural disasters – Participants are allowed to withdraw up to $22,000 to pay for expenses related to a natural disaster, taxed as gross income over three years without additional penalty. This provision was first introduced during the early part of the pandemic. Taxpayers benefitted from this period because they could defer the tax hit over several years. Retirement funds are meant to be used in your retirement, but when unforeseen circumstances do occur, it is advantageous to have access to those funds in a more tax-efficient way. 

Financial incentives to boost participation – Employers may offer de minimis financial incentives, not paid for with plan assets, such as low-dollar gift cards, to boost employee participation in workplace retirement plans. 

IRA Charitable Distributions – Expands the IRA charitable distribution provision to allow for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts. Indexes for inflation the annual IRA charitable distribution limit of $100,000. This is something to consider as you continue to maximize your retirement accounts during your working years. If you wish to contribute to a 501(c)(3) organization, you can make a distribution directly from your IRA to the organization and it will not be reported as income to you. You were able to (1) make a pre-tax contribution, (2) invest it and have it grow, tax-deferred, and (3) make a distribution to a qualified organization without EVER having to pay tax.

RMD Age Requirement – Required minimum distribution age increases to 73.

In 2020, RMDs went from 70 ½ years old to 72 years old. This provision adds another year that you can continue to allow your tax-qualified monies to grow. For participants reaching age 74 on or before December 31, 2032, the required minimum distribution age increases to 75.

Deferral Limits – Beginning January 1, 2023, 401(k) deferral limits increase to $22,500 and catch-up contributions increase to $7,500 for participants of 50 years of age and older. These substantial increases to deferral limits represent the silver lining to the inflation we’ve been experiencing. 

Starting in 2024:

Matching of employee student loan payments – Employers with 401(k), 403(b) or SIMPLE plans have the option to make matching contributions on workers’ qualified student loan payments. Matching contributions are also allowed with governmental 457(b) plans. To be considered a qualified student loan payment, the payment must be made by a participant to repay a qualified education loan that was incurred by the participant to pay higher education expenses. In addition, the total amount of the participant’s qualified student loan payments cannot exceed (1) the participant’s compensation, or (2) the deferral limit under Internal Revenue Code Section 402(g), whichever is less. 

This is perhaps the most significant change enacted in Secure Act 2.0 when it comes to veterinary practices. Student debt is one of the most significant issues facing young veterinarians. Practices that offer this new match will provide a benefit to younger veterinarians that can differentiate their practice from other practices not offering this match.

529 plan transfers to Roth IRAs – Leftover 529 account savings can be rolled over into a Roth IRA without penalty, subject to IRA contribution limits, up to a maximum of $35,000 over the course of a lifetime. Additional information and regulations will be forthcoming to help clarify exactly how this new 529 rollover opportunity will be administered.

Catch-up contribution tax treatment – All catch-up contributions to qualified retirement plans are subject to Roth tax treatment, except for employees with compensation of $145,000 or less.

Emergency retirement plan distributions – Participants are allowed to withdraw up to $1,000 annually without an early-withdrawal tax penalty, and they have up to 3 years for repayment. No further emergency distributions are permissible during the 3-year repayment period unless repayment occurs.

Penalty-free withdrawals for survivors of domestic abuse – Survivors of domestic abuse are allowed to withdraw the lesser of $10,000 or 50% of their retirement account without penalty upon self-certification as a survivor of domestic abuse.

Roth 401(k) RMD requirements – Roth 401(k)s are exempt from pre-death RMD requirements.

IRA limits – IRA contribution limits indexed to inflation.

Starting in 2025:

Mandatory automatic-enrollment and savings escalators – New 401(k) and 403(b) plans are required to auto-enroll participants with salary deferral of at least 3% and not more than 10%, escalating at 1% per year of service up to a minimum of 10% and a maximum of 15%.

Special retirement plan catch-up contributions – Special retirement plan catch-up contributions up to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for savers between the ages of 60 through 63 begin, indexed to inflation after 2025.

Overall, SECURE 2.0 is a significant improvement for retirement planning in the United States. It expands access to workplace retirement plans by making it easier for small businesses to offer them and providing new options for retirement savings. Additionally, SECURE 2.0 increases the incentives for employers to offer retirement plans, which will likely lead to more Americans having access to these important benefits. SECURE 2.0 is an important step forward in helping Americans secure their financial futures and achieve a comfortable retirement.

Please contact your investment advisor for any specific questions on how Secure Act 2.0 might impact your retirement and how you can maximize these updates for better financial outcomes. Does your company offer a retirement plan? If so, be sure you are taking advantage of the plan and all the applicable changes. Are you a practice owner that has held off on adopting a retirement plan? This might be the perfect time to revisit putting a retirement plan in place. 

About the Authors 

Morgan Webb and John Chalk offer financial planning and investment advisory services through Trinity Portfolio Advisors, LLC, an SEC-registered investment advisor. Their practice specializes in guiding veterinarians toward financial independence and security.

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