In the last week of 2022, President Joe Biden signed into law the Consolidated Appropriations Act of 2023. The $1.7 trillion omnibus spending bill covers a huge range of topics, from spending in support for Ukrainian defense to the social media apps federal employees are allowed to download on their government-issued devices (hint: not TikTok). However, this blog will focus on the impact of the legislation on retirement savings policies, especially 401(k)s.
The retirement-related portion of the omnibus billed is dubbed the “SECURE 2.0 Act of 2022” and builds upon an act passed in 2019. Its goal is to expand the number of Americans saving for retirement and increase the amount they save. Some of the most important provisions of the legislation include:
- Mandated Automatic Enrollment
- Increased Limits for Catch-up Contributions
- Higher Age Threshold for Required Minimum Distributions
Mandated Automatic Enrollment
Effective for plan years beginning after 2023, 401(k) and 403(b) sponsors must automatically enroll employees in plans once they become eligible to participate in the plan. Previously, eligible employees had to elect to enroll. Under the new law, employees must opt out of enrollment if they do not wish to participate.
Generally, the amount of the automatic contribution must be set between 3 and 10%, depending on the employer’s policies.
Increased Limits for Catch-up Contributions
As we have discussed in a previous blog, the maximum catch-up contribution for 2023 is $7,500.
However, the SECURE 2.0 Act allows an additional increase in the contribution amount for participants aged 60 through 63. The additional increase is effective for tax years after 2024. For most plans, this second catch-up limitation would be $10,000. Furthermore, like the standard catch-up amounts, these limitations will also be subject to adjustments for inflation.
Higher Age Thresholds for Required Minimum Distributions
Under current law, plan participants are required to begin taking required minimum distributions (RMDs) at age 72. Under the SECURE 2.0 Act of 2022, the age at which participants must begin taking RMDs is increased over a period of ten years. Starting in 2023, the age is increased to 73 for individuals who turn 72 after 2022 and age 73 before 2033. For individuals who turn 74 after 2032, RMDs must begin at age 75.
These provisions aim to increase the rate at which Americans save for retirement. If you have questions about saving for retirement, please call our office at 480-392-6801.