On December 29, 2022, President Joseph R. Biden signed into law the Consolidated Appropriations Act, 2023, Division T of which may be cited as the “SECURE 2.0 Act of 2022” (the Act). The Act contains many detailed provisions impacting retirement plans. This article will review selected provisions of the Act that may have the broadest application and their potential impact. Because the Act is very detailed and not all of its provisions are discussed here, and because each person’s financial and tax situation is unique, you should speak with your attorney, accountant and other tax and financial advisors before changing your plans.

Required Beginning Date (RBD) and Required Minimum Distributions (RMDs)

• CHANGE
The Act changes the age at which a participant must begin receiving RMDs. Beginning in 2023, if you attained age 72 after 2022, you must begin taking RMDs by April 1 of the year after you attain age 73. Beginning in 2033, if you attained age 74 after December 31, 2032, you must begin taking RMDs April 1 following the year you attain age 75.

» IMPACT
Participants may retain assets in their retirement plans for a longer period, allowing those assets to compound without income tax for a longer time. Participants should consider which assets classes are best to hold in qualified plans versus taxable accounts. Also, participants who retire before attaining their RBD should consider whether to fund lifestyle expenses during the period from retirement to their RBD from either taxable or qualified accounts (or a combination of both).

• CHANGE
Beginning in 2024, lifetime RMDs will no longer be required for Roth designated accounts in employer plans, as has been the case for Roth IRAs.

» IMPACT
Roth accounts need not be distributed during the owner’s or their surviving spouse’s lifetimes, allowing assets to compound income tax free. Employees should consider whether to allocate retirement assets to Roth designated accounts and whether to invest assets in a Roth designated account differently from those invested in a traditional account.

• CHANGE
Beginning in 2024, following the death of a plan participant, if the participant’s surviving spouse is the beneficiary, in addition to other beneficiary elections, the Act allows the surviving spouse to elect to be treated as the deceased employee.

» IMPACT
Such an election could benefit the surviving spouse in many ways, among them: (i) RMDs will be delayed until the age that the deceased spouse would have been required to take RMDs, (ii) the surviving spouse’s RMDs will be calculated based on the Uniform Lifetime Table (Table III) rather than the Single Lifetime Table-For Use By Beneficiaries (Table I), and (iii) upon the surviving spouse’s subsequent death, the spouse’s beneficiaries will be considered original beneficiaries of the account, which could allow the spouse’s eligible designated beneficiaries to receive RMDs over their lifetimes.

• CHANGE
Beginning in 2023, the Act allows charitable organizations other than supporting organizations and donor advised funds to be treated as a designated beneficiary of an Applicable Multi-beneficiary Trust (AMBT) benefiting a disabled or chronically ill eligible designated beneficiary.

» IMPACT
The participant may name certain charitable organizations as beneficiaries of an AMBT while still permitting the retirement account to be distributed over the disabled or chronically ill individual’s lifetime. This allows certain charitable organizations to be included as a beneficiary of the AMBT, for example as a remote contingent beneficiary should there be a failure of individual beneficiaries.

Qualified Charitable Distributions (QCDs)

• CHANGE
Beginning in 2023, the Act allows an individual to make a one-time election that allows a “split-interest entity” to receive a QCD. The total amount that can be paid into a split-interest entity is $50,000 (indexed for inflation n taxable years beginning after 2023). For these purposes, a split-interest entity is a charitable remainder annuity trust that is funded exclusively by QCDs, a charitable remainder unitrust that is funded exclusively with QCDs and a charitable gift annuity but only if such annuity is funded by QCDs and begins making fixed payments of 5% or greater to the annuitant not later than one year from the date of funding. Additionally, the remainder beneficiaries of a split-interest entity must be a qualified charitable organization which could receive a QCD outright. Only the IRA owner, the IRA owner’s spouse or both may hold the income interest in a split-interest entity, which interest must not be assignable. Importantly, all distributions from the split-interest entity to the holder of the “income” interest will be treated as ordinary income.

» IMPACT
Given the $50,000 limitation and the ordinary income tax treatment of all distributions received by the donor, it is unlikely that many charitable remainder trusts will be created using this method. However, a charitable gift annuity may be a practical and tax-advantaged way to benefit your favorite charity from your IRA while retaining a stream of payments for your (and, perhaps, your spouse’s) lifetime.

• CHANGE
For tax years beginning after 2023, the Act also adjusts for inflation the maximum amount (currently $100,000) that qualifies as a QCD.

» IMPACT
QCDs now keep up with inflation. For participants who do not need their IRAs to pay living expenses, QCDs are an income tax-advantaged way to benefit a charity (and reduce the participant’s RMD, thereby reducing the participant’s gross income for federal, and often for state, income tax purposes). The inflation adjustment prevents the real amount available for a QCD from being reduced over time.

Catch-up Contributions

• CHANGE
For IRAs, beginning after 2023, the Act indexes the catch-up contribution amount for inflation.

For employer plans, beginning in 2025, other than SIMPLE plans, the Act increases the catch-up amount for participants who have attained ages 60 through 63 before the end of the tax year to the greater of $10,000 or 1½ times the regular catch-up amount in effect for 2024. For tax years beginning after December 31, 2025, this amount is indexed for inflation.

For SIMPLE plans beginning in 2025, the Act increases the catch-up amount for such plans for participants who have attained age 60 through age 63 before the end of the tax year to the greater of $5,000 or 1½ times the regular catch-up amount in effect for 2025. For tax years beginning after December 31, 2025, this amount is indexed for inflation.

» IMPACT
Older participants can save more for retirement on a pretax (or Roth) basis.

Employer Matching Contributions for Student Loan Payments

• CHANGE
Beginning in 2024, the Act would permit matching contributions to be made by an employer to a defined contribution plan, SIMPLE plan, 403(b) plan or governmental 457 plan (rules may differ somewhat for each type of plan) on behalf on an employee with respect to certain qualified student loan payments made by the employee.

» IMPACT
For employees who are unable to contribute to a retirement plan because their income is needed to pay student loans, employer matching contributions may enable them to save for retirement.

529 Plans

• CHANGE
Beginning in 2024, under certain conditions and subject to specific limitations, The Act permits a tax-and penalty-free rollover of a long-term 529 Plan account by its designated beneficiary to a Roth IRA, up to $35,000, in the aggregate. The 529 Plan must have been open for at least 15 years and such rollovers are subject to the Roth IRA annual contribution limit.

» IMPACT
The ability to roll over a 529 Plan to a Roth IRA (rather than changing the 529 Plan’s beneficiary) allows the current beneficiary of a 529 Plan to reposition unused education funds in a tax-advantaged way to support their future needs in retirement.

Penalty-free Distributions

Generally, unless an exception applies, withdrawals from a retirement plan or IRA before the owner attains age 59½ are subject to a 10% penalty.

• CHANGE
The Act carves out several exceptions to the general rule. Also, the Act allows for the repayment of certain distributions. Some of the changes are:

  • Qualified Birth or Adoptions. Penalty-free distributions made for qualified birth or adoptions may be repaid within three years with respect to distributions made after December 29, 2022. A qualified birth or adoption distribution made before that date may be repaid before January 1, 2026.
  • Domestic Abuse Victims. After 2023, the Act permits penalty-free distributions to be made from applicable eligible retirement plans to an employee participant who is a domestic abuse victim. The distribution can be repaid within three years. The plan participant may self-certify that the distribution is an eligible distribution to a domestic abuse victim.
  • Certain emergency expenses. After 2023, The Act permits penalty-free distributions to be made for any emergency personal expense distribution up to the lesser of $1,000 or the present value of the employee’s nonforfeitable accrued benefit over $1,000. The distribution may be repaid within three years.
  • Terminally ill persons. After December 29, 2022, the Act allows distributions to be made to a terminally ill individual without penalty. For these purposes a “terminally ill individual” means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 84 months or less after the date of the certification. The distribution may be repaid within three years.
  • Purchase of Certain Long-term Care Contracts: After December 29, 2025, the Act allows certain distributions made to an employee from a defined contribution plan without penalty to purchase a certified long-term care contract for benefit of the employee, the employee’s spouse and such other members of the employee’s family as defined by regulations. The amount distributed cannot exceed in any one year the least of: (i) the amount paid during the year for the Contract, (ii) an amount equal to 10% of the present value of the employee’s non-forfeitable accrued benefit under the plan, and (iii) $2,500 (indexed for inflation in taxable years after December 31, 2024, rounded to the nearest multiple of $100).
  • Disaster Recovery: For disasters occurring on or after January 26, 2021, the Act makes permanent the ability of a participant to receive a penalty-free distribution of up to $22,000 for disaster recovery. Unless the taxpayer elects out, the qualified disaster distribution (for any year) will be included in the taxpayer’s income ratably over three years beginning with the year the distribution is made. During the three years after the taxpayer receives a qualified disaster distribution, the distribution can be repaid.
  • Emergency Savings Accounts: Beginning with 2024 plan years, to help individuals save for emergency expenses, the Act allows employer plans to offer pension-linked emergency savings accounts. The accounts are short-term savings accounts maintained as part of an individual account plan and follow the rules for Roth accounts. There are limitations on which employees can have such an account and how much can be contributed. Note that plan changes will be necessary to implement these provisions.

» IMPACT
Participants can now use retirement accounts without penalty (within limits) to better their lives, recover from hardship and other life problems and can pay those amounts back if they are able. Nevertheless, participants should give careful consideration regarding the use of retirement plan assets in this way so as not to leave themselves with insufficient assets in retirement.

Reduction in Excise Taxes

• CHANGE
Beginning in 2023, the Act provides relief with respect to excise taxes for errors made with respect to IRAs and qualified plans. The excise tax for failing to take an RMD is reduced from 50% to 25% of the amount that should have been taken and if certain conditions are met, the excise tax is reduced to 10%.

» IMPACT
Penalties imposed on often inadvertent mistakes that were onerous are more manageable.

Part Time Employees

• CHANGE
For plan years beginning after December 31, 2024, the Act reduces the time in service requirement from three years to two years. For plan years beginning after December 31, 2020, service before calendar year 2021 is disregarded for determining when employer contributions vest in the employee and also for determining eligibility to participate in the plan.

» IMPACT
More employees can save for retirement.

Other Changes

There are many rule changes in the Act, including:

  • Originally set to begin in 2024, but now beginning in 2026, catch up contributions to defined contribution plans for employees whose wages exceed $145,000 (indexed for inflation for tax years beginning in 2025) must be designated as Roth contributions.
  • Effective for contributions to a defined contribution plan (including 403(b) and governmental 457(b) plans) made after December 29, 2022, employees may elect that employer matching or nonelective contributions be Roth contributions.
  • Beginning in 2023, taxpayers can create a SEP IRA for their domestic employees.
  • Beginning in 2023, the Act allows SIMPLE IRAs to accept employee Roth contributions. The Act also allows employees to elect Roth treatment for both employer and employee contributions to SEP IRAs.

Many Changes, Seek Assistance

The Act makes many changes to the rules regarding retirement plans. Consult with your attorney and accountant as to how these rules may impact your unique situation. Additionally, your PNC Private Bank® Wealth Strategist can work with your tax advisors to illustrate how these changes could impact your financial and estate plans.

For more information, please contact your PNC Private Bank advisor.