Updates to federal law may offer relief to Americans struggling to save for retirement. The SECURE 2.0 Act was signed into law in December 2022. This law creates opportunities for employers and employees regarding 401(k) and emergency savings plans, as well as student-loan repayment.
Many of these policy changes expand on updates made to the 2019 SECURE Act, which included retirement-related changes such as allowing employers to add annuities to 401(k) plans and raising the minimum age for required minimum distributions.
The recent law creates additional flexibility for businesses in their retirement offerings and adds opportunities for employees to improve their financial planning. Here are four key areas of the latest law where financial advisors should be prepared to guide clients.
Under 2022 law, employers starting new retirement plans in 2025 and beyond will be required to automatically enroll eligible employees in 401(k) and 403(b) plans. These plans will set aside at least 3% but no more than 10% of paychecks. Existing plans are exempt, as are businesses with 10 or fewer workers, new businesses operating for less than three years, and church and governmental plans.
Starting in 2024, employers will be allowed to offer emergency savings accounts linked to their retirement accounts. These accounts come with four tax-free, penalty-free withdrawals per year, although there are limits to the maximum balance and annual contribution totals. Employee contributions to such a plan must be eligible for any matching contributions given for elective deferrals.
401(k) Emergency Withdrawals
Starting in 2024, the Secure 2.0 Act expands the conditions under which workers can make hardship withdrawals. For example, people who are victims of domestic violence or have a terminal diagnosis are eligible for withdrawals, although they have to be paid back within three years. Advisors will have to guide clients through the eligibility process and ensure they understand the withdrawal limits and how repayment works.
People suffering from the effects of the COVID-19 pandemic and recent economic uncertainty might see emergency withdrawals as a potential option. According to survey data from Bankrate only an estimated 43% of U.S. adults would use emergency savings to cover an unexpected expense.
Matching Contributions for Student Loan Repayment
Many employers provide matching contributions for 401(k) or 403(b) contributions. However, people with student loans may delay saving for retirement while they focus on paying down debt. They can miss out on years of retirement savings and matching contributions. SECURE 2.0 Act ensures that workers making student loan payments qualify for employer-matching contributions, even if they aren't otherwise making qualifying retirement plan contributions.
To be eligible for a match, student loan repayments must meet certain qualifications. Repayments mustn't exceed the lesser of the maximum deferral limit ($22,500 for the year 2023) or the maximum annual addition limit ($66,000 or 100% of the participant's 2023 compensation, whichever is less). Additionally, the participant must annually certify to their employer that they’ve made loan repayments.