The beginning of a new year often comes with many changes. For 2023, some of the most significant transformations are occurring in the retirement industry, thanks to the recent passage of the SECURE Act 2.0. While some of the new law’s provisions will not take effect until future years, others will need to be addressed and put into action this year. Following are some of the most critical changes employers must adopt in 2023.
Introduces Option for Employer Contributions to Workers’ Roth Accounts
Employers sponsoring 401(k), 403(b) and governmental 457(b) plans may offer employees the option to designate all or a portion of the employer’s match or non-elective contribution as a matching contribution to a Roth account, provided the employers’ contributions are fully vested at the time of contribution. Plan participants making this election would need to pay tax on the match in the year of the contribution, but withdrawals in retirement would be tax-free.
Allows Employees to Self-Certify Hardship Distributions
Rather than requiring plan participants to provide documentation of an “immediate and heavy financial need” for an in-service hardship withdrawal, plan sponsors may instead rely on employees’ self-certification that 1) they, in fact, have a hardship and 2) the amount they requested for distribution is not in excess of their financial needs.
Waives Early-Withdrawal Penalty in Certain Instances
Employees who live in a federally declared disaster area may take an early distribution of up to $22,000 without incurring a 10 percent early withdrawal penalty. The penalty is also waived for early distributions taken by plan participants diagnosed with a terminal illness.
Increases the Age for Required Minimum Distributions
Effective Jan. 1, 2023, owners of tax-advantaged retirement accounts, including 401(k)s, 403(b) and traditional IRAs, must begin taking annual required withdrawals from their plans when they reach age 73, rather than the previous threshold of 72 years old. Individuals who turned 72 in 2022 still need to take their first RMD by April 1, 2023, whereas those turning 72 in 2023 can wait until April 1, 2025, to take their first withdrawal and apply it to the 2024 tax year.
Reduces Employers’ Notification Requirements to Certain Employees
While employers must continue to provide all their employees with annual notices regarding plan eligibility, they are no longer required to issue certain notices to employees who opt of of the employers’ retirement savings plans.
New and Higher Tax Credit for Eligible Employers
Small, start-up businesses with up to 50 employees may receive a full, 100 percent tax credit for up to $5,000 of the administrative costs they incur during the first three years they establish an employee retirement plan. Previously, the credit was limited to 50 percent of the administrative costs.
In addition, SECURE Act 2.0 introduced to businesses with up to 100 employees a new tax credit of up to $1,000 per employee in 2023 based on their employee matching and profit-sharing contributions.
There are additional changes to employer-sponsored retirement plans scheduled to take effect in 2024 and 2025, including increasing force-out amounts, raising catch-up contributions for plan participants aged 60 to 63, mandating catch-up contributions be made to Roth plans, and requiring employers with 11 or more employees to automatically enroll eligible participants. It is critical plan sponsors meet with their advisors to understand and timely implement all the retirement planning reforms required under the new law.
About the Author: Olga Ismail is the head of Retirement Plan Consulting and a financial advisor with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC (PWAS). She can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or email@example.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10 percent federal tax penalty. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance cannot be guaranteed. Matching contributions from an employer may be subject to a vesting schedule. Please review your retirement plan documents or consult with a financial professional for more information.
Updated on February 5, 2024