Congress enacted significant new rules for retirement benefits in the waning days of 2022 when it included the text of the “Secure Act 2.0” in an omnibus legislative package. As its name implies, this “2.0” is a revision of a previous Secure Act that was signed into law in 2019.

Among its changes to today’s retirement systems, here are five key considerations that may impact your church, ministry, or staff:

1. Optional Roth contributions for employer-matching and non-elective contributions

Prior to enactment of the Secure Act 2.0, all employer contributions to retirement accounts were considered “pre-tax” contributions. However, employer contributions can now be made on a Roth basis to retirement accounts.

Employer-matching and non-elective contributions made as Roth contributions are taxable to the employee at the time they are made. This also means that contributions and their related earnings are not taxed upon distribution. As a reminder, participants must be 100 percent vested in employer Roth contributions at the time they are contributed to the plan.

2. Changes to the age requirement for Required Minimum Distributions

The Secure Act 2.0 brought about immediate and future changes to the Required Minimum Distribution (RMD) age when an account holder must start liquidating an IRA. In 2019, the RMD age increased to 72 (from 70 ½), and now the Secure Act is extending that age further to 73 as of January 1, 2023. In another 10 years (2033), the RMD age will increase again to 75.

The Secure Act 2.0 also changes the excise tax on missed RMDs. Previously, if an RMD was not met, the penalty for missing the required minimum distribution was 50 percent. Now that tax penalty has been reduced to 25 percent, and it me be reduced an additional 10 percent if the minimum distribution can be made in a “timely manner.”

3. Automatic enrollment for retirement plan participants  

Effective for plan years beginning AFTER December 31, 2024, organizations generally will be required to automatically enroll eligible employees in 401(k) retirement plans for private sector organizations or 403(b) plans for tax-exempt organizations. Upon being enrolled, the contribution amount is a minimum of 3 percent and increases 1 percent each year until the contribution limit reaches a maximum of 15 percent. Employees who do not desire to take advantage of this program are able to opt out.

In addition, for organizations whose 401(k) or 403(b) plan is subject to ERISA requirements, the Secure Act 2.0 extends retirement eligibility to part-time employees. To be eligible, the employee will need to work 500 hours over the course of 3 consecutive years or 1,000 hours over the course of one year. The three-year requirement is further reduced to 2 years beginning January 1, 2025.

Of note, this program is not required for organizations that are less than 3 years old, have less than 10 employees, or church and government agencies.

4. New option for Qualified Charitable Distributions

A Qualified Charitable Distribution (QCD) allows those who have retirement accounts to transfer money directly from their account to a charity or nonprofit to satisfy their required minimum distribution and avoid recognition of income, up to a $100,000 annual limit. While the standard QCD annual limit continues to be $100,000, the new act allows for yearly increases in the QCD as it is indexed for inflation.

Another change for QCDs is an allowance for a one-time, $50,000 distribution made to a charitable gift annuity (CGA) or other split-interest gift, such as a charitable remainder unitrust (CRU) or charitable remainder annuity trust (CRAT). This counts towards the $100,000 annual QCD limit and towards your annual RMD.

Of note, QCDs must be made directly from an IRA to a qualified organization within the calendar year, and these changes are effective in 2023.

5. Rollover excess 529 College Savings Funds to a Roth IRA

529 college savings accounts provide an advantage to families that wish to contribute after-tax dollars to an account for their children’s future educational expenses. Some states offer significant tax advantages for owning these types of accounts.

But what if a 529 account has a lump sum remaining after educational expenses have been paid? The Secure Act 2.0 now allows a rollover of up to $35,000 (lifetime maximum) from a 529 college saving account that has been open at least 15 years to the beneficiary’s Roth IRA—subject to the yearly contribution limit for such retirement accounts.   

 

ECFA recommends consulting with your professional counsel to determine the overall impact of the Secure Act 2.0. If you’re looking for help, the ECFA Business Directory is a great place to start your search.