SECURE 2.0, signed into law on December 29, 2022, included over 90 retirement plan-related provisions. Inevitably, there would be a few technical errors and unintended consequences.
There are issues with the Required Beginning Date (RBD) for both defined benefit and defined contribution plans. The RBD was updated in SECURE (1.0) from a triggering age of 70½ to age 72 for those turning 72 after December 31, 2019.
In SECURE 2.0 the triggering age:
- Increases to age 73 for those turning 72 after December 31, 2022 and before January 1, 2033, and
- Increases to age 75 for those turning 74 after December 31, 2032.
This drafting, however, leads to two triggering ages and thus two RBDs for those born in 1959. They will both turn 73 in 2032 (before 2033) and 74 in 2033 (after 2032), so their RBD would be both 73 and 75. The Senate Financing Committee has confirmed that age 75 was the intended RBD age for those born in 1959. A technical correction will reflect this.
An unintended consequence of raising the RBD age relates to abandoned Individual Retirement Accounts (IRAs). In certain states (Kentucky, Maine, Colorado, and Nevada), an IRA is considered “abandoned” if they remain dormant for three years following age 70½. Other states have abandonment linked to RBD by reference; thus, any increase in RBD age will automatically be incorporated. For those states where age 70½ is specifically referenced, a participant may find themselves with an abandoned IRA at age 73½, before an otherwise age 75 RBD. These states will individually need to revise their legislative wording for IRAs.
Nearer term, the technical error that has made headlines is for catch-up contributions in defined contribution plans. Catch-up contributions have been available since 2015 for employees age 50 or over. SECURE 2.0 restricts pre-tax catch-up contributions to those earning less than $145,000 in the prior year. However, if wages exceed $145,000, the catch-up would need to be paid to a Roth fund. Unfortunately, when marrying the text of Roth and pre-tax contributions, a paragraph was inadvertently omitted in the final legislation draft that seemingly bans all pre-tax and Roth catch-up contributions after 2024. If that drafting were intended, it would be a stark contrast to similar legislation measures in recent years. The Joint Committee of the Treasury Department has confirmed it was not intended and that it is a technical drafting error that will be corrected. Now we just have to wait for another congressional bill to include it on or before 2024.
Contact a Bolton consultant to further discuss these issues and to better understand how SECURE 2.0 might impact your organization.