5 Recent Changes and How They Impact Retirement Plans
Many Americans work for decades to save for retirement and diligently save money for the future. When an employer offers a pension or other retirement plan options, it can be helpful to those trying to save for retirement, especially when an employer matches employee contributions or offers other retirement incentives.
The SECURE 2.0 Act of 2022 (SECURE 2.0 Act) can benefit many working Americans by making it easier to save for retirement. The SECURE 2.0 Act was signed into law on December 29, 2022 to address issues related to retirement and savings. The SECURE 2.0 Act creates new flexibility and accessibility to help individuals plan for a more secure future.
Most of the SECURE 2.0 Act’s provisions take effect in 2024 (or later). At that point, a company will likely be required to automatically enroll eligible employees into its retirement plan, and employers who start new retirement plans will be required to automatically enroll employees at a rate of at least 3%, beginning in 2025. Exceptions to this requirement are new companies in business for less than three years and businesses with 10 or fewer workers.
Any change to the laws governing retirement plans can bring confusion for employers and employees alike. It is therefore important to stay up to date on these plans and your rights so you know whether you are receiving the benefits to which you are entitled. Some information about these changes is provided below. To learn more about these changes or get answers to frequent questions about ERISA, reach out to the expert ERISA attorneys at McKennon Law Group PC.
Employer Matching Based on Student Loan Payments
Around 43 million Americans carry student loans (as of 2023), making it even harder to save money in a retirement plan. This new update allows employers to offer an optional benefit that helps those paying student loans save for the future.
Beginning in 2024, student loan payments may be considered retirement contributions for the purpose of qualifying for matching contributions in a retirement account. Employers will also be able to contribute to company retirement plans on behalf of employees who are paying student loans rather than saving for retirement. This allows employers providing qualified retirement benefits to amend their plans so that qualifying student loan payments trigger a contribution match.
For example, an employer offering a 3 percent match (meaning it contributes up to 3 percent of the employee’s salary when the employee does the same) will now be able to choose to count student loan payments as the employee’s “contribution” and match it even if the employee is not contributing that much directly to the retirement plan.
It is important to note that employers can decide whether to implement this change; it is not an automatic right for those with retirement plan benefits.
New Options for Penalty-Free Early Withdrawals
Withdrawing funds from your retirement plan prematurely (before reaching the required retirement age) may result in a 10 percent early withdrawal penalty by the Internal Revenue Service (IRS). While people have some options allowing them to withdraw money as a loan to cover certain types of expenses, the SECURE 2.0 Act adds to those options. For example, The SECURE 2.0 Act will allow for temporary borrowing from retirement plans without a penalty to pay for long-term care coverage premiums, for emergency withdrawals of $1,000 per year, and for emergency savings accounts for some employees.
Limitations on Catch-Up Contributions for Some Workers
The SECURE 2.0 Act will also limit some employees’ ability to make catch-up contributions. Individuals who make more than $145,000 annually will not be able to make pre-tax catch-up contributions, although they will still be able to make after-tax catch-up contributions pursuant to the limitations set each year by the IRS. This may impact how much individuals are able to save via such contributions.
However, the SECURE 2.0 Act will also allow people aged 62 to 64 (depending on the plan) to contribute even more in catch-up contributions to qualifying plans. The maximum amount allowed will be adjusted annually to account for inflation.
Mandated Automatic Enrollment for New Retirement Plans
Starting in 2025, most major employers will be required to automatically enroll employees in any qualifying retirement plans offered. Currently, the trend is for employers to offer the plan and assume employees are not interested if they do not elect to enroll. The SECURE 2.0 Act reverses this assumption and the employee must elect to not enroll. This is a substantial change, especially considering that automatic enrollment defers 3 to 10 percent of a person’s income.
Higher Ages for Mandatory Distributions
Whereas employees previously had to take the required minimum distributions (RMDs) from their retirement each year beginning when they were 72, the SECURE 2.0 ACT increases the age for RMDs to 73 in 2023, and to age 75 by 2033. Once a person reaches the age for required RMDs, he or she must take RMDs every year or face tax penalties.
Being required to take minimum distributions can be an issue for individuals who do not yet need such an amount from their retirement and want to leave it in investment accounts or avoid paying taxes on the income in that year. This change therefore protects those who want to wait to take RMDs. Because these age thresholds do not stop persons from taking distributions earlier, the change serves to benefit those who want to wait.
Choose an ERISA Pension Attorney Who Will Fight for Your ERISA Rights
The laws related to retirement plans and benefits are detailed and complicated. Understanding your rights as to pension benefits is critical to protecting your access to those benefits. Employers and ERISA plans often deny claims for pension benefits. If an employer or ERISA plan denies your claim for retirement benefits, or any other ERISA claim (such as disability, life, health or accidental death and dismemberment), the knowledgeable and experienced attorneys at McKennon Law Group PC can help. Reach out to McKennon Law Group PC now for a free consultation.