SECURE 2.0 – More Changes in Store for Your Clients

VIEW AS PDF

 

By Timothy S. Thomasson, CPA, MTAX, and Campbell S. Thomasson, CPA, MACC

At the end of 2019, Congress enacted the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 2019), containing 30 provisions primarily designed to preserve and expand options for retirement savings.

This past December, while Americans were dealing with a raging winter storm and airline delays, Congress passed the Consolidated Appropriations Act of 2023, an omnibus federal spending bill. President Biden signed the bill on December 29, 2022. This bill includes the Setting Every Community Up for Retirement Enhancement Act 2.0 (SECURE 2.0 or The Act). SECURE 2.0 represents an ambitious follow-up to its predecessor, containing over 90 provisions that impact employer-provided retirement savings accounts and/or individual retirement accounts (IRAs).

Enhancing Participation in Retirement Savings Accounts

Expanding Automatic Enrollment
SECURE 2.0 contains several provisions designed to increase participation in retirement savings accounts by employees and self-employed individuals. One issue being addressed by SECURE 2.0 relates to employees who have not taken definitive steps to participate in plans offered by their employers. The Act adds IRC Section 414A, requiring 401(k) and 403(b) plans to automatically enroll participants once becoming eligible.

Employee contributions in a participant’s initial year of participation must be at least 3% but not more than 10% of eligible compensation. Beginning the first day of each plan year thereafter, the contribution must increase by 1 percentage point, until it reaches at least 10% but not more than 15%. Employees must affirmatively elect if they choose not to participate.

401(k) and 403(b) plans existing prior to the enactment date of SECURE 2.0 are grandfathered, as are SIMPLE 401(k), church and governmental plans. Exemptions also apply to small businesses with 10 or fewer employees, and businesses in existence for less than three years. This provision of SECURE 2.0 is effective for plan years beginning December 31, 2024.

Employer Matching Contributions for Student Loan Payments
A difficult decision many employees make is to postpone retirement saving while repaying student loans. One opportunity cost of this decision is foregoing employer matching contributions.

Effective for plan years beginning after December 31, 2023, employers can make matching contributions to 401(k), 403(b) and SIMPLE IRA plans for “qualified student loan repayments.” The Act broadly defines “qualified student loan repayments” as the repayment of any indebtedness incurred by the employee to pay higher education costs.

Higher Catch-up Limits Coming Soon
Defined contribution retirement plans can allow participants who are at least age 50 to make contributions in excess of the normal limits. For example, the annual dollar limit for 2023 on catch-up contributions to a 401(k) or 403(b) plan is $7,500, while the limit for a SIMPLE IRA plan is $3,500.

Beginning in 2025, SECURE 2.0 adds a special catch-up provision for those individuals even closer to retirement. For individuals ages 60 to 63, the catch-up limit for 401(k) and 403(b) plans increases to the greater of $10,000 or 50% more than the regular catch-up amount for 2024. The Act increases the catch-up contributions for SIMPLE IRAs to $5,000. This amount will be increased for inflation in later years.

A note of caution: See discussion below for the requirement that catch-up contributions be made to Roth accounts for certain taxpayers.

Taxpayers will also see an increase in catch-up amounts to traditional and Roth IRAs. Under current law, contributions by a taxpayer 50 or over is increased by $1,000. However, this amount is not indexed for inflation. SECURE 2.0 indexes such amount, effective for tax years beginning after December 31, 2023.

Saver’s Credit Now a Saver’s Match
Before SECURE 2.0, eligible individuals who contributed to a qualified retirement plan, such as an IRA or 401(k) plan, were eligible for a nonrefundable tax credit based on a percentage of their contributions. Effective for tax years beginning after December 31, 2026, SECURE 2.0 replaces the nonrefundable tax credit with a federal matching contribution, limited to 50% of personal retirement contributions up to $2,000 per individual (Saver’s Match).

The Saver’s Match must be deposited directly into the taxpayer’s IRA or retirement account. The Saver’s Match phases out from $41,000 to $71,000 of taxable income for individuals married filing jointly, from $30,750 to $53,250 for those filing head of household, and from $20,500 to $35,500 for those filing single or married filing separately.

Additional Relief from 10% Early Withdrawal Penalty
Taxpayers may be reluctant to contribute towards retirement savings accounts for fear of needing access to funds for emergency situations. Unless an exception applies, a 10% early withdrawal penalty is imposed on distributions from tax-deferred retirement accounts received before age 59½.

Several exceptions to this penalty already exist. SECURE 2.0 provides an additional exception for distributions used for unforeseeable or immediate financial needs relating to personal or family expenses. Only one distribution per year (up to $1,000) is allowed. The taxpayer is allowed to repay the distribution over three years. No additional emergency distributions are permissible for three years unless repayment is made.

The Act also expands exceptions to the penalty to include distributions due to terminal illness, domestic abuse and natural disasters. The exceptions for emergency needs and domestic abuse begin for tax years beginning after December 31, 2023. The exceptions for qualified disasters and terminal illness are effective immediately.

More Coverage for Part-Time Workers
A report by the Transamerica Center for Retirement Studies indicated that employers only offered 51% of employees working part-time participation in retirement plans, compared to 77% of full-time employees. SECURE 2019 required employers to allow long-term, part-time workers to participate in 401(k) plans.

Specifically, part-time employees became eligible for participation once (1) completing three consecutive years of service working at least 500 hours and (2) obtaining age 21. SECURE 2.0 modifies this rule by reducing the three-year requirement to two years and extends coverage for part-time workers to 403(b) plans subject to ERISA.

Increasing Employer’s Options in Offering Retirement Savings Accounts

Starter 401(k) Plans Remove Common Barriers to Plan Sponsorship
Many employers, especially smaller employers, cannot incur the administrative burden and cost of providing employees with retirement vehicles. SECURE 2.0 allows employers not already maintaining a qualified plan to offer a “starter 401(k) deferral-only arrangement.”

Under a starter 401(k) plan, all eligible employees are automatically enrolled at a deferral rate not less than 3% but not to exceed 15%. The deferral rate must be applied uniformly to all employees. An employee can elect not to participate. The employer itself does not make any contributions (matching or otherwise) to the plan. The aggregate amount of employee deferrals is tied to the contribution limits for IRAs. For 2023, this would be $6,500 plus $1,000 for individuals who have attained the age of 50 by the end of the year.

The Act also permits not-for-profit organizations to offer a “safe harbor 403(b) plan.” These plans have features like the starter 401(k) plans. Employers are exempt from costly non-discrimination testing.

The provisions for starter 401(k) and safe harbor 403(b) plans apply to years ending after December 31, 2023.

Expansion of Small Employer Pension Plan Startup Costs Tax Credit
Currently, the small employer pension plan startup tax credit is 50% of qualified administrative costs related to a plan’s first three years, with a cap of $5,000. To incentivize even more small businesses giving their employees the opportunity to save for retirement, SECURE 2.0 increases the credit to 100% of qualified administrative costs, with the $5,000 cap remaining the same.

The increase in eligible percentage of qualified administrative costs from 50% to 100% only applies to small businesses with 50 or fewer employees. Businesses with 51 to 100 employees may still take advantage of  the original 50% credit and businesses with greater than 100 employees are not eligible for the credit.

Additionally, SECURE 2.0 adds another credit for start-up pension plans, based on actual employer contributions. The new credit will be a percentage of employer contributions to the startup plan on a per-employee basis, with a cap of $1,000 per employee.

This credit is available in full for small businesses with 50 or fewer employees and is phased out for small businesses with 51 to 100 employees. Employers receive the full credit in the first two years of the plan, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. The credit is no longer available after the first five years of the plan. Defined benefit plans do not have access to this credit. These expanded credits apply for tax years beginning after December 31, 2022.

Flexibility for Employer Matching Contributions to a Roth Plan
In eligible employer-sponsored retirement plans, such as a 401(k) or 403(b), employer contributions to an employee’s retirement account have previously only been allowed to be made on a pre-tax basis. Those pre-tax contributions did not always fall in line with the character of the employee contributions, which are often to after-tax Roth accounts.

Under SECURE 2.0, employees can now elect to receive employer contributions on a Roth basis. These contributions would be on an after-tax basis.

Prior to the Act, employee contributions to Simple IRA plans and employer contributions to Simplified Employee Pension plans (SEP) could not be on an after-tax Roth basis. The Act now allows for contributions to Roth accounts. These changes are effective for tax years beginning after December 31, 2022.

Emergency Savings Accounts
As noted in the discussion of expanded penalty relief above, families often tap into retirement savings during times of urgent financial need. To promote continued retirement savings in this situation, SECURE 2.0 introduces savings accounts that are linked to an employee’s pension plan.

Employers can automatically enroll non-highly compensated employees into these accounts at no more than 3% of their salary, capped at $2,500. Any excess contributions, to the extent they occur, go into the employee’s Roth defined contribution plan. Contributions to the emergency savings account, as well as excess contributions that are rerouted into retirement accounts, must all be made on an after-tax Roth basis. Upon separation of service, employees can either take their plan balance in cash or roll the balance over to a Roth-type plan or Roth IRA.

More Time to Fund Solo 401(k) Plans
SECURE 2019 allowed sole proprietors with no other employees to establish a Solo 401(k) plan. The sole proprietor is wearing two hats: the “employer” and “employee.” The “employer” contribution is limited to 25% of the income from the business. The “employee” elective deferral is tied to the normal 401(k) rules.

For 2022, this amount was $20,500 for taxpayers under 50. A Solo 401(k) plan could be established for a plan year by the due date (before extension) for filing the tax return for that year (e.g., April 15, 2023, for the 2022 tax year). Employer contributions could be made by that same date and apply to the prior year. However, elective “employee” deferrals would have to be made by December 31 of the tax year.

SECURE 2.0 will allow a sole proprietor to fund the employee contributions by the initial due date of the return for the plan’s initial year. Employee deferrals for future years will still need to be made by December 31.

Small Financial Incentives for Contributing to a Plan
Employer matching contributions are designed to encourage an employee to participate in a qualified plan. However, prior to SECURE 2.0, employers were prohibited from providing small incentives like gift cards to encourage participation. Effective immediately, employers can now offer de minimis incentives to encourage participation.

Preserving Savings Longer Through Retirement

Delay in Start of Required Minimum Distributions
Under current law, required minimum distributions generally must start at age 72, increasing the likelihood participants spend retirement savings during their lifetime. Congress recognized that many individuals were working longer, meaning they were required to start accessing funds prior to the need for such funds.

SECURE 2.0 pushes the age for mandatory distributions back to 73 starting on January 1, 2023 (for participants who attain age 72 after December 31, 2022). The date for required minimum distributions gets pushed to age 75 starting on January 1, 2033 (for individuals who attain age 74 after December 31, 2032).

Surviving Spouse Election to Be Treated as Employee
Effective for tax years beginning after December 31, 2023, the Act permits a surviving spouse who is the designated beneficiary of a deceased employee’s qualified retirement account to elect to be treated as the deceased employee for purposes of the required minimum distribution rules. Prior to this provision, a surviving spouse had to roll the balance in the qualified retirement account into an IRA to receive the more favorable distribution period.

Rollovers from 529 Plans to Roth Accounts
Section 529 plans are a vehicle millions of Americans use to help save for college education costs of a designated beneficiary. Often, not all the funds in a 529 plan are needed. This can happen if the plan growth exceeds expectations, or a beneficiary receives scholarships or does not attend college.

For distributions after December 31, 2023, SECURE 2.0 allows beneficiaries to rollover up to $35,000 of excess 529 Plan funds to Roth IRAs throughout their lifetime. The 529 Plan must have been open for at least 15 years and the rollovers are still subject to the annual Roth IRA annual contribution limit.

Revenue Provisions

Roth Requirement for Catch-up Contributions
As discussed above, individuals 50 or older can make additional “catch-up contributions” to qualified retirement plans (currently $7,500 as of 2023) on either a pre-tax or after-tax Roth basis (if their employer offered a Roth-type qualified plan). SECURE 2.0 requires that all individuals with taxable income over $145,000 (to be increased annually for inflation) in the previous calendar year must contribute their catch-up contributions to a Roth-based plan.

Accordingly, these catch-up contributions will be on an after-tax basis. Employers not offering Roth-based options will be required to do so in order to continue to permit catch-up contributions. This provision is effective for tax years beginning after December 31, 2023.

Optional Treatment of Employer Contributions as Roth
We discussed above that employers can now offer the option to have matching or non-elective contributions made to a Roth-type account. Accordingly, these contributions would be on an after-tax basis. Also, SECURE 2.0 permits employee contributions to a Simple IRA, and employer contributions to a SEP, to now be on a Roth basis. While having these options increases flexibility, they serve as a short-term revenue raiser.

Hardship Withdrawals for 403(b) Plans
Prior to the Act, the hardship withdrawals for participants in 403(b) plans were more restrictive than for 401(k) plans. SECURE 2.0 conforms the 403(b) rules to the 401(k) plans. While facilitating the early withdrawal of retirement funds may be contradictory to encouraging savings, this provision alleviates concerns regarding inaccessible funds and serves as a revenue raiser.

SECURE 2.0 is a continuation of, and in many cases an expansion of, SECURE 2019. With 92 new or modified retirement provisions, practitioners are encouraged to review the entire Act for potential application to their clients.

About the Authors: Timothy S. Thomasson, CPA, MTAX, is Graduate Program Director and an associate clinical professor in the Hankamer School of Business at Baylor University. He is also a practicing CPA. He can be reached at Timothy_Thomasson@baylor.edu.

Campbell S. Thomasson, CPA, MACC, is a graduate of Baylor Unversity and a practicing CPA. He has prior work experience at Ernst & Young LLP and Cain Watters & Associates. He is pursuing his Ph.D. starting Fall 2022. He can be reached at Campbell_Thomasson@yahoo.com.

 

 

 

 

  • TXCPA’s 2024-2025 Year in Review

    TXCPA addressed key challenges in the accounting profession through strategic initiatives focused on the CPA talent shortage, advocating for licensure flexibility, expanding student outreach, and enhancing member services. Key achievements included support for legislation introducing additional CPA pathways, strong participation in advocacy efforts and impressive engagement in CPE programs.
    View Article
  • CPE: The Significance of Codes of Conduct in Professional Organizations - Standards for Ethical Practice

    This article examines the ethical codes of four major professional organizations - AICPA, ACFE, CFA Institute, and IIA - highlighting their shared values of integrity, objectivity, confidentiality, and competence. While all emphasize ethical behavior and professional standards, each code is tailored to the unique responsibilities of its field.
    View Article
  • 89th Legislative Session Review: New House Leader, Rule Changes and a Productive Session for TXCPA

    The 89th session of the Texas Legislature began on January 14, 2025. TXCPA has been hard at work advocating its legislative agenda and has had a very productive session. Texas is one of the state leaders in addressing CPA pipeline issues.
    View Article
  • Special Report: The Digital Transformation of Accounting

    Digital transformation is reshaping accounting, making technology adoption essential for firms to stay competitive. Automation streamlines reporting, while document management systems improve organization and compliance. Embracing innovation allows firms to boost efficiency, deliver deeper client value and lead in a rapidly evolving profession.
    View Article
  • Key Considerations for Financial Statement Auditors Before Leveraging Artificial Intelligence in Their Audits

    There is a growing role for generative AI tools to be used in financial statement audits. The tools offer numerous advantages, including enhanced data analysis, continuous learning, predictive insights, audit automation, and cost savings. However, challenges remain, such as data privacy risks, bias in training data and the inability to verify source data. Learn more in this article.
    View Article
  • How Accountants Can Embrace an Entrepreneurial Spirit

    The use of AI-driven technologies has resulted in numerous tools that threaten the existence of many professionals. Accountants are not immune to the threat since many of their tasks can be automated. To stay relevant, accountants can upskill or start their own business. Despite low risk tolerance, their financial expertise makes them strong entrepreneurial candidates.
    View Article
  • Maximizing Audits: Key Elements for Efficient and Successful Financial Assessments

    Audits provide stakeholders with reliable financial insights, but the process can be daunting for companies. To prepare effectively, businesses should focus on strong internal controls, accurate transaction records and clear, compliant financial statements. Internal controls help prevent fraud and ensure accurate reporting, while well-organized documentation streamlines auditor reviews.
    View Article
  • Spotlight on the Accounting Profession: Jessica Rodriguez Reyes

    Jessica Rodriguez Reyes, an outstanding undergraduate in the BS/MS accounting program at the University of North Texas, shares her journey as a first-generation college student. With internship experiences in small and large firms, Jessica emphasizes the value of hands-on learning and her dedication to mentoring other students is making a noticeable impact.
    View Article
  • A Year of Progress and Impact

    As the 2024–2025 membership year ends, we reflect on a year of progress driven by the dedication of leadership, volunteers and, most importantly, our members. Together, we advanced initiatives, strengthened our community and expanded our reach. Looking forward, even greater opportunities lie ahead to build on this success.
    View Article
  • What’s Happening Around Texas - May-June 2025

    Members in Austin, Dallas and San Antonio participated in community service activities and professional networking events. Fort Worth hosted a successful masquerade ball to fund scholarships, while TXCPA South Plains introduced its new board. Southeast Texas engaged students at a career expo, Victoria hosted a student-CPA coffee meet-up, and Wichita Falls organized an educational event at Midwestern State University.
    View Article
  • Accounting Firms Continue to Innovate in Response to Rapidly Changing Market Conditions

    There is a growing trend of private equity investments in CPA firms amid declining CPA Exam participation, talent shortages and rising reliance on AI. While offering growth opportunities, the deals raise concerns about maintaining professional independence in a profit-driven model.
    View Article
  • Take Note

    In this edition of Take Note: Renew Your TXCPA Membership Today; TXCPA Passport is On-Demand CPE at Your Fingertips; Tips to Reduce Digital Overload; Get Published in Today’s CPA Magazine
    View Article
  • Classifieds

    The classified ad section features listings for practice owners looking to sell, professionals seeking firms to purchase and a variety of specialized services. Whether you're looking to expand, sell or explore niche opportunities, these classified ads can connect you to valuable business prospects and resources.
    View Article

CHAIR
Mohan Kuruvilla, Ph.D., CPA

PRESIDENT/CEO
Jodi Ann Ray, CAE, CCE, IOM

CHIEF OPERATING OFFICER
Melinda Bentley, CAE

EDITORIAL BOARD CHAIR
Jennifer Johnson, CPA

MANAGER, MARKETING AND COMMUNICATIONS
Peggy Foley
pfoley@tx.cpa

MANAGING EDITOR
DeLynn Deakins
ddeakins@tx.cpa

COLUMN EDITOR
Don Carpenter, MSAcc/CPA

DIGITAL MARKETING SPECIALIST
Wayne Hardin, CDMP, PCM®

CLASSIFIEDS
DeLynn Deakins

Texas Society of CPAs
14131 Midway Rd., Suite 850
Addison, TX 75001
972-687-8550
ddeakins@tx.cpa

 

Editorial Board
Derrick Bonyuet-Lee, CPA-Austin;
Aaron Borden, CPA-Dallas;
Don Carpenter, CPA-Central Texas;
Rhonda Fronk, CPA-Houston;
Aaron Harris, CPA-Dallas;
Baria Jaroudi, CPA-Houston;
Elle Kathryn Johnson, CPA-Houston;
Jennifer Johnson, CPA-Dallas;
Lucas LaChance, CPA-Dallas, CIA;
Nicholas Larson, CPA-Fort Worth;
Anne-Marie Lelkes, CPA-Corpus Christi;
Bryan Morgan, Jr, CPA-Austin;
Stephanie Morgan, CPA-East Texas;
Kamala Raghavan, CPA-Houston;
Amber Louise Rourke, CPA-Brazos Valley;
Shilpa Boggram Sathyamurthy, CPA-Houston, CA
Nikki Lee Shoemaker, CPA-East Texas, CGMA;
Natasha Winn, CPA-Houston.

CONTRIBUTORS
Melinda Bentley; Kenneth Besserman; Barry Kaplan; Holly McCauley; Shicoyia Morgan; Craig Nauta; Kari Owen; Dipesh Patel, CPA, CGMA; John Ross; Lani Shepherd; Patty Wyatt

 

Your TXCPA membership has not been renewed for 2025 -2026. Renew now.