The Consolidated Appropriations Act, 2023, P.L. 117-328, enacted on Dec. 29 included (as its Division T) the Secure 2.0 Act, which contains several retirement and tax provisions. The Secure 2.0 provisions mostly focus on expanding coverage, increasing retirement savings, and simplifying and clarifying retirement plan rules, but there are other changes included as well.

Credit for military spouses that participate in employer defined contribution plans

The act creates a credit for small employers for each military spouse that starts participating in the employer’s eligible defined contribution plan (new Sec. 45AA). A small employer is defined as one with no more than 100 employees who earned at least $5,000 in the preceding year.

The annual credit amount is $200 for each military spouse who participates in the employer’s plan, plus the amount of related employer contributions to the plan (but capped at $300 of contributions for any individual). A military spouse counts for purposes of the credit only in the tax year that includes the date they begin participating in the plan and the two succeeding tax years. “Military spouse” is defined as an individual who is married to a member of the uniformed services (as defined in 10 U.S.C. Section 101(a)(5)) serving on active duty. Highly compensated employees (within the meaning of Sec. 414(q)) are excluded from the definition of “military spouse.”

Small financial incentives for contributing to a plan

The act allows employers to provide de minimis financial incentives (not paid for with plan assets) to employees who elect to have their employer make contributions pursuant to a salary reduction agreement.

Starter 401(k) plans and safe-harbor 403(b) plans

The act establishes two new retirement plans: starter 401(k) deferral-only arrangements and safe-harbor 403(b) plans.

An employer is generally eligible to offer a starter 401(k) deferral-only arrangement if neither the employer nor a predecessor employer maintains another qualified plan for the year in which the determination is being made. Under the starter 401(k) deferral-only arrangement, each eligible employee must be treated (unless the employee elects otherwise) as having elected to have the employer make elective contributions in an amount equal to the applicable qualified percentage of compensation.

All employees of the employer must be eligible to participate in the arrangement other than those that do not meet the age and service requirements. The qualified percentage is determined under the terms of the arrangement, but must not be less than 3% or more than 15%, and it must be applied uniformly.

Employers may not make matching or nonelective contributions to starter 401(k) deferral-only arrangements. An employee’s elective contributions for a calendar year may not exceed $6,000, adjusted for cost of living, with up to $1,000 of catch-up contributions permitted for employees who attain age 50 by the end of the tax year.

Similar rules apply to safe-harbor 403(b) plans for tax-exempt employers that do not already maintain a qualified plan.

ABLE program age limit increased

The act increases the age limit before which an individual’s disability or blindness must have occurred from 26 to 46 in order for the individual to be eligible to establish and become the designated beneficiary of an achieving a better life experience (ABLE) account. The change is effective for tax years beginning after Dec. 31, 2025.

Improving coverage for part-time workers

Previously, Sec. 401(k) plans generally had to permit long-term part-time employees to make elective deferrals if the employee had worked at least 500 hours per year with the employer for at least three consecutive years and had met the minimum age requirement (age 21) by the end of the three-consecutive-year period. The act reduces the three-year requirement to two years, effective for plan years beginning after Dec. 31, 2024.

Tax-free rollovers from Sec. 529 accounts to Roth IRAs

The act permits beneficiaries of Sec. 529 college savings accounts to make direct trustee-to-trustee rollovers from a Sec. 529 account to a Roth IRA without tax or penalty. The Sec. 529 account must have been in existence for more than 15 years at the time of the rollover, and aggregate rollovers cannot exceed $35,000. Rollovers are also subject to the Roth IRA annual contribution limits. The change is effective for distributions made after Dec. 31, 2023.

Pension-linked emergency savings accounts

The act amends the Employee Retirement Income Security Act (ERISA) to allow plans to establish short-term savings accounts as part of an individual account plan on behalf of an eligible participant. Such accounts will be Roth accounts of up to $2,500 with no minimum contribution or account balance requirements that allow for withdrawal or distribution of the account balance, at least once a month, at the participant’s discretion. Such distributions will not be subject to the Sec. 72(t) 10% additional tax for early withdrawals.

Penalty-free emergency withdrawals

The act adds a new exception from the Sec. 72(t) 10% tax on early distributions from retirement accounts. The new exception applies to certain distributions used for emergency expenses, which are used for meeting unforeseeable or immediate financial needs relating to necessary personal or family emergencies. One distribution is allowed per year of up to $1,000. Taxpayers have the option to repay the distribution within three years. No further emergency distributions are allowed during the three-year repayment period unless repayment has been made. The exception is available for distributions made after Dec. 31, 2023.

Penalty-free retirement plan withdrawals for domestic abuse victims

The act amends Sec. 72(t) to allow domestic abuse victims to take distributions of up to $10,000 (adjusted for inflation after 2024) from a qualified retirement plan without being subject to the 10% additional tax for early withdrawals. “Domestic abuse” includes physical, psychological, sexual, emotional, or economic abuse by a spouse or domestic partner. Employees or participants can self-certify that they qualify for the exception. The provision is effective for distributions made after Dec. 31, 2023.

Penalty-free retirement plan withdrawals for individuals with a terminal illness

The act amends Sec. 72(t) to allow individuals with a terminal illness to take distributions from a qualified retirement plan without being subject to the 10% additional tax for early withdrawals. Employees or participants will need a physician’s certification to qualify for the exception. A terminally ill person is defined as someone who has an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification. The provision is effective for distributions made after Dec. 31, 2023.

Penalty-free retirement plan withdrawals in connection with qualified disasters

The act amends Sec. 72(t) to allow penalty-free withdrawals of up to $22,000 for “qualified disaster recovery distributions.” These are defined as any distribution made on or after the first day of the “incident period” of a qualified disaster and before 180 days after the “applicable date” for that disaster. Eligible individuals must have their principal place of abode within the qualified disaster area and must have sustained an economic loss as a result of the qualified disaster.

The “incident period” means the period designated by the Federal Emergency Management Agency as the period during which the disaster occurred. The “applicable date” is the latest of (1) the date of enactment of the act, (2) the first day of the incident period, or (3) the date of the disaster declaration.

Any amount of a qualified disaster recovery distribution that an individual must include in income will be included ratably over a three-year period.

The provision applies to distributions with respect to disasters for which the incident period begins on or after Jan. 26, 2021 (30 days after the enactment of the Taxpayer Certainty and Disaster Relief Act of 2020, P.L. 116-260).

The provision is effective for distributions made after Dec. 31, 2023