SECURE Act 2.0 Finally Here
On December 29, 2022, President Biden signed the SECURE 2.0 Act of 2022 (“SECURE 2.0”). The new act is being called SECURE 2.0 based on the name of its thematic predecessor, the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”). SECURE 2.0 was included as part of the defense authorization and government funding bill that passed Congress at the end of December.
Like the SECURE Act that preceded it, SECURE 2.0 includes numerous changes to the Internal Revenue Code of 1986, as amended (the “Code”) and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) designed to enhance individual retirement goals. What follows is a summary of key provisions of SECURE 2.0 with an emphasis on provisions impacting employers. Many of the changes will, or would if implemented by an employer, require plan amendments. The provisions do not have a uniform effective date, so attention is needed to when they become effective.
Required Minimum Distributions
Starting January 1, 2023, the required minimum distribution age, upon which qualified retirement plan distributions must commence, is increased to 73 for individuals who turn 72 after December 31, 2022. And 10 years from now, the required minimum distribution age will increase again, to age 75, but only for individuals who turn 74 after December 31, 2032.
Another significant change to the required minimum distribution rules is that starting in 2024, Roth accounts in employer-sponsored plans are no longer required to make required minimum distributions while the participant is alive.
Catch Up Contributions Increase
Beginning in 2025, participants who are between the ages of 60 and 63 can make catch up contributions of up to the greater of $10,000 or 150% of the regular catch-up amount (the regular catch-up amount in 2023 is $7,500; 150% would be $11,250). Note: SIMPLE plans have a different limit: beginning in 2025, the catch-up amount for SIMPLEs is the greater of $5,000 or 150% of the regular catch-up amount (which for SIMPLEs is $3,000).
Mandatory Roth Treatment of Catch-Up Contributions for High Earners
Starting in 2024, and provided the plan allows catch-up contributions, employees who make more than $145,000 (adjusted for cost-of-living) from their employer may make catch-up contributions to the employer’s plan only as Roth contributions.
Employers may amend their defined contribution plans to allow participants to designate the employer’s matching or nonelective contributions as Roth contributions. Only contributions that are fully vested when made may be subject to this election. This option to allow participants to designate future matching or nonelective contributions as Roth contributions is effective on date of enactment, so employers may want to review its applicability and possible implementation immediately.
Automatic Enrollment and Automatic Escalation
For plan years beginning after December 31, 2024, 401(k) and 403(b) plans established after SECURE 2.0’s December 29, 2022, date of enactment will be required to use what is called an eligible automatic contribution arrangement or “EACA” to automatically enroll participants at 3% or more of their compensation, increasing the amount 1% annually until the contribution rate reaches at least 10% (but not more than 15%). EACAs allow new participants who do not want to participate to opt-out within 90 days. After that time, elections can be changed just like in most other 401(k) and 403(b) plans.
The new requirements for automatic enrollment and automatic escalation do not apply to plans established before SECURE 2.0’s date of enactment.
Cash-Out Limitation Increases
For qualified retirement plan distributions made after 2023, the mandatory cash-out limit (i.e., the limit on the size of an employee’s benefit or account that an employer can distribute without the employee’s consent as long as the plan contains appropriate provisions authorizing such distributions and appropriate notices have been provided) is increased to $7,000 (it was $5,000). Employers who are interested in implementing this change may want to act quickly to amend their plan and make appropriate changes to plan procedures.
Making Matching Contributions Based on Participants’ Student Loan Repayments
In the past, some employees may have missed receiving employer matching contributions because the funds they might have contributed to an employer’s 401(k), 403(b), or governmental 457(b) plan were needed by them to make student loan payments.
Starting in 2024, employer 401(k), 403(b), and governmental 457(b) plans are permitted to match certain student loan payments as if they were plan contributions. Such matching contributions will be treated like regular matching contributions for all purposes, including nondiscrimination testing and safe harbor rules. Employers may rely on employee certifications as evidence of student loan repayment amounts.
Employers may choose to amend defined contribution plans to allow participants to start taking emergency distributions of up to $1,000 per year starting in 2024. The scope of the emergency that permits withdrawal is limited to the same sorts of situations as hardship distributions, and there can be only one distribution in any three-year period except to the extent the employee has rolled emergency distributions in the prior two years back into the plan or made elective deferrals that replace the amount of the emergency distributions taken in the two prior years. While an emergency distribution is taxable, it is not subject to the 10% excise tax that would, for example, apply to a hardship distribution prior to age 59 ½. Emergency withdrawals can be repaid to the plan within three years of withdrawal, in which case the employee could file an amended return to receive a credit for any Federal income tax paid on the emergency withdrawal.
Distributions on Account of FEMA-Declared Disasters
For disasters on or after January 26, 2020, there will not be a 10% excise tax on distributions of up to $22,000, if they relate to a qualified disaster (or recovery from a qualified disaster). These disaster distributions can also be repaid within a three-year period.
Domestic Violence or Abuse Distributions
Starting in 2024, employers may amend their retirement plans to permit participants who self-certify they have experienced domestic violence or abuse within the last year to take distributions of up to the lesser of 50% of their vested account balance or $10,000 (to be adjusted for cost-of-living). As with emergency distributions, the distribution is taxable, but is not subject to the 10% excise tax, and can be repaid to the plan within three years of withdrawal.
Terminal Illness Distributions
Starting in 2024, employers may amend their retirement plans to permit a participant who is eligible for distribution and whose physician certifies that they have a terminal illness to withdraw their benefit without the 10% excise tax. This amount is also eligible for repayment in limited circumstances.
Long-Term Care Insurance Distributions
Starting December 29, 2025, employers may amend their retirement plans to permit participants to take distributions to pay for long-term care insurance. The distribution is limited to the lesser of (a) the cost of the insurance, (b) 10% of the vested account balance, or (c) $2,500 annually (to be adjusted for cost-of-living). These distributions are not subject to the 10% excise tax, if it would otherwise apply.
Emergency Savings Accounts for 401(k) and Other Defined Contribution Retirement Plans
Employers sponsoring defined contribution plans (such as 401(k), 403(b), and governmental 457(b) plans) may choose to allow participants to create Emergency Savings Accounts starting in 2024. Participants can allocate contributions up to 3% of their compensation (not to exceed the total account value at any time of $2,500, adjusted for cost-of-living). Employees can take monthly withdrawals (up to four of which per year must be without administrative fees) from their Emergency Savings Accounts. Although an employee’s emergency savings account contributions are treated as Roth contributions, and therefore are included in an employee’s taxable W-2 compensation as they are made, employers must generally treat them the same as elective deferral contributions for matching contribution purposes. Thus, like SECURE 2.0’s provision for matching employees’ student loan repayments, its provision for employee emergency savings accounts appears intended to encourage lower-paid participants to contribute to their employer’s defined contribution plan and earn matching contributions, even if they might otherwise be reticent about making long-term retirement contributions.
Expansion of Requirement for Part-Time Employee Participation
The SECURE Act already requires employers to start allowing certain long-time part-time employees who have worked at least 500 hours for at least three years to start participating in their employer’s 401(k) plan beginning in 2024. SECURE 2.0 reduces the period during which a part-time employee must have worked at least 500 hours a year to be eligible to participate to just two years and extends the requirement to 403(b) plans. Both changes are effective for plan years beginning after December 31, 2024.
De Minimis Incentives to Participate
Employers are now permitted to provide employees with de minimis (small) financial incentives to participate in the employer’s 401(k) or 403(b) retirement plan. What is de minimis has not yet been defined and is likely to be a small amount of taxable cash or personal property. These de minimis incentives cannot be paid out of plan assets.
403(b) Plan Changes
There are also changes specific to 403(b) plans. In one of SECURE 2.0’s few simplifying changes, the 403(b) hardship rules will be adjusted to be in line with those for 401(k) plans. Also, in another major and long sought simplification, 403(b) plans will now be permitted to participate in bank collective investments trusts (which will expand investment options for these types of plans). Both of these changes are effective December 29, 2022, the date of SECURE 2.0’s enactment.
Congress Seems to Tell IRS to Massively Expand the Scope of Self-Correction for Plan Errors
The IRS has for several decades operated a correction system for plan document and administrative failures that might otherwise jeopardize a 401(k) or other qualified retirement plan’s, or a 403(b) plan’s, tax-qualified status. This correction system is referred to as the Employee Plans Compliance Resolution System (“EPCRS”) and is promulgated in a detailed Revenue Procedure that is updated from time to time by the IRS. The current embodiment of EPCRS is Revenue Procedure 2021-30.
Section 305 of SECURE 2.0 appears to require the IRS to dramatically expand the applicability of the Self-Correction Program (“SCP”), eliminating all requirements for its application other than that (1) the error in question was not intentional, (2) correction must take place before the IRS identifies the plan failure (which in itself would appear to be a very significant and deliberate relaxation of the previous requirement that a plan sponsor not have been notified by the IRS that the plan was the subject of an IRS exam), and (3) the correction must be completed within a reasonable period following discovery of the error by the employer.
Other Administrative Changes
SECURE 2.0 added many other provisions with respect to qualified plan, 403(b), and governmental 457(b) administration. For example, a database to search for hard to find or otherwise lost participants is to be created. And employers will also now have simpler options for how to notify employees who choose not to participate in retirement plans about their options, along with many other changes.
Employers should take these changes and options seriously. Coordination with service providers and benefits counsel will be important and should be done promptly as some provisions are immediately effective. Our benefits team is ready to assist with any questions or in implementing SECURE 2.0.
The views and opinions expressed in the article represent the view of the author and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.