SECURE 2.0 Act: Key Provisions for Retirement Plan Sponsors

Big tax, administrative changes on the horizon for qualified retirement plans with SECURE 2.0

On December 23, 2022, as a part of the government’s year-end spending bill, Congress passed, with bi-partisan support, the SECURE 2.0 Act of 2022 (“SECURE 2.0” or the “Act”). The Act was signed by President Joe Biden on December 29, 2022.

What is the SECURE 2.0 Act of 2022?

SECURE 2.0 gets its name from a similar retirement savings initiative signed into law in 2019—the Setting Every Community Up for Retirement Enhancement (SECURE) Act (referred to in this alert as “SECURE 1.0”).

SECURE 2.0 is largely intended to make it easier for employers to sponsor retirement plans for their employees and easier for employees to save more for retirement. It adds new components to most private-sector workplace plans and includes provisions to expand coverage, increase retirement savings and simplify and clarify retirement plan rules and administration. It also significantly impacts rules regarding retirement plan distributions.

Key provisions of SECURE 2.0 affecting qualified retirement plans

Mandatory automatic enrollment for new 401(k) and 403(b) plans

Effective for plan years beginning on or after January 1, 2025, new 401(k) and 403(b) plans established on or after December 29, 2022 must include an automatic enrollment provision that automatically enrolls employees, and an automatic escalation provision that automatically escalates participants’ deferral percentage, in either case, unless the employee opts out. The initial automatic enrollment must be at least 3% of eligible compensation and cannot exceed 10%. In addition, each subsequent year, plans must increase the amount by 1% each year, to a maximum of at least 10%, but no more than 15% of compensation. Certain special rules apply to governmental and church plans, as well as plans for new or small businesses.

Changes to required minimum distributions

• SECURE 1.0 previously increased the applicable age for required minimum distributions (RMDs) to 72 (from 70 ½). Pursuant to SECURE 2.0, the RMD age is further increased as follows:
  • RMDs must be taken at age 72 for participants who turn 72 between January 1, 2020 and December 31, 2022 (i.e., who were born in 1950 or earlier).
  • The RMD age increases to 73 beginning January 1, 2023, for participants who reach age 73 before January 1, 2033 (i.e., who were born 1951-1959).
  • The RMD age increases to 75 effective January 1, 2033.[1]
• Effective for plan years beginning on or after January 1, 2024, Roth accounts held in an employer retirement plan are not subject to RMD requirements while the participant is alive.
• Effective January 1, 2023, the excise tax imposed on participants for failing to take an RMD will decrease from 50% to 25%, with a further reduction to 10% if corrected within a two-year correction window.
• A surviving spouse that is designated as the beneficiary of an employer-provided plan benefit may elect to be treated as the deceased employee for purposes of the RMD rules.
• Effective for calendar years beginning after December 29, 2022, SECURE 2.0 also relaxes the RMD rules applicable to annuity payments to permit commercial annuities issued in connection with an eligible retirement plan to provide additional types of payment such as annual payment increases up to 5% and certain lump sums.

Catch-up contributions

• Effective January 1, 2025, if a plan provides for catch-up contributions, the Act increases the catch-up contribution limit for participants ages 60-63 to the greater of $10,000 or 150% of the regular catch-up amount. This amount is subject to inflation increases.
• Effective January 1, 2024, catch-up contributions made by employees whose compensation exceeds $145,000 (as indexed) must be made as Roth contributions and are subject to Roth rules. This Roth treatment of catch-up contributions is mandatory for any plan that makes catch-up contributions available.

Increase dollar limit for mandatory distributions

Effective January 1, 2024, the involuntary cashout limit will increase from $5,000 to $7,000.

Roth elections for matching contributions

Effective immediately, plan sponsors have the option to offer a provision to allow participants the ability to elect some or all of the plan’s matching contributions or nonelective employer contributions on a Roth basis, but only if the contributions are fully vested at the time they are made.

Matching contributions for student loan payments

Effective for plan years beginning on or after January 1, 2024, employers may amend their plans to include a provision to match “qualified student loan payments” as if the student loan repayments were elective deferrals. Vesting and matching schedules must be the same as if the loan payments had been salary deferrals. For purposes of nondiscrimination testing, these matching contributions are treated as regular matching contributions; and, for purposes of elective contributions, plans may test the employees who are receiving matching contribution separately.

Penalty-free emergency withdrawals

Beginning January 1, 2024, employers have the option to offer an emergency savings distribution provision for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” These qualifying distributions are not subject to the 10% early withdrawal penalty. The maximum distribution allowed is $1,000, and participants may be given the option to repay the distribution within three years. Only one distribution may be made every three years or one per year if the participant fully repays the prior distribution.

Penalty-free withdrawals for cases of domestic abuse

Beginning January 1, 2024, plans can permit participants to withdraw up to the lesser of $10,000 or 50% of the participant’s account balance, if the participant certifies that he or she has experienced domestic abuse within the past year. The amount withdrawn will not be subject to the 10% early withdrawal penalty, and the individual has the opportunity to repay the withdrawn amount over a three-year period.

Penalty-free withdrawals for individuals with terminal illnesses

Effective for distributions made after December 29, 2022, distributions made to a participant who is otherwise eligible for a distribution and is determined by a physician to be terminally ill will not be subject to the 10% early withdrawal penalty. These amounts can also be repaid over a three-year period.

New rules for qualified federally declared disasters

For qualified federally declared disasters occurring on or after January 26, 2021, SECURE 2.0 provides permanent rules allowing participants to make a withdrawal of up to $22,000 within 180 days after the disaster, without being subject to the 10% early withdrawal penalty. Amounts can be taken into income over three years and may be repaid to the plan within three years. SECURE 2.0 also allows plans to increase the maximum loan amount and extend the repayment period for individuals who experience a qualified disaster.

Emergency savings accounts linked to retirement plans

Effective January 1, 2024, employers have the option to offer (or automatically opt employees into) emergency savings accounts that permit non-highly compensated plan participants to make Roth-like contributions to a special savings account within the retirement plan. Eligible employees can defer up to 3% of compensation, up to a total contribution of $2,500 (adjusted for inflation after 2024). Once contributions reach the limit, the additional contributions can be directed to the employee’s Roth account (if applicable) or stopped until the balance attributable to contributions falls below the cap. Employers may impose a lower maximum limit at their discretion. An employee’s contributions to the emergency savings account must be eligible for matching contributions at the same matching rate established under the plan for elective deferrals (but the matching contributions are not made to the emergency savings account). Employees may take at least one tax-free, penalty-free distribution from the savings account per calendar month. In addition, employers may not impose any fees for distributions on at least the first four distributions each year. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan (if they have one) or individual retirement account (IRA).

Expansion of Employee Plans Compliance Resolution System (EPCRS)

Effective December 29, 2022, the Act expands access to the self-correction program to allow certain inadvertent failures to be corrected at any time. Currently, plan sponsors can only correct so-called significant failures within three years from the date of the failure. In addition, the Act allows for the self-correction of many plan loan errors. The Act directs that Revenue Procedure 2021–30 (or any successor guidance) shall be updated to reflect this provision of the Act no later than two years after its enactment.

Recovery of retirement plan overpayments

Effective December 29, 2022, a plan fiduciary is generally not considered to have violated their fiduciary duty under ERISA and qualified retirement plans will not be disqualified if the plan fails to recover an inadvertent benefit overpayment so long as certain requirements are met. Plans are limited in their ability to offset future benefits to recover the overpayment (generally capped at 10% per year) and to recover the overpayment directly from the participant.

Changes to long-term, part-time employee eligibility

SECURE 1.0 requires plan sponsors to allow long-term, part-time workers to participate in the 401(k) plan if they complete three consecutive years of service with at least 500 hours of service. Effective January 1, 2025, SECURE 2.0 reduces the measuring period for long-term, part-time employees’ service eligibility from three years to two years. The Act also extends this provision to ERISA-covered 403(b) plans as well.

Repayment of qualified birth or adoption distribution limited to three years

SECURE 1.0 authorized plan sponsors to amend their plans to allow individuals to receive distributions in the case of birth or adoption without paying the 10% early withdrawal penalty. Effective immediately, SECURE 2.0 reduces the repayment period to three years (previously unlimited). This change also applies retroactively to the three-year period beginning the day after the employee received the distribution.

Reliance on employee certification of hardship

Effective January 1, 2023, plan administrators may rely on a plan participant’s certification that they experienced an event that constitutes a hardship for purposes of taking a hardship withdrawal. Previously, an employer could rely on the participant’s certification regarding the amount necessary to address the hardship but not their certification regarding the actual hardship event.

Amendments to increase benefit accruals for previous plan year

Effective January 1, 2024, the Act allows discretionary amendments that increase participants’ benefits to be adopted by the due date of the employer’s tax return (an extension from the current requirement to amend by the end of the applicable plan year).

De minimis incentives to improve retirement plan participation

Effective for plan years beginning after December 29, 2022, employers are allowed to provide “de minimis financial incentives” to boost participation in retirement plans. The Act does not define what de minimis means, but uses low-dollar gift cards as an example. The financial incentives cannot be paid for with plan assets.

Eliminating unnecessary plan notice requirements related to unenrolled participants

Effective January 1, 2023, plans are no longer required to provide certain intermittent notices to employees who have not elected to participate in the employer’s plan. However, employers are required to send an annual reminder notice regarding eligibility and any applicable election deadlines. This rule applies only to an unenrolled participant who received the summary plan description when initially eligible and any other required notices related to eligibility.

Requiring periodic paper benefit plan statements

Effective for plan years beginning on or after January 1, 2026, a paper benefit statement must be furnished once per year for defined contribution plans and at least once every three calendar years for defined benefit plans, unless the plans follow the Department of Labor’s (DOL)DOL’s electronic delivery rules or the participant or beneficiary requests that the statements be provided electronically.

Create a national database to locate missing participants and funds

To better locate lost plan participants, the Act directs the DOL to form an online searchable database to gather information to assist plan sponsors to locate missing participants and for participants to locate their retirement plan benefits.

Key provisions specific to 403(b) qualified retirement plans

Expand hardship sources

The Act will expand the contribution sources that can be used for a 403(b) hardship withdrawal to match those available to a 401(k) plan, effective for plan years beginning after December 31, 2023.

Elimination of barriers for 403(b) plans to utilize certain investment vehicles

403(b) plans will now be allowed to invest in collective investment trusts (CIT). However, note that securities law issues may still limit the ability to offer such investments.

Multiple employer 403(b) plans

403(b) plans have the option to join a Pooled Employer Plan (PEP) or a Multiple Employer Plan (MEP) beginning in 2023. This provision also includes relief from the “one bad apple rule” so that the violations of one employer do not affect the tax treatment of employees of compliant employers.

Key provisions specific to defined benefit retirement plans

Enhancing retiree health benefits in pension plans

The sunset date is extended to the end of 2032 for an employer to use assets from an overfunded pension plan to pay retiree health and life insurance benefits provided the transfer is no more than 1.75% of plan assets and the plan is at least 110% funded.

Corrections of mortality tables

The Act requires that for purposes of the minimum funding rules, a pension plan is not required to assume beyond the plan’s valuation date future mortality improvements at any age greater than 0.78%. SECURE 2.0 directs the Treasury Department to update the mortality tables used to determine minimum funding rules for valuations, beginning with valuation dates in 2024, within statutory limits.

Participant disclosure requirements for lump sum distribution windows

SECURE 2.0 will require specialized notices to participants being offered a temporary lump sum distribution option under a pension plan. The special notice must be provided at least 90 days before the first date the participants could elect a lump sum. SECURE 2.0 also will require plans to provide notification of the lump sum offering to the Pension Benefit Guaranty Corporation and the DOL. The effective date of this provision is pending DOL final regulations.

Cash balance plans

The Act clarifies the projected interest crediting rate for cash balance plans shall not exceed 6%. This clarification will allow plan sponsors to provide larger pay credits for older longer service workers. This provision is effective for plan years beginning after December 29, 2022.

Additional annual funding notice requirements

Effective for plan years beginning on or after January 1, 2024, SECURE 2.0 amends the information that pension plan administrators must include in their annual funding notices to participants, beneficiaries and the PBGC.

Key provisions specific to small employers

Enhanced tax credits for new smaller plans

Effective January 1, 2023, employers with 50 or fewer employees can qualify to receive a start-up tax credit of 100%, which was previously 50%.

For defined benefit plans, the amount of the additional credit will be a percentage of the amount the employer contributes for employees, up to $1,000 per employee. This full additional credit is limited to employers with 50 or fewer employees and phased out (over five years) for employers with between 51 and 100 employees. The credit percentage is 100% in years one and two, 75% in year three, 50% in year four and 25% in year five—with no credit in subsequent tax years.

Military spouse retirement plan eligibility credit for small employers

Effective January 1, 2023, small employers may qualify for a tax credit of up to $500 for each non-highly-compensated military spouse, for up to three years per spouse if they offer special plan benefits to military spouses.

A new Starter-401(k) retirement plan

Beginning January 1, 2024, small employers will have access to a new type of employer-sponsored retirement plan, known as a “Starter 401(k)” plan, that offers a safe harbor from nondiscrimination and top-heavy testing requirements. Employers are not required to make contributions, and annual contributions would be limited to $6,000 with an additional $1,000 in catch-up contributions beginning at age 50. The plan must automatically enroll employees at 3% to 15% of pay when they become eligible unless they opt out.

Key provisions specific to governmental section 457(b) plans

Elimination of the “first day of the month” requirement

Effective January 1, 2023, participants may request changes to elections any time prior to the date that the compensation being deferred is available. Note that this change is only for governmental 457(b) plans and not 457(b) plans of tax-exempt entities.

Additional provisions of interest to retirement plan sponsors

• SECURE 2.0 expands availability of Qualified Longevity Annuity Contracts (QLACs) by removing the current limit of 25% of the participant’s account balance and increasing the dollar limit to $200,000 (indexed for inflation).
• The Act also directs the DOL to update regulations within two years to address performance benchmarks for asset allocation funds.
• Effective January 1, 2024, SECURE 2.0 reforms the family attribution rule under the Code to (1) address inequities where spouses with separate businesses reside in a community property state when compared to spouses who reside in separate property states and (2) modify the attribution of stock between parents and minor children.
• Starting in 2024, the IRA catch-up contribution limit will be adjusted for inflation. The current IRA catch-up contribution limit is $1,000 for individuals over the age of 50.
• Beginning in 2028, owners of an S corporation may defer recognizing taxable income on the sale of their company to an ESOP that owns at least 30% of the corporation’s stock if the sales proceeds are reinvested into qualified replacement property. Unlike with C corporations, however, only 10% of the sale proceeds of the sale to an S corporation ESOP may be deferred.
• Effective January 1, 2027, a Saver’s Match program will replace the Saver’s Credit program, changing it from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into the retirement plan. The match is 50% of the first $2,000 contributed to a retirement account each year (a maximum of $1,000). Similar to the Saver’s Credit, the Saver’s Match is phased out as the individual’s income increases.

Next steps for plan sponsors

1. Confirm which provisions apply and the corresponding effective dates. Many of the provisions are effective in 2023 or 2024 while some are effective immediately upon enactment (December 29, 2022). Other provisions are pushed back to 2025 or later, while one (the reinstatement of qualified disaster distributions) takes effect retroactively to disasters occurring on or after January 26, 2021.
2. Consider potential plan design changes and amendments. As long as the plan is in operational compliance with the required provisions and any optional changes you implement, plan sponsors have until the last day of the first plan year beginning on or after January 1, 2025 (i.e., December 31, 2025, for calendar year plans and 2027 for governmental plans) to adopt amendments related to SECURE 2.0, SECURE 1.0 and the CARES Act. However, plan sponsors may decide to adopt plan amendments sooner than the required deadline to reflect recordkeeper changes and discretionary changes that require adoption of amendments the year in which they are implemented.

For assistance on steps to ensure plan compliance—or for more information on SECURE 2.0—please contact the Employee Benefits/Executive Compensation team at Hunton Andrews Kurth LLP.

*Contributors to this client alert included associate Ali Qamar and ERISA specialist Pam Kline.
 

¹Note: There appears to be an error in the drafting of the legislation with respect to the RMD ages. The Act states that age 73 RMDs will apply to those who turn “age 73 before January 1, 2033,” but then later states that age 75 RMDs will apply to those who turn “74 after December 31, 2032.” The issue with the language is that an individual born in 1959 turns 74 in 2033 (i.e., after December 31, 2032), which would mean that individuals born in 1959 would have two RMD ages (age 73 and 75) at which they are supposed to begin RMDs. Because this clearly is not the intent of the provision, the language will likely need to be clarified in later guidance.