After months of discussions and drafts of parallel bills in the House and Senate, Congress passed the long-awaited SECURE 2.0 Act of 2022 ("SECURE Act 2.0" or the "Act"), included in the year-end spending bill (Consolidated Appropriations Act, 2023). President Joe Biden signed the $1.7 trillion omnibus spending package on December 29, 2022. While the SECURE Act 2.0 aims to help small businesses to adopt retirement plans and make it easier for Americans to save, it will require plan sponsors to take action over the next few years to comply (noting that there are no required actions needed to be taken by the end of 2022).
The following provides a summary of some of the key provisions of the SECURE Act 2.0 that retirement plan sponsors should know. Our Calfee Employee Benefits and Executive Compensation Practice Group will be issuing more detailed analyses on these items in future First Alerts, so please keep an eye out for these updates.
Required Minimum Distribution ("RMD") Changes
The 2019 SECURE Act (aka SECURE Act 1.0) increased the age for when required minimum distributions from certain retirement accounts must start from 70½ to age 72. SECURE Act 2.0 raises the RMD in two steps. First, the RMD age increases to 73 starting January 1, 2023. Second, the RMD age is raised to age 75 starting January 1, 2033.
Practice pointer: While plan amendments are not required to reflect these changes until a few years down the road, plan sponsors will need to consider updating any notices providing details on RMDs to ensure that they reflect age 73 as the new RMD age and to also make sure the new age is set up properly with any third-party administrator (TPA).
Another RMD change is the excise tax for the failure to properly administer RMDs. Currently, if a participant or beneficiary fails to receive a requirement minimum distribution, the individual is subject to a 50% additional tax on the amount of the missed distribution. Starting in 2024, the 50% additional tax is reduced to 25%, and if the shortfall is corrected within two years, the additional tax is lowered to 10%.
Increase in De Minimis Distribution Limit from $5,000 to $7,000
Under current law, plan administrators may transfer the accounts of former employees on an involuntary basis if the account value is less than $5,000. Under SECURE Act 2.0, the threshold for making these involuntary distributions is increased from $5,000 to $7,000 effective for distributions starting in 2024.
Catch-up Contribution Limit and Special Roth Treatment
Under current law, plan participants who have attained age 50 are permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. Secure Act 2.0 increases these limits to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63. The increased catch-up limit is effective for taxable years beginning in 2025 and the increased amounts are indexed for inflation after 2025.
In addition to the new catch-up limits, effective in 2024, catch-up contributions made under a 401(k), 403(b) plan or governmental 457(b) plan by participants who are high-paid must be made as Roth contributions. For this purpose, a "high-paid" participant is one whose wages for the preceding calendar year from the employer sponsoring the plan exceed $145,000 (as indexed for inflation).
Employer Contributions as Roth
SECURE Act 2.0 provides plan sponsors the option to design their plans to give plan participants the right to decide on whether matching contributions and nonelective employer contributions are made in the form of Roth contributions. This optional design is effective as of the effective date of SECURE Act 2.0.
Practice pointer: Any plan sponsor who is considering adding this provision will need to make sure that its TPA can administer this design. In addition, plan participant communications will need to be addressed.
New 401(k) Plans Must Use Automatic Enrollment and Auto-Escalation
Effective in 2025, any new 401(k) plan must be an "eligible automatic contribution arrangement" which has an automatic default contribution rate of between 3% and 10% of compensation. In addition, the plan must automatically increase each participant’s contribution rate by an additional 1%, up to at least 10%, but not over 15%. Of course, participants may opt out of the default contribution rates but Congress expects that for many employees, automatic enrollment and escalation features will increase the amount of their retirement savings.
Emergency Savings Provision
To help their employees save for unexpected expenses, SECURE Act 2.0 allows employers to offer to their non-highly compensated employees ("NHCEs") emergency savings accounts within the employer’s defined contribution plan starting in 2024. Employers may automatically opt employees into these accounts at no more than 3% of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the plan). The amounts would be treated as Roth contributions, but participants could be allowed to withdrawal amounts at least once per month.
Student Loan Matching Program
SECURE Act 2.0 allows plan sponsors to design their plans to allow participants to receive matching contributions by reason of repaying their student loans (and not otherwise make elective deferrals to the plan). SECURE Act 2.0 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to qualified student loan payments. A "qualified student loan payment" is broadly defined as any indebtedness incurred by the individual solely to pay qualified higher education expenses of the employee. For purposes of the nondiscrimination test applicable to elective contributions, SECURE Act 2.0 permits a plan to test separately the participants who receive
matching contributions on student loan repayments. Student loan matching program may be permitted as soon as plan years beginning in 2024.
Practice pointer: A number of employers had been waiting for guidance ever since the IRS issued a private letter ruling specifically involving a 401(k) plan and contributions linked to student loan payments. Plan sponsors who want to add this plan design feature to their plans will need to work internally (i.e. payroll, HR, benefits departments) and with their third-party administrator to set this up properly.
Long-Term, Part-Time Worker 401(k) Plan Eligibility
SECURE Act 1.0 created the concept of long-term, part-time workers requiring that 401(k) plans allow individuals who worked three consecutive years of at least 500 hours who were not otherwise eligible to participate in the plan to be eligible to make elective deferrals into the plan. SECURE Act 2.0 reduces the number of years from three years to two years effective for plan years beginning after December 31, 2024.
SECURE Act 2.0 makes a few changes on the plan participant communication/notice requirements.
First, SECURE Act 2.0 eliminates certain notice requirements for individuals who have elected to not participate in an employer’s plan (aka "unenrolled participants" under SECURE Act 2.0). While this means that a number of notices required under ERISA and the Internal Revenue Code do not have to be provided, a new "Annual Reminder Notice" must be provided. These new rules are effective starting in 2023.
Second, SECURE Act 2.0 requires paper benefit statements to be provided to plan participants. For defined contribution plans, this means that a paper statement must be provided at least annually (meaning that the other three quarterly statements can be provided electronically, assuming the requirements for electronic distribution has been satisfied). For defined benefit plans, a paper statement must be provided once every three years.
Retirement Savings Lost and Found
SECURE Act 2.0 requires the U.S. Department of Labor ("DOL") to create a searchable, national online lost-and-found database of information on qualified plan benefits owed to missing, lost or non-responsive participants and beneficiaries. The database will enable retirement savers, who might have lost track of their retirement benefits/accounts, to search for the contact information of their plan administrator. SECURE Act 2.0 directs DOL to create the database no later than two years after enactment (i.e., by the end of 2024).
Practice pointer: This provision will also result in plan administrators being required to provide DOL with the information involved on the missing, lost or non-responsive participants and beneficiaries. As such, plan administrators will need to determine whether they will handle this reporting obligation themselves or delegate to a third party.
Expansion of the EPCRS
SECURE Act 2.0 expands the Employee Plans Compliance Resolution System ("EPCRS") to allow more types of errors to be corrected internally through self-correction, apply to inadvertent IRA errors, and exempt certain failures to make required minimum distributions from the otherwise applicable excise tax. The expansion of the EPCRS is effective on the date of enactment of SECURE Act 2.0.
Previous laws provided for a nonrefundable credit for certain low-income individuals who make contributions to individual retirement accounts and employer retirement plans. SECURE Act 2.0 repeals and replaces the credit with respect to IRA and retirement plan contributions, and changes it from a credit paid in cash as part of a tax refund to a government matching contribution that must be deposited into a taxpayer’s IRA or retirement plan. The match is 50% of elective contributions up to $2,000 for an individual. These new provisions are effective starting in 2027.
Expansion of QLAC Limits
Under current law, defined contribution plans and IRAs may allow participants to purchase qualifying longevity annuity contracts ("QLACs") subject to certain limits (the amount being the lesser of 25% of the account or $145,000). SECURE Act 2.0 addresses the limitations, effective as of the date of enactment of SECURE Act 2.0, by repealing the 25% limit and allowing up to $200,000 (indexed) to be used from an account balance to purchase a QLAC.
Plan Withdrawal Opportunities
SECURE Act 2.0 allows retirement plans to permit a few new withdrawal opportunities for plan participants.
First, starting in 2024, plan participants may be given an opportunity to take a distribution (not subject to the 10% early distribution tax) for certain emergency expenses. These withdrawals must be unforeseeable or immediate financial needs relating to personal or family emergency expenses. In addition, these withdrawals are limited to one distribution per year of up to $1,000, and individuals may repay the distribution to the plan within three years. Furthermore, while the limitation is one distribution per year, no additional emergency withdrawals are permitted during the three-year repayment period unless repayment is completed.
Second, SECURE Act 2.0 provides for penalty-free withdrawals due to domestic abuse situations. Starting in 2024, plans may permit participants who self-certify domestic abuse to withdraw the lesser of (a) $10,000 (as indexed for inflation) or (b) 50% of the participant’s account. Participants who withdraw plan funds under this provision may repay the amount over three years.
Third, effective as of the date of enactment of the SECURE Act 2.0, distributions to individuals who are terminally ill is not subject to the 10% tax on early distributions.
SECURE Act 2.0 will require action by plan sponsors over the coming years. In the short term, it’s all about learning about how the new legislation impacts your plans and, from there, starting conversations with the outside vendors and advisers for your plans to make sure you’re covered.
If you have any questions or would like for Calfee to review your plan documents to ensure compliance with the SECURE Act 2.0, please contact any member of our Employee Benefits and Executive Compensation practice group.