SECURE 2.0 Act: What 401(k) Plan Sponsors Need to Know (2023)

On December 29, 2022, President Biden signed the bill into law as part of the actConsolidated Appropriations Act of 2023, the SECURE 2.0 Act of 2022 (“SECURE 2.0 Act”). The SECURE 2.0 Act builds on the Establishment of Every Community for Retirement Improvement Act 2019 (“SECURE Act”) with the aim of improving the level of retirement provision for employees. The SECURE Act 2.0 is radical legislation with many complex provisions.

It isTo knowhighlights some of the key provisions of the SECURE 2.0 Act that apply to employer-sponsored 401(k) plans, including provisions related to contributions, payouts and administrative matters.

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Matching Contributions for Student Loan Repayments (valid for plan years beginning after December 31, 2023)

One reason younger workers don't save for retirement is the financial drain of paying off student loans. Prior to the SECURE 2.0 Act, matching contributions could only be made for eligible employee deferrals, and although the IRS previously ruled that non-eligible employer contributions may be conditional on student loan payments, that ruling did not extend to the employer's counterpart. posts. The SECURE Act 2.0 Amendment allows for employer contributions in respect of qualifying student loan repayments to be made in lieu of (or in addition to) employee elective deferrals. In addition, such Matching Contributions will count towards the Safe Harbor 401(k) and Safe Harbor Plan 401(k) auto-enrollment requirements.

Repayments of qualifying student loans that are eligible for matching must not exceed the maximum deferral limit under IRC section 402(g) (the maximum deferral limit, which is $22,500 in 2023) and IRC section 415(c) (the maximum annual addition limit), whichever is less, which in 2023 is the lesser of either $66,000 or 100 percent of the participant's compensation). In addition, the participant must certify annually to the employer making the matching contribution that the loan repayments have actually been made.

Increase in catch-up contributions for older insured persons (valid for tax years beginning after December 31, 2024)

Congress has previously attempted to close gaps in pension provision by allowing participants aged 50 and over to make additional contributions over and above the limits set in the IRC or under the terms of a plan document. These contributions, known as “catch-up contributions,” remained a fixed amount (subject to inflation adjustments) and did not change with the participant's age. For 2023, the maximum catch-up contribution limit is $7,500.

The SECURE 2.0 Act introduces catch-up contribution limits that increase as participants age. Under the SECURE Act 2.0, beginning in 2025, the maximum catch-up fee for participants who turn 60-63 during the tax year is $10,000 or 150% of the regular catch-up fee for 2024, whichever is greater (subject to inflation). Index). ). For tax years beginning in 2024, catch-up contributions must be made as Roth contributions for participants earning $145,000 or more per year.

Emergency Savings Account (valid for plan years beginning after December 31, 2023)

Although applicable law permits on-duty withdrawals from 401(k) plans in cases of hardship, there is no specific provision for a separate emergency savings account (ESA) within a 401(k) plan. The SECURE 2.0 Act specifically allows employers to provide an ESA for employees who are not highly compensated under the plan, which must be funded by Roth contributions. The plan may automatically enroll eligible participants in an ESA at 3 percent of compensation.

Once the ESA Account balance reaches $2,500 (inflation-indexed) or less amount as determined by the Plan Sponsor, no further contributions are permitted until the Participant makes a withdrawal. There shall be no minimum contribution or balance requirements. Participants must be able to make at least one withdrawal per month and the first four withdrawals per year must not be subject to a fee. ESAs can be invested in cash, interest-bearing deposit accounts, and capital preservation accounts. IRC does not seem to define what constitutes an emergency, suggesting that such withdrawals can be made for any purpose.

Optional employer contributions Roth (now)

Historically, all employer contributions to 401(k) plans have been pre-tax contributions, and participants pay no tax on such contributions and related income until distribution. Under the SECURE 2.0 Act, employers can allow employees to choose voluntary and employer-matched contributions as Roth contributions. Roth employer contributions are taxable to the employee at the time they are paid, and such contributions and related income are not taxable at the time of distribution. Participants must be 100 percent invested in Roth employer contributions at the time they pay into the plan.

Automatic enrollment and automatic increases for newly established 401(k) plans (valid for plan years beginning after December 31, 2024)

One way to encourage retirement savings is to make contributions the default option and require participants to make a positive decision to stop contributions. Under the SECURE 2.0 Act, any 401(k) or 403(b) plan created after the SECURE 2.0 Act came into force must include an automatic enrollment provision that automatically enrolls employees (unless the employee objects) and an automatic escalation provision that automatically increases participants' deferral percentage each year. Employees must be automatically enrolled in a contribution percentage of at least 3 percent but no more than 10 percent, and after each plan year that a participant completes a year of service, the contribution percentage must be automatically increased by 1 percent until the contribution is at least 10 percent , but no more than 15 percent. Employers enrolled in multi-employer plans (including but not limited to plans sponsored by payroll or staffing agencies) are considered new plans and are therefore subject to contribution requirements.

Long-term part-time employee participation (valid for plan years beginning after December 31, 2024)

Under the Employee Retirement Income Security Act (or “ERISA”), 401(k) plans may exclude part-time employees who have not completed a “year of service,” which is defined as at least 1,000 hours of service over a 12-month period. Under the SECURE Act, employees who work at least 500 hours in a three consecutive year period must be eligible for an employer's 401(k) plan. Beginning in 2025, the SECURE 2.0 Act will reduce the number of consecutive years that part-time workers must work at least 500 hours to participate in a 401(k) plan from three to two years. Note that these long-term part-time employees only need to be eligible to make employee contributions to the 401(k) plan; A Plan Sponsor is not obligated to make Employer Contributions (including Matching Contributions) on your behalf.

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Increased Involuntary Payout Limits (applicable to payouts made after December 31, 2023)

Former employees who hold assets in qualifying pension plans pose complications for plan administrators. For example, the fees for keeping records are often based on the number of participants with accounts, whether active or inactive, and plan administrators must pass many plan disclosures to former employees until they receive their full payouts from the plan.

To reduce these plan burdens, plans may “retire” former participants without their consent. For participants with an account balance of US$1,000 or less, payouts may be made directly to the participant. For participants with balances between $1,000 and $5,000, the distribution must be paid into an Individual Retirement Account (IRA) established for the participant, unless the participant agrees to a direct distribution. Under the SECURE 2.0 Act, the limit for involuntary transfers/withdrawals will be increased from $5,000 to $7,000.

Maintenance Distributions (valid for distributions made after December 28, 2025)

Distributions from a retirement plan before a participant reaches age 59/2 Age (or age 55 if the benefit is in the form of an annuity) are subject to a 10 percent prepayment penalty, unless otherwise applicable. The SECURE 2.0 Act creates a new exemption from withholding tax for distributions made to pay for certified long-term care insurance. “Certified Long-Term Care Insurance” has a very technical definition, loosely covering a qualifying long-term care insurance contract within the meaning of IRC Section 7702, or a tab or other provision in an insurance contract that covers life or annuity risk of chronic illness of the insured or provides essential assistance if the insured requires care at home or in a nursing home. The 10 percent prepayment penalty exception is limited to (a) the cost of insurance, (b) 10 percent of the participant's vested benefits account balance, or (c) $2,500 per year (adjusted for cost of living), whichever is less).

Exception to the 10 percent penalty on distributions for terminally ill participants (effective immediately)

The SECURE 2.0 Act provides an additional exemption from the 10% prepayment penalty for distributions to terminally ill participants. “Terminally ill participants” are defined as those who are certified by a physician as having an incurable disease or condition that can reasonably result in death within 84 months of the date of certification. Terminally ill participants who receive distributions have the option to repay them to the plan (if the plan allows) or to an IRA under rules similar to those used to pay qualifying birth or adoption distributions.

Minimum Distribution Required Older Age (Effective Tiered Data)

Retirement plan participants are required to withdraw the required minimum distributions (RMDs) from the plan once they reach a certain age. The SECURE Act increased that age from 70½ to 72 for employees turning 70½ after December 31, 2019.

SECURE Act 2.0 increased the age of RMD again. Effective January 1, 2023, the RMD age will be raised to 73 for individuals who turn 72 after December 31, 2022. In addition, the RMD age will be raised to 75 for individuals who turn 74 after December 31, 2032.

Reduced RMD Failure Penalty (effective after December 31, 2022)

The IRC imposed a penalty on participants who fail to take RMDs on time, which was 50 percent of the amount by which the year's RMD exceeded the distribution taken that year. SECURE Act 2.0 reduces the penalty to 25 percent of that amount. The penalty rate is further reduced to 10 percent if the participant files a tax return reflecting the penalty prior to (1) the date the IRS issues a notice of deficiency regarding the penalty, (2) the date the fine is imposed becomes. , or (3) at the end of the second year following the year in which the full RMD was not taken.

administrative matters

Elimination of the obligation to register for participants who are not enrolled (valid for planning years beginning after December 31, 2022)

There are numerous communications that must be sent to plan participants. Applicable law requires these notices to be sent to employees who are eligible to participate in a 401(k) plan, even if they have elected not to participate. SECURE Act 2.0 allows sponsors of defined contribution plans to avoid sending multiple notifications to unregistered participants. Instead, the plan sponsor must send non-registrants the summary plan description and an annual notice of their eligibility to de-enroll and any application election deadlines. The plan sponsor must also provide any documents requested by the participant that the participant would have received if they had enrolled in the plan.

Expansion of the IRS Employee Plan Enforcement Resolution System (effective immediately)

Under current IRS Employee Plan Compliance Resolution System (EPCRS) guidelines (Revenue Procedure 2021-30), self-correction (without IRS filing) of operational errors is only available for errors that are deemed to be insignificant or for those errors reported on be fixed end. of the third plan year after the plan in which the failures occurred. Under the 2021-30 revenue method, factors to consider in determining whether an operational failure under a plan is insignificant include, among other things, whether other failures occurred during the reporting period, the percentage of assets and the contributions involved, the number of years in which the error occurred, the number of participants affected in relation to the total number of participants in the plan, whether the correction was made within a reasonable time after the error was discovered, and the reason for the error . Significant deficiencies not corrected by the effective date require filing with the IRS and approval from the IRS before corrections can be made.

The SECURE Act 2.0 permits self-correction of any permissible unintentional error at any time, unless the error was identified by the IRS before self-correction began or self-correction was not identified within a reasonable time after error correction was completed. A "justified unintentional error" is defined as any error that has occurred despite the existence of the currently required self-correction standards and practices according to the EPCRS guidelines.

What employers need to do now

• Start evaluating the impact of the changes required by the SECURE 2.0 Act on your retirement plans as soon as possible.

• Determine which optional provisions of the SECURE 2.0 Act you wish to incorporate into your plans and manage operational compliance with all applicable provisions.

• Once the above assessments and determinations are complete, begin consulting your attorney regarding the timeline for plan changes as the Treasury Department may issue additional guidance.

• Consider the timing and content of employee communications and updates to summary plan descriptions.

Brianna Richardson also contributed to this article.