Compliance News | October 23, 2023
As the end of the year approaches, sponsors of calendar-year retirement plans focus their attention on amendments and operational changes. This year, there’s good news: no amendments are required to comply with the SECURE 2.0 Act (SECURE 2.0) or any other legislative action or Treasury Department guidance. There are also no required changes on the IRS’s Required Amendments List or its Operational Compliance List.
However, because SECURE 2.0 retroactive corrections require operational compliance, plans are likely to have to implement operational changes in 2024, along with those already applicable in 2023. Even though no amendments are required, some plans may want to make amendments.
As is always the case, any discretionary amendments not related to the SECURE Act (SECURE) or SECURE 2.0 that will be retroactive to earlier in the plan year must be made by the end of the plan year (December 31, 2023 for calendar-year plans).
SECURE 2.0 adopted an amendment date of the last day of the first plan year beginning on or after January 1, 2025 (or such later date provide by regulations). For collectively bargained and governmental plans, SECURE 2.0 substituted 2027 for 2025. SECURE 2.0 also revised the dates for SECURE amendments to match the dates for SECURE 2.0.
SECURE and SECURE 2.0 also provide relief from anti-cutback provisions if the plan is operated in accordance with the eventual amendment. As a result, plans will have to operationally comply with the statutory changes in 2024 plan years even though no amendment is required.
SECURE 2.0 made major changes to both the ERISA and Internal Revenue Code rules governing overpayments. These changes were effective on enactment, which was December 29, 2022, which means plans should already be operating in accordance with the new rules. Neither Treasury nor the DOL have issued guidance yet.
Significant statutory changes include a list of restrictions on plan actions and amounts that can be recovered if a plan wants to recover inadvertent overpayments. Fiduciaries are provided relief to decide not to seek recoveries.
SECURE 2.0 broadened the ability of a plan to self-correct inadvertent errors without a submission to the IRS. The provision was effective on enactment (December 29, 2022) with instructions to the IRS to amend the EPCRS guidance within two years. IRS Notice 2023-43 provided initial guidance on the expansion, but additional guidance and revision of the EPCRS revenue procedure is needed. Until that additional guidance is issued, plans may rely on the Notice.
SECURE 2.0 changed the RBD to age 73 for those who attain age 72 after December 31, 2022 (born on or after January 1, 1950). The RBD will change to age 75 in 2033 for those born on or after January 1, 1960.
Generally, a participant may not be required to take a distribution upon separation from service if the present value of the distribution exceeds $5,000. In plans subject to the spousal consent requirements, this is also the value above which spousal consent is required. SECURE 2.0 allows, but does not require, plans to increase that value to $7,000. The automatic rollover rules, in such a plan, would apply for values between $1,000 and $7,000.
In determining RMDs, plans may allow spouses to elect to have the calculation of the remaining life expectancy to use the Uniform Life Mortality Table specified in the required minimum distribution regulations, which provides for a longer life expectancy (delays expected death) than the previously required tables.
SECURE 2.0 required all catch-up contributions made by individuals with FICA wages over $145,000 to be made as a Roth contribution starting in 2024. Notice 2023-62 provided administrative relief delaying the effective date of the Roth requirement until 2026.
SECURE changed minimum participation rules for non-collectively bargained LTPT employees in 401(k) plans starting in 2024. SECURE 2.0 expanded the requirement to apply to ERISA-covered 403(b) plans starting in 2025. In addition, SECURE 2.0 changed, effective in 2025, the LTPT employee definition for both types of plans from employees age 21 and older who worked at least 500 hours in three consecutive years to those who worked those hours in two consecutive years. It eliminated a rule requiring considering years before 2021 for vesting purposes effective in 2024. Once an LTPT employee becomes a participant, they must be allowed to make elective contributions. No employer matches or other contributions are required. Thus, if a non-collectively bargained employee has at least 500 hours in each of 2021, 2022 and 2023, the LTPT employee must be offered the opportunity to make elective contributions to a 401(k) plan. Neither the IRS nor the DOL has issued guidance.
SECURE 2.0 allows a plan to treat a student loan payment as an elective employee contribution for purposes of triggering matching contributions to a 401(k), 403(b) or a governmental 457(b) plan. The provision is effective for plan years beginning after December 31, 2023. The IRS has not yet issued guidance or model language for this provision.
SECURE 2.0 includes two approaches for employers to help employees access small amounts from 401(k), 403(b), and governmental 457(b) plans. The simpler provision allows a participant to take up to $1,000 from their account once every three years and not be subject to the 10% premature distribution tax. The other new provision allows for withdrawals of up to $2,500 subject to numerous conditions if the plan establishes a pension-linked emergency savings account. The IRS has not issued guidance yet.
Effective in 2024, amounts in Roth accounts will no longer be subject to the RMD rules. This change does not affect distributions that are required for 2023 but permitted to be paid in 2024.
For a more complete list of changes made by SECURE 2.0, see our January 4, 2023 insight, “SECURE 2.0 Retirement Reform Becomes Law.”
SECURE and SECURE 2.0 provide plans with the ability to delay amending a plan, but only if the eventual amendment is consistent with earlier operation. Plan sponsors’ focus should now be on operating in accordance with those statutes.
However, do not forget that the delayed amendment dates only apply to the legislative changes. Any other discretionary changes that are to apply retroactively to earlier in the plan year still need to be officially adopted by the close of the plan year.
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.