Compliance News | January 4, 2023
The SECURE 2.0 Act of 2022 (SECURE 2.0) was enacted as part of the 2023 Consolidated Appropriations Act, which was signed into law on December 29, 2022. It is the culmination of a multi-year, bicameral, bipartisan effort to follow up on the SECURE Act that was enacted on December 20, 2019. SECURE 2.0 contains roughly 90 separate provisions each with its own effective date.
This insight focuses on the provisions of SECURE 2.0 that are of interest to large and medium-sized employers and plans:
Several SECURE 2.0 provisions affect required minimum distributions (RMDs).
This provision of SECURE 2.0 increases the age component of the required beginning date to 73 starting in 2023 for anyone who was not 72 by the end of 2022. The age will increase to 75 as of January 1, 2033.
SECURE 2.0 eliminates the IRS regulation’s limit (25 percent of the account), increases the dollar limit from $100,000 to $200,000 and makes other changes, including allowing a 90-day, free-look provision and addressing post-purchase divorces. This provision is effective for contracts purchased or received in an exchange on or after enactment. The Treasury Department must update the relevant regulations by June 29, 2024.
Current regulations require annuities to be essentially non-increasing to satisfy the RMD rules. SECURE 2.0 allows purchased annuities to satisfy the RMD rules even if the annuity includes provisions that increase annual payments by less than 5 percent. It also allows the annuity to pay lump sums that shorten the payment period (using reasonable actuarial assumptions), to accelerate the next 12 months payments, to provide for return of premiums (minus payments) upon death and to pay certain dividends. This provision applies for calendar years ending after December 29, 2022.
SECURE 2.0 reduces the penalty tax on participants who fail to take RMDs timely from 50 percent to 25 percent. If the failure is corrected in a timely manner, the tax is reduced to 10 percent. This provision is effective for taxable years beginning after enactment.
IRS regulations do not reduce the RMD that must be paid from the remaining balance of an account when a partial annuity is purchased and annuitized, even if the amount of the annuity payments plus the remaining RMD payments exceed the amount of RMDs required when no annuity is purchased; that is, the account is bifurcated for RMD purposes. SECURE 2.0 provides an offset for the annuity amount against the remaining RMD requirement. This provision is effective on enactment. The Treasury is instructed to update relevant regulations.
The surviving spouse of a participant who dies before commencing RMDs is allowed to elect to be treated as the employee for RMD purposes; thereby delaying when RMDs must commence. This provision is effective for calendar years beginning after December 31, 2023.
Roth IRAs are not subject to the RMD rules if the IRA holder dies before the required beginning date. This provision applies this same rule to Roth accounts in 401(k), 403(b) and governmental 457(b) plans. This provision eliminates the pre-death rule for transfers, rollovers and exchanges after December 31, 2023. It does not eliminate the rule if the payment was for a calendar year beginning before January 1, 2024 that is permitted to be paid on or after that date.
SECURE 2.0 provides that a trust established for a chronically ill or disabled eligible designated beneficiary (a “special needs trust”) shall not be considered a multi-beneficiary trust, for purposes of post-death distributions, solely because the trust includes a charity as a beneficiary.
SECURE 2.0 makes several changes to the IRS and Department of Labor (DOL) rules on overpayments and corrections.
The provision provides that plan fiduciaries are not required, under certain circumstances, to seek recovery of mistaken overpayments from participants; in addition, the plan sponsor does not have to make a payment to the plan in lieu of seeking repayment. Rollovers of overpayments do not have to be removed. None of the changes restrict the plan from reducing future payments to the correct payment amount.
If the fiduciary wanted to recover past overpayments, the fiduciary could not do so if the inadvertent error leading to the overpayment occurred more than three years before the overpayment was identified by the plan. If the plan does seek recovery, the plan is not allowed to charge interest and reductions at any one time are limited to 10 percent.
The provision also instructs plan fiduciaries to consider the participant’s financial hardship. This provision is effective on enactment; special rules apply for fiduciaries with respect to determinations made prior to enactment to seek or not to seek recovery of overpayments.
This provision broadly expands a plan’s ability to use self-correction if a failure of the IRS rules is inadvertent. In the case of loans, the provisions also provide relief under the DOL rules. This provision instructs the Treasury to revise the guidance on the Employee Plans Compliance Resolution System (EPCRS) to include these changes no later than two years after enactment.
The current EPCRS provision limits the special correction rule for automatic enrollment and automatic escalation to failures that occurred on or before December 31, 2023. This provision applies to errors after December 31, 2023 and provides a grace period to correct (9½ months after the end of the plan year in which the mistake was made).
Most of the SECURE Act’s retirement reform provisions are aimed at DC plans.
SECURE 2.0 requires all new 401(k) and 403(b) plans to have automatic enrollment. The initial default deferral amount is 3 percent but not more than 10 percent. Each subsequent year, the amount is increased by 1 percentage point until it reaches 10 percent. Thereafter, employers may choose to use a higher percentage up to 15 percent.
There are exceptions for existing plans, plans of businesses with 10 or fewer employees, plans of businesses where the business has not been in existence for three years, church plans and government plans. This provision is effective for plan years beginning after December 31, 2024.
SECURE 2.0 allows 401(k), 403(b) and governmental 457(b) plans to treat a student loan payment as an elective employee contribution for purposes of triggering matching contributions. Therefore, these employee contributions can be counted in the average contribution percentage test for nondiscrimination. This provision is effective for contributions made for plan years beginning after December 31, 2023.
SECURE 2.0 includes two approaches for employers to help employees access small amounts in case of financial emergencies:
Both options are effective for distributions made after December 31, 2023.
Current law allows older workers to make catch-up elective contributions up to a limit ($7,500 in 2023) to certain plans starting at age 50. SECURE 2.0 increases the yearly amount for workers ages 60 to 63 to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025. These amounts are indexed for inflation after 2025. This provision is effective for taxable years beginning after December 31, 2024.
SECURE 2.0 requires all catch-up contributions to a qualified plan be treated as Roth contributions, except contributions for employees with compensation of $145,000 or less (indexed). This provision is effective to taxable years beginning after December 31, 2023.
SECURE 2.0 also allows DC plans to provide participants with the option of receiving matching contributions on a Roth basis. This provision is effective on December 29, 2022.
The SECURE Act addressed qualified DC plan MEPs and PEPs but did not address MEPs or PEPs for 403(b) plans. SECURE 2.0 allows 403(b) plans to participate in MEPs and PEPS including providing relief from the “one-bad-apple” rule for violations. This provision is effective for plan years beginning after December 31, 2022.
Prior law provided for one named fiduciary. This raised concerns that one fiduciary would have to do both recordkeeping and collect contributions. SECURE 2.0 allows all PEPs to also name a non-employer fiduciary solely for purposes of collecting contributions. This provision is effective for plan years beginning after December 31, 2022.
In 2021, the DOL issued a proposed regulation on the requirements for a “group of plans” that are allowed to file one Form 5500 for the entire group because they have a common trustee, common administrator and common investments. The proposed regulation required audits at the group level. SECURE 2.0 instructs the DOL to provide in the final regulations that there will be no audits at the group level. The DOL would be able to continue to require audits at the individual plan level (if over 100 participants). This provision is effective as of December 29, 2022.
The SECURE Act changed minimum participation standards for non-collectively bargained 401(k) plans so that the plan is required to allow long-term, part-time workers to make elective contributions. The SECURE Act defined “long-term” as participants who have worked at least 500 hours in each of three consecutive years. SECURE 2.0 changes the three years to two years and applies the participation rule to ERISA-covered 403(b) plans effective for plan years beginning after December 31, 2024. It also provides that pre-2021 service is disregarded for vesting effective as if the language was included in the SECURE Act.
SECURE 2.0 allows plans to accept a participant’s self-certification of a hardship event in a 401(k) or 403(b) plan. Participants can already certify the other component of hardship eligibility: financial need. The provision also applies to unforeseeable emergency distributions from governmental 457(b) plans. The Treasury may provide that a plan cannot accept self-certification if the plan has actual knowledge of the falsehood of the certification. This provision is effective for plan years beginning after December 29, 2022.
The Bipartisan Budget Act of 2018 expanded the hardship distribution sources for 401(k) plans to include Qualified Matching Contributions (QMACs), Qualified Non-Elective Contributions (QNECs) and earnings on those and on elective contributions. SECURE 2.0 expands the rule so that all 401(k) sources are available for all 403(b) plan hardship distributions. This provision is effective for plan years beginning after December 31, 2023.
SECURE 2.0 Act allows 403(b) custodial accounts to be invested in collective trusts under the tax and ERISA rules. However, before 403(b) custodial accounts can use the new provision, securities law amendments are needed, and they are not included in SECURE 2.0. This provision is effective for amounts invested after the date of enactment.
SECURE 2.0 allows a DC plan to eliminate all notices to “unenrolled” participants (i.e., participants who do not elect to participate for a year and have no existing account balances) other than the basic annual election reminder notice and other standard notices, such as the SPD. This provision is effective for plan years beginning after December 31, 2022.
SECURE 2.0 limits the period in which the plan must accept repayment to three years; it is currently unlimited. This provision is effective for distributions made after the date of enactment; distributions made prior to enactment may be paid back any time before January 1, 2026.
Under prior law, 457(b) plan participants were required to make or change deferral elections prior to the first day of the month. SECURE 2.0 eliminates the special first day-of-the-month rule for governmental 457(b) plans (but not nongovernmental 457(b) plans). This provision is effective for taxable years beginning after the date of enactment.
Rather than providing for special rules on a disaster-by-disaster basis, SECURE 2.0 provides for permanent rules for the use of retirement funds in the case of any federally declared disaster. Plans can permit participants to take distributions of up to $22,000 free of the 10 percent premature distribution penalty. The distributions can be taken into account as gross income for federal income tax purposes over three years. Distributions can be repaid to an eligible retirement account within three years.
The limit on disaster-related loans is increased to the lesser of 100 percent of the present value of the vested account or $100,000. Additionally, amounts distributed prior to the disaster to purchase a home can be recontributed. This provision is effective for disasters occurring on or after January 26, 2021.
The DOL has rules limiting permissible benchmarks for disclosure of mixed-asset investments, such as target date funds. SECURE 2.0 directs the DOL to update its regulations so that an investment that uses a mix of asset classes can be benchmarked against a blend of broad-based securities market indices under certain conditions. This provision requires the DOL to update its regulations no later than two years after enactment.
Generally, employers may not provide anything but matching contributions as an incentive to make elective contributions to a plan. This provision allows the employer to provide small financial incentives to employees, such as gift cards in small amounts. The cost of the incentive cannot come from plan assets. The change applies to both 401(k) plans and 403(b) plans. This provision is effective for plan years beginning after enactment.
SECURE 2.0 introduces several exceptions to the early withdrawal penalty for DC plans.
The 10 percent premature distribution penalty does not apply to a distribution taken from a DC plan because of domestic abuse. The limit is $10,000 or 50 percent of the account, if less. The amount can be repaid to an IRA (or to the plan if it accepts such repayments) within three years. A participants can take advantage of the premature distribution relief if the participant satisfies the domestic abuse standard of section 72(t)(2)(K)(iii)(II) of the IRC and the participant is eligible to take a distribution for another reason. This provision is effective for distributions made after December 31, 2023.
The 10 percent early withdrawal tax on distributions no longer applies in the case of a distribution to a terminally ill participant (after doctor certification) nor to up to $2,500 of distributions from retirement plans used to pay for qualified long-term care contracts for participants and spouses. This provision is effective for distributions made after December 29, 2022.
The 10 percent early withdrawal tax on distributions includes an exception for distributions from a tax-preferred retirement vehicle in the form of substantially equal periodic payments over the recipient’s life expectancy. This provision provides that the exception continues to apply in the case of a rollover, exchange of annuities or RMD. This provision is effective for transfers, rollovers and exchanges after December 31, 2023 and effective for annuity distributions on or after December 29, 2022.
There is an existing exemption from the early distribution tax for distributions from a government plan by a public safety officer. The existing exemption is for those who attain age 50. This provision expands the exemption to public safety offers with 25 years of service. This provision also extends the exemption to correction officers who are employees of state and local governments. Both provisions are effective on enactment.
The existing exemption from the 10 percent early distribution tax that applies to public firefighters is extended to private sector firefighters. This provision is effective for distributions made after enactment.
Although most of the SECURE 2.0’s retirement reform provisions are aimed at DC plans, there are several provisions that only affect DB plans.
The VRP is indexed each year by a cost-of-living index. The SECURE 2.0 eliminates further indexing. Moreover, the VRP is frozen at the rate of $52 for each $1,000 of unfunded vested benefits. This provision is effective on the date of enactment.
Cash-balance plans and other hybrid plans with variable indices need to project interest for several purposes. Prior law required projections at the prior year’s rate, which overemphasized the positive or negative return of the prior year. A new rule allows that projection to be at a reasonable rate (not to exceed 6 percent). This provision is effective for plan years beginning after December 29, 2022.
SECURE 2.0 provides that, for purposes of the minimum funding rules, a pension plan is not required to assume that after the valuation date there will be future mortality improvements of greater than 0.78. The Treasury is required to amend the current regulation June 29, 2024, but this provision is deemed to take effect on December 29, 2022. The Treasury is instructed to modify the 0.78 in the future as necessary to reflect material changes in the overall rate of improvement projected by the Social Security Administration.
The annual funding notice for DB plans requires information on the funding of the plan. SECURE 2.0 provides for additional information to make the notice more useful for participants. This provision is effective for plan years beginning after December 31, 2023.
Single-employer DB plans may not pay benefits exceeding 100 percent of compensation. This limit does not apply to governmental, multiemployer and certain other types of DB plans. SECURE 2.0 removes the limit for non-highly compensated employees in a rural electric cooperative plan. Rural electric cooperative plans affected are multiple employer plans subject to the single-employer plan rules. This provision is effective for limitation years ending after December 29, 2022.
Under a provision of the tax code that will expire in 2025, transfers of assets from the pension component of a DB plan to the 401(h) account for retiree health of the same plan are allowed only if the plan is substantially overfunded and other conditions are met. SECURE 2.0 extends the ability to make transfers until 2032. In addition, the percentage funding is lowered from 125 percent to 110 percent if no more than 1.75 percent of the plan’s pension assets are transferred to the 401(h) account. This provision is effective for transfers made on or after the date of enactment.
SECURE 2.0 provides that plan administrators of plans offering a lump-sum window must provide plan participants and retirees with specified information 90 days before the window to help participants and retirees determine whether the lump sum is best for their financial futures when compared to other benefit options under the plan. This provision specifies that the DOL must issue rules implementing this provision within one year after enactment. The rules must be applicable not earlier than the issuance of a final rule and not later than one year after issuance of a final rule.
Plan sponsors will also be interested in the provisions noted below.
This provision of SECURE 2.0 is aimed at helping participants find their pension assets and for plans to find participants. It creates an online searchable register at the DOL that will allow participants to find where their plan benefits currently sit (e.g., after a merger, change of administrators or purchase of an annuity contract). This provision directs the creation of the database no later than two years after enactment.
Existing DOL regulations carve out several exceptions allowing benefit statements to be delivered electronically. SECURE 2.0 narrows these exceptions by requiring at least one paper notice be provided before electronic notices can be provided unless certain conditions are met.
For DC plans, unless the participant elects otherwise, at least one of the benefit statements each year must be on paper. In the case of a participant-directed DC plan, the other three can be electronic.
For DB plans, a paper statement must be provided at least once every three years unless the participant elects otherwise. The DOL must update regulations and guidance by December 31, 2024.
Under this provision, the annual paper statement requirement is effective for plan year beginning after December 31, 2025.
SECURE 2.0 increases the permissible non-consent cash-out limit, now $5,000, to $7,000. This provision applies to distributions made after December 31, 2023.
SECURE 2.0 requires plans to treat domestic relations orders issued by Native American Tribal Courts in a manner similar to those issued by other courts. This provision is effective for domestic relations orders received by the plan after December 31, 2022, including any such order which is submitted for reconsideration after such date.
SECURE 2.0 allows retroactive discretionary amendments increasing benefits (except matching contributions) to be made up to the plan’s 5500 filing date (or, for single-employer plans, the employer’s tax-filing date). Currently, the requirement is that these retroactive amendments must be made by the end of the plan year in which they are effective. This provision is effective for plan years beginning after December 31, 2023.
An employer is permitted to distribute a participant’s account balance or accrued benefit if the value is less than $5,000 (changed to $7,000 by a separate provision) and there is a distributable event. If the value is $5,000 or less, the participant must be offered an opportunity to have the plan rollover the amount to an account of the participant’s choice. If the participant does not provide rollover information, the plan must rollover the money into a default IRA. This provision allows a plan service provider to provide employer plans with automatic portability services, which results in the automatic transfer of the default IRA account into a participant’s new employer’s plan, unless the participant elects otherwise. The DOL has provided an individual prohibited transaction exemption to a clearinghouse that provides the services above. This provision will eliminate the need for an exemption. This provision is effective for transactions occurring on or after December 29, 2023.
This insight doesn’t cover provisions aimed at small employers and small plans, nor provisions dealing with IRAs, SIMPLEs, SEPs or ESOPs. It also does not cover the Savers’ Credit or provisions providing tax credits to encourage small employers to establish plans.
With limited exceptions, none of the provisions are effective for 2023 (because of how late in 2022 SECURE 2.0 was passed). While most provisions are effective before the 2025 plan year, no amendments are required until the last day of the 2025 plan year (2027 for collectively bargained and government plans) provided the plans are operated in accordance with SECURE 2.0 from the provision’s effective date.
SECURE 2.0 also provides extended anti-cutback relief tied to the amendment date. Similar changes are made to the deadlines for amendments to the SECURE Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (so that there are coordinated amendment dates).
As guidance on SECURE 2.0 is issued, we’ll keep you informed.
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.
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