Compliance News | July 25, 2022

SECURE 2.0 Retirement Reform: Focus on DC Plan Provisions

SECURE 2.0, shorthand for three bills that would have significant implications for retirement plans, continues to work its slow but steady path through Congress. It now appears that SECURE 2.0 will be enacted late this year. Plan sponsors should be aware of the many changes included in this pending legislation.

This insight addresses the most significant provisions that would affect midsize and large DC plans.

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SECURE 2.0 has numerous provisions aimed at encouraging more savings in 401(k), 403(b) and governmental 457(b) plans through automatic enrollment, automatic escalation and improved safe harbor. It also includes a provision that makes it easier for an employer to make matching contributions to plans when an employee makes a payment on a student loan. Another highlight is two different provisions allowing emergency savings.

Savings provisions

These provisions are intended to encourage more savings:

  • Requirements for automatic enrollment, automatic escalation and automatic re-enrollment. One bill would require all new 401(k) and 403(b) plans to have automatic enrollment and automatic escalation. A different bill would require auto-re-enrollment every three years for plans first adopting auto-enrollment in the future.
  • Introduce a new automatic enrollment safe-harbor plan with higher automatic electives. One bill adds a new auto-enrollment safe harbor with higher minimum and maximum automatic contribution percentages and higher match requirements than those that apply under the current automatic enrollment safe harbor. The safe harbor allows the plan to avoid certain non-discrimination testing rules.
  • Allow plans to make matching contributions based on student loan repayments. The bills include a provision allowing 401(k), 403(b), and governmental 457(b) plans to treat a student loan payment as an elective contribution for purposes of triggering matching contributions. There are related changes to the nondiscrimination rules.
  • Allow emergency savings. The bills include two approaches to employers setting aside small amounts of money for financial emergencies. One approach is a “sidecar” to a 401(k) or ERISA 403(b) plan (max of $2,500). The other approach is a new distribution rule allowing participants to take a small amount ($1,000) out of their 401(k), 403(b) or governmental 457(b) plan. It is possible that the final bill will include both approaches with amendments so that the provisions work for both the IRC and ERISA.
  • Permit older participants to make higher catch-up contributions. Current law allows older workers to make catch-up contributions of up to $6,500 to certain plans starting at age 50. The bills would increase the yearly amount to $10,000 for certain older workers (ages 60–63 in one bill and ages 62–64 in another).
  • Require or allow certain contributions to be Roth contributions. Employee Roth contributions, rather than pre-tax contributions, move the budget cost outside of the 10-year budget window used for testing the cost of legislation. The bills vary, but items permitted or required to be treated as Roth contributions include catch-up contributions and, if the employer allows and the employee elects, employer matches and employer non-elective contributions.
  • Allow 403(b) multiple employer plans (MEPs) and 403(b) pooled employer plans (PEPs). The SECURE Act addressed qualified DC plan MEPs and PEPs but did not address MEPs or PEPs for 403(b) plans. Under the bills, 403(b) MEPs and PEPS would be allowed under similar rules to those for qualified plan DC MEPs and PEPs. However, a governmental 403(b) plan and a non-governmental 403(b) plan would not be able to be in the same MEP or PEP. One of the bills also would allow a PEP, whether qualified or 403(b), to have a non-employer fiduciary solely for purposes of collecting contributions.
  • Clarify that there will be no “group of plans” audits at the “group” level. The DOL issued a proposed regulation on the requirements for a “group of plans.” These are plans that have a common trustee, common administrator and common investments and, therefore, are allowed to file one Form 5500 for the entire group. The proposed regulation required audits at the group level. This provision would instruct 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).
  • Revise the definition of “long-term, part-time workers.” 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 500 hours in each of three years. The bills would change that to two years, eliminate the need to retroactively trace vesting credit, fix some technical issues and add a parallel ERISA provision.

Other DC plan changes being considered

The bills include many other provisions that would affect DC plans, including these:

  • Permit self-certification of hardship to simplify administration. The bills would allow plans to let participants self-certify that they had a hardship event. Participants can already certify the other component of hardship eligibility: financial need. The provision would also apply to unforeseeable emergency distributions from governmental 457(b) plans. The Treasury Department may provide that a plan cannot accept self-certification if the plan has actual knowledge of the falsehood of the certification.
  • Make all 401(k) hardship sources available to all 403(b) plans. 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. Currently, no 403(b) plan can distribute earnings and 403(b) custodial accounts cannot distribute QMACs and QNECs under the hardship rules. This provision would expand the rule so that all 401(k) sources are available for all 403(b) plan hardship distributions.
  • Permit 403(b) plans to use collective investment trusts. The bills would allow 403(b) custodial accounts to be invested in collective trusts under the tax and ERISA rules. However, security law amendments are needed, and they are not yet included in any of the bills because of committee jurisdictional issues.
  • Limit notices that unenrolled participants must receive. The bills would allow 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 election notice and other standard notices, such as the SPD. The bills would instruct the federal agencies to issue a regulation within two years.
  • Limit qualified birth or adoption distribution repayments to three years. The bills would limit the repayment period to three years; it is currently unlimited.
  • Withdrawals related to domestic abuse could be made without a penalty. No distribution restriction or 10 percent premature distribution penalty would apply to a distribution taken from a DC plan because of domestic abuse. The limit would be $10,000 or 50 percent of the account, if less. The amount could be repaid within three years. There does not appear to be a requirement that a plan include a specific provision allowing such distributions. However, participants could take advantage of the premature distribution relief if they satisfy the domestic abuse standard and are eligible to take a distribution for another reason.
  • Eliminate the 457(b) first-day-of-the-month requirement. Unlike 401(k) and 403(b) plans, 457(b) plan participants must elect to defer money prior to the first day of the month. The other plans only must defer prior to the compensation being available. The special first-day-of-the-month rule would be eliminated for governmental 457(b) plans (but not nongovernmental 403(b) plans).

Have questions about SECURE 2.0 and the implications for DC plans?

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About SECURE 2.0

The three SECURE 2.0 bills are:

  • The Securing a Strong Retirement Act of 2022 (H.R.2954), which the House of Representatives passed by a 414-5 vote in March 2022
  • The Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act of 2022 (S.4353), which the Senate Health, Education, Labor and Pension (HELP) Committee reported out unanimously on June 14, 2022
  • The Enhancing American Retirement Now (EARN) Act, which the Senate Finance Committee reported out unanimously on June 22, 2022

There are numerous provisions in these three bills, some identical, some with minor modifications and some with no parallel.

These provisions continue the work done by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which is why SECURE 2.0 is shorthand that many retirement industry professionals use to describe the provisions. (We discussed the SECURE Act in our March 4, 2020 insight.)

What happens next?

Members of Congress are expected to negotiate a bicameral, bipartisan version for passage in the House and Senate. That version could include provisions that are in none of the bills currently and revisions to the existing proposed changes. Enactment is not likely until after the November election.

Because retirement bills rarely are brought up for a vote by themselves, if SECURE 2.0 moves forward, it is likely it will be added to an end-of-year “must-pass” bill. This could be the appropriations bill, a tax bill or some other “must-pass” bill.

Additional SECURE 2.0 provisions

We discuss more SECURE 2.0 provisions in other July 25, 2022 insights: “SECURE 2.0 Provisions That Would Affect DB Plans” and “SECURE 2.0 Would Change the RMD Rules, Corrections and More.” The second insight covers some provisions that would apply to both DC and DB plans.

See more insights

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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.