RMD changes

The SECURE 2.0 bills include provisions that would:

• Increase the required beginning date (RBD) age. Under one bill, the RBD age would increase to 75 starting in 2032. Another bill would increase the RBD age to 75 in 2033 with interim increases to age 73 in 2023 and to age 74 in 2030.
• Expand qualifying longevity annuity contract (QLAC) increases. A QLAC is a deferred annuity purchased by a DC plan participant. Because the purchase is at retirement and payments do not start until age 80 or 85, QLACs are much cheaper than immediate annuities and provide a fail-safe against participants running out of money. The Treasury issued guidance explaining what deferred annuities satisfy the RMD requirements and thus can be QLACs. However, the Treasury was limited in what it could do without statutory change. The bills would eliminate the regulation’s limit (25 percent of the account), increase the dollar limit from $100,000 to $200,000 and make other changes, including allowing 90-day, free-look provisions.
• Allow certain annuity increases. Current regulations require annuities to be essentially non-increasing (except for cost of living) to satisfy the RMD rules. The bills would provide additional exceptions to the non-increasing limit, such as allowing annuity payments that increase by less than 5 percent and accelerations of future annuity payments.
• Reduce the penalty tax for RMD failure. The bills would reduce the penalty tax on participants who fail to take RMDs from 50 percent to 25 percent. If the failure is corrected in a timely manner, the tax is reduced to 10 percent.
• Waive the penalty tax for terminally ill individuals and long-term care distributions. The 10 percent early withdrawal tax on distributions would not apply in the case of a distribution to a terminally ill participant (after doctor certification) nor to distributions from retirement plans used to pay for qualified long-term care contracts for participants and spouses.
• Allow more credit against the remaining RMD when an annuity is purchased for part of the RMD. IRS regulations do not reduce the RMD that must be paid from the remaining balance when a partial annuity is purchased, even though the amount of the annuity payments plus the remaining RMD payments exceed the amount of RMDs required when no annuity is purchased. The bills would provide an offset for the annuity amount against the remaining RMD requirement.
• Clarify the RMD age 70½ accrual rule. When the SECURE Act moved the RMD age to age 72, it did not clearly preserve the rule that required actuarial increases for work after age 70½ (for non-5 percent owners). The bills would clarify that the intent was to continue to require actuarial adjustments for active workers after age 70½ (for non-5 percent owners).
• Allow the surviving spouse to elect to be treated as the employee. The surviving spouse of a participant who dies before commencing RMDs would be allowed to elect to be treated as the employee for RMD purposes; thereby delaying when RMDs must commence.
• Eliminate pre-death RMDs from in-plan Roth accounts. Roth IRAs are not subject to the RMD rules if the IRA holder dies before the required beginning date (RBD). This provision would apply this same rule to Roth accounts in 401(k), 403(b) and governmental 457(b) plans.
• Clarify definition of a multi-beneficiary trust. The bills provide that a trust established for a chronically ill or disabled eligible designated beneficiary shall not be considered a multi-beneficiary trust, for purposes of post-death distributions, solely because the trust includes a charity as a beneficiary in addition to the spouse.

EPCRS changes

Under the Employee Plan Corrections Resolution System (EPCRS), the IRS allows a plan that violates the tax qualification rules to correct by self-correction, by submitting an acceptable correction under the voluntary compliance program (VCP) or by entering into a closing agreement with the IRS.

Changes being proposed to EPCRS include the following:

• Plan sponsors would not be required to recover retirement plan overpayments. Plan fiduciaries would not be required, under certain circumstances, to seek recovery of overpayments from participants and would not have to make a payment to the plan in lieu of seeking repayment. Nothing would restrict the plan from reducing future payments to the correct payment amount. However, if the fiduciaries wanted to recover past overpayments, they would be limited if the inadvertent error leading to the overpayment occurred more than three years before it is identified by the plan. If the plan does seek recovery, the plan would not be allowed to charge interest and reductions at any one time would be limited to 10 percent. The provision would also instruct plan fiduciaries to consider the hardship of paying and legitimize any rollovers the participant had already made to IRAs or another plan of the overpayment.
• Expand ability to self-correct inadvertent plan failures. This provision would broadly expand a plan’s ability to use self-correction if the failure is inadvertent.
• Extend time frame for correcting automatic enrollment failures. The current EPCRS provision limits the special correction rule for automatic enrollment failures to failures that occurred on or before December 31, 2023. This provision would instruct the Treasury to also allow EPCRS for failures after such date and to make other improvements.

Amendment date, lost and found, and paper benefit statements

These provisions address significant issues:

• Delay amendment dates. While the effective dates of most provisions would be earlier (some as early as 2023), the bills would not require plan sponsors to make amendments that conform with plan operation until later — generally the end of the 2024 plan year (2026 for collectively bargained and governmental plans). The bills also provide extended anti-cutback relief tied to the amendment date. Similar changes would be made amendments to the SECURE Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (so that there is a coordinated amendment date). Because SECURE 2.0 is likely to be enacted late in 2022, employer groups are asking the Treasury to extend the amendment date by notice or other type of guidance.
• Establish a lost and found registry. These provisions are aimed at helping participants find their pension assets and for plans to find participants. There are considerable design differences between the bills, including whether the entity is administered by the Treasury or the DOL. Both would create an online searchable register 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). One of the bills would require small mandatory distributions (under $1,000) to be transferred to the registry when participants are missing. Employers would have to provide additional information to the agency on mergers, transfers, annuity purchases and the like.
• Require an annual paper benefit statement. Existing DOL regulations carve out several exceptions allowing benefit statements to be delivered electronically. One bill narrows these exceptions to require at least one paper notice before electronic notices can be provided unless certain conditions are met. For active participants, the plan would be required to provide a one-time written notice advising participants of their right to request paper statements. For separated participants, the plan would be required to furnish the participant at least one paper statement each year unless the participant asks to receive statements electronically.

Additional changes

Plan sponsors may also be interested in these provisions:

• Increase the DOL’s disclosure requirements for lump-sum window elections. One of the bills would increase the information that plans must provide to terminated vested participants if they offer them the ability to elect a lump sum during a window period. The bill would also require additional reporting to the DOL and the PBGC.
• Increase the cash-out amount. The bills would increase the non-consent cash-out limit, now $5,000. Two of the bills would raise the limit to $7,000; the other bill would increase it only to $6,000.
• Legislate automatic disaster relief. The CARES Act made emergency changes to in-service distribution rules and loans. These bills include automatic changes in the disaster distribution and loan rules similar to the changes made under the CARES Act so that no Congressional action would be needed for future disasters.
• Native American tribal QDROs. Plans would have to treat domestic relations orders issued by Native American Tribal Courts in a manner similar to those issued by other courts.
• Allow retroactive amendments until tax filing date. This provision would allow retroactive amendments increasing benefits (except matching contributions) to be made up to the plan’s tax-filing date. Currently, the requirement is that these retroactive amendments must be made by the end of the plan year.
• Permit exchange-traded funds (ETFs) in variable annuities. The bills would instruct the Treasury Department to update its ETFs regulation to allow variable ETFs to be included in variable annuities. The effective date would be seven years after enactment.
• Encourage auto-portability. The DOL provided an individual prohibited transaction exemption to a clearinghouse that essentially allows a participant to rollover a distribution to the clearinghouse and the clearinghouse to roll the rolled-over distribution to a participant’s new plan automatically. One bill would create a broad statutory exemption. Any final legislation will have to include an ERISA amendment also.
• Permit mixed-performance benchmarks for investments. The DOL has rules limiting permissible benchmarks for disclosure of mixed-asset investments, such as target date funds. The provision would require the DOL to allow mixed benchmarks.

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 Retirement Reform: Focus on DC Plan Provisions” and “SECURE 2.0 Provisions that Would Affect DB Plans.” The second insight covers some provisions that would apply to both DB and DC plans.