On December 20, 2023, the IRS issued Notice 2024-02 (“Notice”), providing guidance on several provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act (“Act”), which we discussed in our Benefits Update dated January 19, 2023. Significantly, the Notice provides clarification on the Act’s automatic enrollment provisions, terminal illness withdrawals, and the timing of mandatory plan amendments.
Automatic Enrollment
The Act requires 401(k) and 403(b) plans established after December 31, 2022 to automatically enroll all new eligible employees in elective deferrals at a rate of at least 3%, with automatic increases of 1% per year until the deferral reaches at least 10%, not to exceed a cap of 15%. The Notice clarifies when a plan is considered to have been established for this purpose:
- A 401(k) cash or deferred arrangement (“CODA”) is considered to have been established on the date that the plan provisions for the CODA are adopted, regardless of the effective date of the provisions. The same rule applies to a salary reduction agreement under which an annuity contract is purchased under a 403(b) plan. This means that if an employer adopts a CODA before December 31, 2022, the CODA would be considered established before December 31, 2022, and therefore exempt from the auto-enrollment requirement, regardless of the effective date.
- If two single employer plans that each include a 401(k) CODA established before December 31, 2022 (“pre-enactment plans”) merge, the merged 401(k) plan is treated as a pre-enactment plan. The same rule applies to a single employer plan that is spun off from a pre-enactment plan. The Notice does not address how this rule would apply to a multiple employer or multiemployer plan.
- 403(b) plans are exempted from the automatic enrollment requirement if the plan was established before December 29, 2022, regardless of when plan language regarding a deferral feature is adopted. This appears to mean that a 403(b) plan that was in existence before the effective date of the Act is not required to comply with the auto-enrollment requirement, even if the plan adds a salary reduction feature after the effective date.
As discussed in our previous Benefits Update, the Act requires auto-enrollment for an employer newly adopting a plan “maintained by more than one employer,” which the Act uses interchangeably with multiple employer plans. The Notice does not address whether this requirement also applies to multiemployer plans.
Terminal Illness Distributions
The Act includes an optional provision that would allow participants to take a distribution without incurring the additional 10% tax on early distributions if the participant is certified by a physician as terminally ill. Terminal illness distributions are available not only from individual account plans such as 401(k) and 403(b) plans, but also from qualified defined benefit plans and individual retirement accounts. However, terminal illness distributions are not permitted from a governmental plan under Code Section 457.
The Notice provides that the following must be included in a certification of terminal illness from a physician:
- A statement that the individual’s illness or physical condition can be reasonably expected to result in death in 84 months or less after the date of certification, consistent with the Act’s definition of a “terminally ill individual”;
- A narrative description of the evidence that was used to support the statement of illness or physical condition;
- The name and contact information of the physician making the statement;
- The date the physician examined the individual or reviewed the evidence provided by the individual, and the date that the certification is signed by the physician; and
- The signature of the physician making the statement, and an attestation from the physician confirming that the narrative description in (b) is based on the physician’s examination of the individual or a review of evidence provided by the individual.
This certification must be submitted to the plan administrator and may be relied upon by the plan administrator as evidence of such terminal illness. The distribution cannot be made before the date of the physician’s certification.
Note that unlike 401(k) hardship distributions, self-certification of terminal illness is not permitted. An employee who has taken a terminally ill distribution may recontribute any amount taken to a qualified retirement plan in which the employee is a beneficiary, provided the plan accepts rollover distributions.
Timing of Plan Amendments
The Notice provides an additional year for plans to adopt plan amendments pursuant to the Act. As a result, non-governmental qualified plans must be amended by December 31, 2026, while applicable collectively bargained plans have until December 31, 2028 to make the required amendments and governmental plans must be amended by December 31, 2029.
Please contact Slevin & Hart for more information about how the Notice may affect your plan.
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