On December 29, 2022, the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act (“Act”) was signed into law as part of an omnibus appropriations bill. The Act expands upon the SECURE Act of 2019, which is discussed in our January 9, 2020 Benefits Update, and makes significant changes to the rules governing 401(k) and other retirement plans, including raising the latest age by which participants must begin to take distributions, mandating automatic enrollment for new 401(k) and 403(b) plans, and permitting emergency distributions without a penalty. Below is a summary of some of the significant provisions of the Act.
Automatic Enrollment
Starting in 2025, the Act requires newly established 401(k) and 403(b) plans 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 the cap of 15%. Employees who do not wish to make 401(k) deferrals will have to affirmatively opt out of the arrangement. The auto-enrollment requirement does not apply to plans established before the enactment of the Act; however, employers that first commence participation in a “multiple employer” plan after the enactment date are treated as having established a new plan and will be subject to the requirement. Further guidance is needed on whether and how this requirement applies to an employer that joins an established multiemployer plan.
Delayed Required Minimum Distributions (RMDs)
The 2019 SECURE Act raised the age at which participants are required to begin taking distributions from their defined contribution and defined benefit retirement plans (known as “required minimum distributions” or “RMDs”) from age 70½ to age 72. The Act again increases the age at which RMDs must be taken to age 73 beginning in 2023, and further increases the age to 75 beginning in 2033. Additionally, the excise tax on participants for failure to take RMDs is decreased from 50% to 25%, and further to 10% if the failure is remedied within two years. The Act also provides surviving spouses of deceased participants with additional flexibility by allowing them to be treated as the participant, permitting them to delay distributions if their spouse was younger.
Roth Contributions Permitted in Some Cases, Required in Others
Beginning in 2024, all catch-up contributions (additional contributions permitted for participants age 50 or older) made to a 401(k), 403(b) or 457(b) governmental retirement plan by an employee whose prior year wages exceed $145,000 must be made as after-tax Roth contributions. In addition, any plan that has one or more participants who exceed this compensation limit and allows catch-up contributions is required to offer all eligible participants the option of making their catch-up contributions on a Roth basis, regardless of their compensation level. Plans also may permit participants to elect to have any matching contributions or nonelective contributions that are made on their behalf designated as Roth contributions, meaning the contribution is included in the participant’s income when made, but earnings generally are not taxed when distributed.
Easier Access to Distributions on an Emergency Basis
The Act includes multiple optional provisions that would allow participants to make withdrawals from their 401(k), 403(b) and 457(b) governmental plan accounts under certain circumstances without incurring the additional 10% tax on early distributions:
- Personal or family emergency expenses: plans may permit participants to take a withdrawal of up to $1,000 from their account up to once per year, and to repay that amount within three years. However, before taking another $1,000 distribution, the participant must repay any distribution taken within the preceding three years.
- Qualified federally declared disasters: effective for disasters occurring on and after January 26, 2021, plans may permit participants to take a penalty-free withdrawal of up to $22,000 from their account, which may be included in the participant’s income over three years and may be repaid; plans also may increase the dollar limit on plan loans from $50,000 to $100,000 and permit a one-year extension of the loan period for affected participants.
- Domestic abuse: plans may permit victims of domestic abuse, who self-certify their eligibility, to take a distribution of up to $10,000 or 50% of the participant’s account value, whichever is less, and to repay the distribution within three years.
- Terminal illness: if a participant is certified by a physician as having an illness that can reasonably be expected to result in death within seven years, the plan may permit an early distribution without penalty; this provision is effective immediately, but the Act contemplates further guidance from IRS on the form and manner of the physician certification.
Modified Reporting Requirements
The Act makes a number of changes to the way plans report performance and other information to participants:
- Investment fund disclosures: the Act directs the Secretary of Labor to update the rules on investment performance disclosures to permit the use of a blend of appropriate market indices as a benchmark for investment funds, such as target retirement date funds, that include a mix of asset classes.
- Unenrolled participants: individual account plans are not required to provide participant notices to employees who decline to enroll in the plan, provided the employee received an initial copy of the plan’s summary plan description and receives an annual reminder of their eligibility to participate and deadlines for enrollment.
- Paper statements: starting in 2026, individual account plans must furnish a paper statement at least once per year and defined benefit plans must furnish a paper statement once every three years, unless a participant has affirmatively chosen to receive disclosures electronically.
Other Provisions
In addition to the provisions above, the Act includes numerous other changes, including but not limited to the following:
- Increasing the maximum amount that may be distributed to a terminating participant without the participant’s consent from $5,000 to $7,000 (an automatic rollover to an IRA is still required for any amount over $1,000);
- Permitting plans to automatically roll in amounts that were rolled over to a default IRA in connection with a participant’s termination from a prior plan and permitting service providers to implement such rollovers automatically unless the participant elects otherwise;
- Permitting 401(k) plan, 403(b) plan and 457(b) governmental plan sponsors to make matching contributions on participants’ student loan payments as if those payments were retirement contributions. Such matching contributions on student loan payments also may be treated as Roth contributions;
- Beginning in 2027, transforming the Saver’s Credit, currently a tax credit available to taxpayers earning below a certain amount who make retirement contributions, into a direct matching contribution of up to $2,000 made by the government to the eligible taxpayer’s plan account or IRA;
- Starting in 2025, increasing the catch-up contribution limit for participants age 60 to 63, up to $10,000 or 150% of the otherwise applicable catch-up limit for participants 50 or older, which is $7,500 for 2023;
- Shortening the maximum waiting period for part-time workers to enroll in 401(k) plans from 500 hours of service in three consecutive years to 500 hours in two consecutive years, starting in 2025;
- Permitting 401(k), 403(b) and 457(b) governmental plans to provide for emergency savings accounts, under which non-highly compensated participants may contribute up to $2,500 in after-tax Roth contributions. Participants would be eligible to receive a distribution from such an account at least once per month, and have contributions to the savings account matched by their employer with a contribution to their (non-emergency) retirement account;
- Giving fiduciaries greater discretion to decide whether to pursue retirement plan overpayments, and also setting limits on a plan’s ability to recoup such overpayments, including prohibiting the demand for payment of interest on overpaid amounts, limiting the offset of future benefit payments to no more than 10% of the overpayment per year, prohibiting recoupment of overpayments to a participant from a beneficiary, and prohibiting recoupment where the first overpayment occurred more than three years before the participant is notified, except in cases where the participant or beneficiary is “culpable” (such as through misrepresentations or omissions that led to the overpayment, or if they knew that the overpayments were in excess of the correct amount);
- Expanding self-correction through the IRS’s Employee Plans Compliance Resolution System (“EPCRS”) to include plan loan failures and other inadvertent administrative failures that occur despite the plan having compliant procedures in place;
- Establishing a retirement savings “lost and found” online database to aid participants in locating retirement benefits, which will require plans to provide certain participant information to the Department of Labor;
- Permitting self-certification of eligibility for 401(k) hardship distributions (self-certification previously was permitted only for the amount needed, not the existence of the hardship).
Please contact Slevin & Hart for more information about how the SECURE 2.0 Act affects your plan.
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