Unpacking the SECURE 2.0 Act of 2022
In December of 2019, before COVID was in our daily vocabulary, President Trump signed the Setting Every Community Up for Retirement Enhancement Act. The SECURE Act sought to increase access to retirement savings accounts and to protect American workers from outliving their retirement assets. Although well-intentioned, COVID- and economy-related distractions have muted the SECURE Act’s impact.
Late last month, Congress came together to agree on a follow-up retirement plan legislative package. On December 29, 2022, President Biden signed into law the “SECURE 2.0 Act of 2022”. SECURE 2.0 includes roughly 90 provisions that will impact plans of all types and sizes, including 401(k) plans, 403(b) plans, 457 plans, ESOPs, defined benefit plans, SIMPLE-IRAs, and stand-alone IRAs.
With so many provisions and 359 pages of legislative text, SECURE 2.0 is not easily navigable. This month’s Newsletter prioritizes the changes most likely to impact current retirement plan sponsors and participants, organized by the years in which the changes become effective. Please be sure to register for this month’s Fiduciary 15 webinar, which will take a deeper dive on the provisions effective now.
Effective in 2023
Plan sponsors should be mindful of the following changes that became effective within the last week and may impact plan administration in 2023:
- Later RMDs: Prior to the SECURE Act, the Tax Code’s “Required Minimum Distributions” or “RMDs” were tied to a participant’s attainment of age 70 ½. The SECURE Act delayed the RMD trigger to age 72. For any participant who had not yet reached age 72 as of the end of 2022, SECURE 2.0 further delays the RMD trigger to age 73. (Note that in 2033, this trigger will extend to age 75 for any participant who attains age 74 in 2033 or later.)
- Lower Excise Tax for RMD Failures: SECURE 2.0 lowers the excise tax for RMD failures from 50% to 25%. The rate may drop further to 10% if corrected within a two-year window.
- Employer Contributions as Roth Contributions: An employer now may permit employees to elect for employer matching or nonelective contributions to be made as Roth contributions. Such amounts must be treated as 100% vested when made. Importantly, this is not a new requirement; a plan sponsor may decide whether to make this election available to participants.
- Hardship Self-Certification: SECURE 2.0 codifies a plan administrator’s ability to rely on a participant’s self-certification of a hardship for purposes of hardship distributions. (Note: this is roughly in line with an internal IRS memorandum that has been permitting self-certification in recent years.)
- Incentivizing Participation: Plan participants may receive de minimis financial incentives – such as gift cards – for electing to make plan deferrals. Plan assets may not be used to pay for any such incentives.
- Collective Investment Trusts in 403(b) Plans: At long last, SECURE 2.0 amends the Tax Code to permit 403(b) plan participants to invest in collective investment trusts (CITs). Importantly, note that this change will not become practically available until securities laws are changed to also permit CITs in 403(b) plans.
- Coverage of Long-Term Part-Time Employees:This change doesn’t really “become effective” in 2023. The initial SECURE Act added a requirement that long-term part-time employees become eligible to make deferrals upon being credited with 500 hours of service in at least three consecutive years. SECURE 2.0 shortens that measuring period to two years. Although the coverage rule does not become effective until 2025, it counts service beginning in 2023. As a result, employers will be well-served to ensure they are counting hours of part-time employees beginning now.
- Disaster, Terminal Illness, and Birth/Adoption Distributions: SECURE 2.0 tweaks rules applicable in these situations. It codifies rules governing plan distributions and loans in the context of a qualified federally declared disaster, provides an exemption from the 10% early withdrawal penalty in the case of a terminal illness, and establishes a three-year repayment deadline for a qualified birth or adoption distribution (in order for such amount to qualify as a rollover distribution).
- Increased Access to Lifetime Income:Before SECURE 2.0, RMD rules limited the complexity of in-plan annuity options. SECURE 2.0 relaxes those limits and frees up plans to offer annuities that provide additional types of payments (such as lump sums). In addition, SECURE 2.0 will increase the appeal of “qualified longevity annuity contracts” (QLACs) by eliminating the 25% limit and increasing the dollar limit from $125,000 to $200,000.
- Unenrolled Participants: As a general rule, eligible employees are considered to be plan “participants” even when choosing not to actively participate. As such, they must receive all communications required to be provided to participants under the Tax Code and ERISA. SECURE 2.0 amends the Tax Code and ERISA to lessen the burden for communicating with “unenrolled participants”; they now must simply receive an annual notice of eligibility to participate during an annual enrollment period.
- Expanded Correction Options: The IRS amended its correction program – the Employee Plans Compliance Resolution System or “EPCRS” – in recent years to: (i) provide safe harbors for correcting automatic enrollment and other employee deferral failures; and (ii) seek input regarding potential guidance relating to a plan fiduciary’s obligations to pursue and collect overpayments to participants. SECURE 2.0 codifies a relaxed safe harbor that does not require a corrective contribution for missed deferrals (but does require a participant notice and any missed matching contributions, plus earnings). It also provides extensive guidance regarding responsibilities following overpayments.
Effective in 2024
Plan sponsors have this year to prepare for the following changes becoming effective in 2024:
- Matching Student Loan Debt Repayments: This is a big one that merits more discussion throughout the year. In short, SECURE 2.0 allows an employer the option of treating student loan payments as if they were employee deferrals. This would effectively permit participants to pay down student loan debt without missing out on the retirement plan matching contribution.
- Emergency Savings Accounts: This is another big one that will generate a lot of additional discussion. SECURE 2.0 allows employers to amend their plans to include an “Emergency Savings Account” or “ESA”. Employees could make after-tax contributions up to $2,500. SECURE 2.0 would require frequent access (requiring that participants be allowed to take at least one ESA distribution per month and prohibiting fees on the first four ESA distributions in a year) and would permit employers to automatically enroll participants in the ESA program (up to 3% of compensation).
- Higher Mandatory Cash-Outs: SECURE 2.0 raises the threshold for small account mandatory cash-out distributions from $5,000 to $7,000.
- Emergency Withdrawals: A participant may elect a penalty-free withdrawal of up to $1,000 for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” The participant may repay the distribution within the subsequent three years and may only receive such a penalty-free withdrawal once in a three-year period if not repaid.
- Domestic Abuse Distributions: Following domestic abuse, participants may receive penalty-free distributions up to the lesser of $10,000 (indexed for inflation) or 50% of the participant’s vested account balance.
Effective in 2025 and Beyond
We have some time before the following changes become effective, but these seem to be particularly noteworthy:
- Increased Catch-Up Contributions: Starting in 2025, participants between age 60 and 63 may make larger catch-up contributions. The ceiling will increase to the greater of $10,000 or 150% of the 2024 catch-up amount.
- Roth Catch-Up Contributions: Also starting in 2025, catch-up contributions must be made on a Roth basis for any participant whose prior year compensation exceeded $145,000 (adjusted for inflation). This will require some payroll programming adjustments for many employers.
- Direction to Agencies: SECURE 2.0 includes many directives for the DOL or Treasury to examine current laws and regulations, and to explore potential changes. Among the noteworthy are directives relating to the consolidation of notices, pension benefit statements, e-delivery of statements, updating RMD regulations to permit partial annuitization, and the creation of an online searchable “Lost and Found” database. None of that guidance is imminent, but could indeed provide some eventual benefits in streamlining plan administration and helping participants to keep track of retirement plan accounts.
We set out to be brief with this summary. As one can see, that’s no easy task. In the upcoming weeks, we will continue to focus on the SECURE 2.0 provisions most likely to impact plan sponsors and participants in 2023. We again invite you to register for this month’s Fiduciary 15 webinar, which will provide a 15-minute deeper dive on the provisions most critical at this time.
– Matthew Eickman, J.D., AIF®