SECURE 2.0 FAQs

The SECURE 2.0 Act of 2022 will expand the retirement plan toolkit available to employers that desire to enhance the plans available for their employees. As the new provisions become effective and as employers plan for the future, questions naturally arise. This month’s newsletter provides brief answers to 20 of the most frequently asked questions. Please be sure to register for this month’s ERISA Attorney Talk webinar, in which QPA’s four ERISA Attorneys will take a deeper dive on these questions and more.

Required Minimum Distributions (RMDs)

1. Who does the new rule impact in 2023? In 2023, the new rule – which further delays the RMD trigger to age 73 – could only impact a participant who reaches age 72 in 2023. (Keep in mind, of course, that most – but not all – plan documents would only impose the age trigger if the participant had already terminated employment. That aspect remains unchanged.) A participant who had reached age 72 before 2023 remains under the prior rule. The age 73 trigger will remain in effect until 2033, at which point it increases to age 75.
2. This sounds like it will require a plan amendment? For calendar year plans, SECURE 2.0 permits plan amendments to be adopted as late as December 31, 2025. We anticipate that many document providers will await additional guidance from the Internal Revenue Service (IRS) before providing the appropriate plan amendments. Stay tuned.

Automatic Enrollment and Escalation

3. This is now required? Not for existing plans. Beginning in 2025, SECURE 2.0 requires automatic enrollment and escalation for new 401(k) and 403(b) plans established after December 29, 2022 (with exceptions for small business, new plans, and church and government plans).
4. So this is irrelevant for existing plans? Perhaps. However, over time, this requirement for new plans will become more relevant because it will further contribute to the marketplace expectation that plan sponsors use automatic enrollment and automatic escalation to enhance their employees’ retirement prospects. If your existing plan doesn’t include those automatic features, Congress essentially said: we won’t require you to use them, but we really think you should.

Roth Employer Contributions

5. All employer contributions will be Roth contributions? No, but this is a common misperception. SECURE 2.0 simply provides employers the option of permitting participants to elect for employer contributions to be made on a Roth basis. This means it’s optional at two levels: (1) the plan sponsor level; and, then (2) on a participant-by-participant basis.
6. SECURE 2.0 requires that these amounts be fully vested. How does that work with the plan’s vesting schedule? Great question. We anticipate that the IRS will release responsive guidance later this year. It will help us to understand whether the answer is: (i) you must fully vest these amounts and ignore the plan’s vesting schedule; (ii) a participant cannot make this election until he or she would be fully vested; or (iii) something else.
7. Is this option available now? Technically, yes. Practically, probably not. There are a number of unanswered questions, including the vesting issue identified above. Recordkeepers, TPAs, and payroll providers need to update their programming. Recordkeepers and TPAs also need to decide how much flexibility they’ll provide employers and participants. As a result, most service providers have not yet made this available to employers.

Matching Student Loan Debt Payments

8. We now have to match student loan debt payments? Nope. This will be an option for plan sponsors beginning in 2024.
9. If we want to do this, where will the matching contributions go? They’ll go into the plan, just as ordinary matching contributions would. In essence, the new law allows an employer to treat a participant’s student loan debt repayments as if they were salary deferrals into the plan.
10. Wait, so why does this help? When recent graduates enter the workforce, they may face an “either-or” scenario when deciding whether to aggressively pay down student loan debt or to make plan deferrals in order to capture a match. In some situations, they may not have a choice; they may feel like they don’t have the budgetary flexibility to begin to save. This allows such an individual to pay down student loan debt without entirely missing out on the matching contribution.
11. How will we know about those payments? SECURE 2.0 will permit plan participants to self-certify the amount of their student loan debt repayments. However, service providers are working together to figure out a number of logistical issues, including potential connectivity with lenders, facilitating more frequent reporting of repayments, and determining the frequency of corresponding matching contributions.

Emergency Savings Accounts (ESAs)

12. What is this? It will feel a bit like a savings account within the retirement plan. Participants will make after-tax contributions into an account with a ceiling of up to $2,500. An employer may set a lower ceiling. SECURE 2.0 limits the permissible investment options to capital preservation vehicles, such as a money market account.
13. Is that $2,500 an annual limit? No. It’s the ceiling on the account. Said more precisely, once a participant hits the ceiling, he or she cannot make additional contributions into the account. IRS guidance will likely clarify how modest earnings will impact the application of the ceiling.
14. These are after-tax contributions that may not be invested aggressively. Why wouldn’t a participant simply put money into a savings account at a local bank? The ESAs offer numerous advantages, including: (i) the convenience of payroll deduction; (ii) centralized account balance reporting on the recordkeeper’s website and app; and (iii) the plan’s matching contribution applying to these amounts.
15. Will all plans include this option when it becomes available in 2024? Probably not. It’s going to take some time before the recordkeepers and TPAs modify their systems to accommodate ESAs. They’re not terribly motivated to prioritize ESAs because the ESAs will hold small amounts, require separate investment election capability, must permit at least one withdrawal per month, and must provide for at least the first four withdrawals to be free each year. At least one national recordkeeper has told plan sponsors that it will not be offering these in 2024. The better ones will, but it’ll take some time.

Catch-Up Contributions

16. When does the catch-up limit increase? The typical limit on catch-up contributions – which are available for participants who will reach age 50 by the end of the year – remains subject to annual cost-of-living adjustments, such as the 2023 increase from $6,500 to $7,500. Additionally, beginning in 2025, SECURE 2.0 increases the annual catch-up limit for any participant who reaches age 60, 61, 62, or 63 during the year.
17. What is the higher catch-up limit? In 2025, it will be the greater of two amounts: (i) $10,000; or (ii) 150% of the regular catch-up limit for 2024. This amount will be indexed for inflation in further years.
18. Catch-up contributions now must be Roth contributions? Not necessarily, but this will be the case for higher paid participants. Beginning in 2024, catch-up contributions must be made on a Roth basis for participants whose wages for the prior year exceed $145,000 (subject to future adjustments for inflation).
19. This sounds messy? Out of the gate, yes, it may be. The statute uses an odd definition of “wages” that requires additional clarification. It also begs questions regarding contributions that are not initially intended to be catch-up contributions, but are reclassified as such in order to address preliminary nondiscrimination testing failures. However, because this change is mandatory, expect it to be a priority for additional IRS guidance.

IRS Guidance

20. You’ve referenced IRS guidance multiple times above. What do you expect? In September of 2020, the IRS issued Notice 2020-68, which provided Q-&-A-style “grab-bag” guidance relating to the initial SECURE Act, which had passed in December 2019. Last month, we participated in multiple meetings with governmental officials who confirmed that the IRS is targeting a similar approach in 2023. With that in mind, the IRS has approached those interactions with the desire to hear of the most pressing questions that require practical guidance. Many of the questions and answers above are reflective of those interactions.

Again, please be sure to register for this month’s ERISA Attorney Talk. In addition, please visit the registration page for the 15^th Annual Qualified Plan Fiduciary Summit. The Summit agenda reflects that you’ll have the opportunity to hear from Fred Reish, the nation’s leading ERISA Attorney, as he provides additional commentary around SECURE 2.0.