The Consolidated Appropriations Act, 2023 (“CAA”), signed by the President into law on December 29, 2022, includes more than 90 provisions affecting retirement plans. That portion of the CAA is loosely referred to as “SECURE 2.0.”
SECURE 2.0 is a follow-up to the “SECURE Act” that was passed in 2019. The original SECURE Act made relatively few changes; most notably, increasing the required minimum distribution age from 70 1/2 to 72. SECURE 2.0 makes many more significant changes and provides plan sponsor employers with many new options. It will be important to operate plans in accordance with SECURE 2.0, and for employers to consider which, if any, of the new optional provisions to implement.
The following is a very brief high-level summary of some of the more relevant SECURE 2.0 provisions affecting existing qualified plans for awareness and consideration.
Effective Immediately (for calendar year plan years)
- The required minimum distribution age increases to age 73. There will be additional increases in 2033 and beyond.
- Hardship distributions may be self-certified by plan participants. Many plan sponsors (and recordkeepers) have been desiring this (and in many cases doing it anyway). This will make it easier for participants to obtain hardship distributions, which will result in plan “leakage,” but also provides plan sponsors with greater certainty from a compliance standpoint when approving hardship distributions. This provision is not required.
- Plans may allow participants to receive matching and nonelective contributions as Roth contributions.
- There are adjustments to the IRS’s correction program relative to qualification failures (the program is known as “EPCRS”). These changes appear quite valuable. Most significantly, the eligibility time period for “self-correcting,” as opposed to submitting a formal application to the IRS, is lengthened.
- There is a new exception to the 10% early distribution penalty for participants who are terminally ill. Interestingly, this does not create a new in-service distribution option.
- The original SECURE Act allowed plans to adopt a new in-service distribution event – qualified birth or adoption distributions (“QBADs”). Participants may repay QBADs to lessen the taxability of the distribution. SECURE 2.0 limits the repayment period to three years.
- Employers may provide participants with de minimus financial incentives to contribute to a plan (for example, gift cards).
- There are more permanent rules regarding distributions and loans in connection with federally declared disasters.
- Notice requirements are eased relative to those employees who are not active plan participants (that is, those employees who are not enrolled).
- Plans may allow matching contributions on student loan repayments. This provision formalizes IRS guidance that was issued a few years ago.
- Catch-up contribution limits may be increased to the greater of $10,000 or 150% of the regular limit for participants ages 60 to 63.
- Participants with compensation in excess of $145,000 making catch-up contributions must make those contributions as Roth contributions.
- Plans may allow participants to contribute to an emergency expense account, and to take limited distributions without as much restriction as exists for hardship withdrawals. The notion is to increase plan participation by making it easier for participants to access funds if need be.
- Plans may also allow for withdrawals of up to $1,000 per year in response to an unforeseen emergency. Unlike the above, this does not involve the establishment of a special emergency expense account. The distribution may be paid back and is not subject to the 10% early distribution penalty.
- The small balance cash-out limit may be raised from $5,000 to $7,000. This is, and always has been, an optional provision. That is, plans are not required to force out small balances when a participant terminates employment; however, most plans do in order to avoid losing track of participants and retaining responsibility for those funds.
- There is a new optional in-service withdrawal provision for victims of domestic violence. The amount is the lesser of $10,000 or 50% of the vested account. Such distributions are excepted from the 10% early distribution penalty.
- The original SECURE Act provided for plan eligibility for certain long time part-time employees. SECURE 2.0 decreases the time period for these employees to enter a plan. Some plans opted to eliminate part-time or temporary employee exclusions to avoid the administrative burden associated with this mandate. This updated provision may prompt more employers to make such a change. In the meantime, employers with plans with this exclusion should be counting hours for these employees and providing plan eligibility as appropriate.
- There will be a new notice requirement relative to lump sum distributions (which is the primary form of distribution for most plans). The Department of Labor is to prepare a model notice.
- There are modifications to the plan benefit statement requirements.
- The time period for making discretionary plan amendments (that is, amendments desired by an employer relative to design changes) is extended. Currently, it is the end of the plan year in which a change is made effective; as of January 1, 2024, it will be the employer’s tax filing date for the subject year.
- The Department of Labor is directed to create a database to assist in locating lost participants. This is helpful, as the lost participant issue has been a topic of much discussion in the past few years and additional guidance/assistance is needed.
- The current “saver’s credit” available to low to moderate income employees may be deposited as a matching contribution to plans willing to accept the contribution, as opposed to a tax refund.
The plan amendment deadline is not until December 31, 2025 (for calendar year nongovernmental plans), which is the same deadline for the original SECURE Act (and the “CARES Act”) amendments. While deliberation over optional provisions and implementation of mandatory provisions should commence now, actual amendments should be delayed until further guidance is issued (except for the CARES Act which should be acted on now even though the actual deadline is a ways off).
Please stay tuned, and do not hesitate to reach out for assistance or with any questions.
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