SECURE 2.0 Act of 2022 (the "Act") was signed into law by President Biden on December 29, 2022 (the date of enactment), as part of the larger government funding bill. The Act makes numerous changes affecting retirement plans. This article provides an overview of the changes that we believe are of most interest to larger plan sponsors. Any plan amendments needed as a result of these changes must be adopted by the last day of the 2025 plan year (2027 for collectively bargained and governmental plans), unless extended by the Department of Labor (DOL) or the Internal Revenue Service (IRS).
Changes Affecting All Retirement Plans
- Increase to Cashout Limit: Starting January 1,
2024, a plan may increase its mandatory cashout limit from $5,000
to $7,000.
- Delayed Amendment Deadline for Benefit Increases: Under current rules, if a plan sponsor wishes to amend its retirement plan to increase benefit accruals or contributions, the amendment must be adopted before the end of the year in which the increase is effective. For plan years beginning after December 31, 2023, the Act delays the amendment deadline for such increases, other than increases in matching contributions, until the employer's tax filing deadline with respect to the year in which the increase is effective.
Changes to Required Minimum Distribution Rules
- RMD Age Increases, Again: The original SECURE
Act in 2019 increased the required minimum distribution (RMD) age
from 70.5 to 72. The Act again increases the RMD age as follows:
for individuals turning age 72 after December 31, 2022 and age 73
before January 1, 2033, the RMD age is 73. For those turning age 74
on and after January 1, 2033, the RMD age is 75. Note that, at the
end of this period, when the RMD age increases from 73 to 75, there
appears to be overlapping RMD ages for participants born in 1959.
We expect that this will be corrected at some point in a technical
amendment.
- RMD Excise Tax Decreases: Currently, an
individual who fails to take their RMD from a retirement plan is
subject to an excise tax of 50% of the RMD amount that should have
been distributed. Effective beginning in 2023, the excise tax is
reduced to 25%, and is further reduced to 10% if the individual
receives all of their past-due RMDs and files a tax return paying
such tax before receiving notice of assessment of the RMD excise
tax and in all events within two years after the year of the missed
RMD.
- No Mandatory RMDs from Roth Accounts: Starting with RMDs required in 2024 (except RMDs due by April 1 for those reaching their RMD age in the prior year), RMDs are no longer required to be made from a designated Roth account maintained under a 401(k), 403(b) or governmental 457(b) plan to a participant during the participant's lifetime. The RMD rules applicable upon a participant's death still apply.
Changes Affecting Defined Contribution Plans (Including 401(k) Plans)
- Auto-Enrollment Required for Most New Plans:
For most 401(k) and 403(b) plans that are newly established after
the Act's effective date, the plan must provide for automatic
enrollment of newly eligible employees at a rate of at least three
percent of pay, and provide an annual automatic increase of at
least one percent until the participant reaches a contribution
level of at least a 10% (but not more than 15%) of pay, starting
with the 2025 plan year. Certain exceptions apply to governmental
plans, plans of small businesses (those with 10 or fewer employees)
and plans of new employers (those in business less than three
years).
- Catch-Up Contributions Modified: The Act made
two changes affecting catch-up contributions. First, starting in
2025, a participant who is age 60, 61, 62 or 63 can make catch-up
contributions equal to the greater of $10,000 or 150% of the
regular catch-up limit. The $10,000 amount will be indexed for
inflation. In addition, starting in 2024, catch-up contributions
made by participants who were paid compensation by the plan sponsor
of $145,000 (indexed for inflation) or more in the prior year must
be made on a Roth basis.
- Employers May Match Student Loan Payments:
Currently, an employer may choose to make an employer contribution
(often referred to as match, but technically not a
matching contribution) with respect to student loan payments
through a somewhat convoluted approach described in an IRS private
letter ruling. The Act amends the Internal Revenue Code to
specifically permit an employer to make matching contributions
under its defined contribution plan (including a 401(k), 403(b) or
governmental 457(b) plan) on certain qualified higher education
loan repayments made by its employees, as if such loan repayments
had instead been contributed to the plan. The new rules are
effective for 2024 and later plan years.
- Employer Roth Contributions Allowed: Effective
immediately, an employee may elect to have employer matching or
non-elective contributions made on a Roth basis, to the extent
permitted by a plan. This avoids an employee have to elect an
in-plan Roth conversion after such contributions have been made to
the plan, and potentially have to pay a small amount of tax on any
earnings that have accumulated on such amounts prior to their
in-plan conversion.
- Mandatory Participation of Part-Time
Employees: Under the SECURE Act of 2019, defined
contribution plans (other than collectively bargained plans) that
permit employee elective deferrals were required to allow part-time
employees who completed 500 hours in each of three consecutive
years to begin participating in the plan, starting in 2024. The Act
changes that requirement to only two consecutive years of 500
hours, effective for plan years beginning in 2025. ERISA-governed
403(b) plans are subject to these same requirements.
- De Minimis Financial Incentives Permitted:
Under current law, the only incentive that an employer may provide
to an employee to encourage the employee to enroll in the
employer's 401(k) or 403(b) plan is a matching contribution
under such plan. Starting with the 2023 plan year, an employer may
provide a de minimis financial incentive, not paid for with plan
assets, to encourage employees to enroll in the plan. The Act does
not define what de minimis means, and the Senate summary of the Act only uses the phrase
"such as low-dollar gift cards" without further
explanation.
- Changes Related to Withdrawals: The Act made
several changes with respect to the withdrawal provisions
applicable to retirement plans, including:
- Starting in 2024, a participant who withdraws up to $1,000 (or such smaller amount that leaves at least $1,000 of vested benefits remaining in the account after the withdrawal) and certifies that it is for a personal or family emergency, may avoid the 10% early withdrawal tax on such amount and may repay such amount to the plan within three years. Only one such withdrawal is permitted per year, and no additional emergency withdrawals may be made within three years unless the participant has either repaid the prior withdrawal or has contributed at least an amount equal to the prior withdrawal. The distribution is not eligible for rollover. In addition, a plan sponsor may amend their plan to permit an in-service withdrawal for this circumstance. The limits apply across all plans maintained within a single controlled group.
- Starting in 2024, a participant who withdraws up to the lesser
of $10,000 (indexed for inflation) or 50% of their vested balance
and certifies that they have been the victim of domestic abuse by a
spouse or domestic partner within the prior one year, may avoid the
10% early withdrawal tax on such amount and may repay such amount
to the plan within three years. The distribution is not eligible
for rollover. In addition, a plan sponsor may amend their plan to
permit an in-service withdrawal for this circumstance. The
distribution limit applies across all plans maintained within a
single controlled group.
- Under current law, a participant who takes a withdrawal for
qualified birth or adoption expenses may repay such withdrawals to
the plan at any time. For withdrawals taken starting following the
date of enactment of the Act, the repayment period is limited to
three years. For withdrawals that have already been taken, the
repayment period ends December 31, 2025.
- Effective for plan years beginning after the date of enactment,
an administrator of a Code Section 401(k), 403(b) or 457 plan that
offers hardship withdrawals may rely on an employee's
certification as to the hardship event and the amount needed for
the withdrawal. Under current regulations, the employer could rely
on the employee's certification that the employee had
insufficient cash or other liquid assets reasonably necessary to
meet the end, but a certification as to the existence of the event
itself or the amount needed was not clearly permitted, although the
IRS has informally indicated its comfort with such
certifications.
- Effective immediately, withdrawals taken from a plan by a
participant who has been determined by their physician as being
terminally ill will be exempt from the 10% tax on early
withdrawals, and may be repaid to the plan within three years.
Unlike some of the other new withdrawal provisions, the Act does
not specifically permit a plan to provide for withdrawals in this
circumstance from a participant's elective deferral or Roth
accounts, although profit-sharing accounts could be available for
an in-service withdrawal in this instance if the plan so
provides.
- Effective for federal disasters occurring on or after January
26, 2021, if a participant lives in a federal disaster area and
suffers an economic loss in connection with the disaster, may make
a withdrawal of up to $22,000 within 180 days after the disaster,
without being subjected to the 10% early withdrawal tax. The
participant may repay such withdrawal to the plan within three
years. A plan sponsor may also amend their plan to permit an
in-service withdrawal for this circumstance. The distribution limit
applies across all plans maintained within a single controlled
group.
- Effective for federal disasters occurring on or after January
26, 2021, if a participant took a plan withdrawal within 180 days
prior to a federal disaster in order to buy or construct a home as
a first-time homebuyer, but was unable to do so because the home
was in a qualified disaster area, the participant may repay that
distribution to the plan within 180 days after the federal
disaster.
- Effective with the 2024 plan year, the hardship withdrawal rules for 403(b) plans are aligned with those of 401(k) plans.
- Loans Related to Federal Disasters: The Act increases the limits on loans taken from a defined contribution plan to the lesser of $100,000 or 100% of the vested account balance if the loan is taken by a participant who lives in a federal disaster area, suffers an economic loss as a result of such disaster and takes the loan within 180 days after the disaster. In addition, for participants living in a federal disaster area and suffering an economic loss, plan loan payments that are due (whether under existing or newly-obtained loans) during the 180 days after the disaster may be delayed for one year and the five-year payment deadline can be extended accordingly. This provision is effective for federal disasters occurring on or after January 26, 2021.
- Plans May Offer Savings Account: The Act
permits a plan sponsor to amend its defined contribution plans to
add "pension-linked emergency savings accounts" starting
with the 2024 plan year. An employer may either allow employees to
choose to make contributions to the account, or automatically
enroll employees (at not more than a three percent of pay rate) in
the account, provided that highly compensated employees are not
permitted to have an emergency savings account. All employee
contributions must be made on a Roth basis and are capped such that
the balance in the employee's emergency savings account
attributable to the employee's contributions may not exceed
$2,500 (indexed for inflation); any contributions above that limit
may be deposited into the participant's regular Roth account
within the plan. Participants cannot choose how to invest the money
held in these accounts; rather, the contributions must be held in
cash, in an interest bearing account, or invested in a fund
designed to preserve principal, as selected by the plan sponsor.
Employees may make monthly withdrawals from the account. If the
employer makes matching contributions under the plan, the employer
must also match the amount contributed to the emergency savings
account at the same rate as the match is made on typical employee
deferrals. That match is contributed to the regular match account
under the plan, not the emergency savings account. Upon an
employee's termination, the balance of the emergency savings
account may either be transferred to a regular Roth account within
the plan or be distributed to the former employee.
- Reduced Notice Obligation for Unenrolled Participants: Effective with the 2023 plan year, a defined contribution plan does not violate ERISA if it fail to provide certain notices to individuals who are eligible, but not enrolled, in the plan, provided that individual was provided a summary plan description and any other required notice relating to initial eligibility and is given an annual reminder notice about their eligibility for the plan.
Changes Affecting Defined Benefit Pension Plans
- Lump Sum Notice: If a defined benefit pension
plan intends to offer a lump sum window to participants or
beneficiaries, then 90 days before the first day that a lump sum
can be elected, the plan sponsor must provide a written notice to
each individual about the lump sum window, including how the lump
sum will be calculated, what the monthly amount would be at normal
retirement age or as a currently payable annuity, that a commercial
annuity may cost more than the annuity available from the plan, and
the ramifications of electing the lump sum, among other items. In
addition, 30 days before the first day that a lump sum can be
elected, the plan sponsor must notify the DOL and the Pension
Benefit Guaranty Corporation (PBGC) of the total number of
participants and beneficiaries eligible for the lump sum window,
the length of the window, and a description of how the lump sum is
to be calculated, and provide a sample of the notice that was given
to participants and beneficiaries. The plan sponsor is also
required to send a second notice to the DOL and PBGC within 90 days
after the close of the lump sum window reporting how many
individuals took the lump sum option. This provision is not
effective until final regulations are issued.
- Changes to Annual Funding Notice: Under
current rules, a defined benefit pension plan is required to
provide participants with an annual funding notice, which
discloses, among other items, the plan's "funding target
attainment percentage." Starting with the 2024 plan year,
rather than disclosing that funding metric, the notice instead will
disclose the "percentage of plan liabilities funded." In
addition, the notice will also need to include the average return
on assets for the plan year, whether the assets are sufficient to
fund liabilities that are not guaranteed by the PBGC as well as
other information.
- Projected Credited Interest Rate for Cash Balance
Plans: Effective for 2023 and later plan years, for
purposes of testing whether a cash balance plan that provides
variable interest crediting rates satisfies the anti-backloading
rules of ERISA and the Code, the plan may use a reasonable
projection of such variable rate, not to exceed six percent. This
new provision will help cash balance plans provide larger benefits
to older, longer service workers.
- Termination of PBGC Variable Rate Premium Indexing: Starting with the 2024 plan year, the PBGC variable rate premium, which underfunded pension plans must pay, will change from an indexed amount to a flat $52 per $1,000 of unfunded vested benefits, which is the indexed amount for the 2023 plan year. Put differently, there will no longer be automatic increases in the PBGC variable rate premiums; rather, for such premiums to increase, Congress will need to act.
Changes Affecting Plan Corrections
- Recovery of Overpayments: Effective
immediately, several rules apply to the recovery of overpayments
made from retirement plans. First, a fiduciary is not considered to
have violated their fiduciary duty under ERISA, and a plan shall
not fail to meet the qualification requirements of the Internal
Revenue Code, if the fiduciary decides to not recover from the
recipient any inadvertent overpayments made from a retirement plan,
and in most cases, decides to not require the plan sponsor to
restore those overpayments to the plan. Second, if a fiduciary
decides to seek a return of the overpayment from the recipient,
then it is prohibited from charging interest, and if the recoupment
is to be accomplished from reducing non-increasing future periodic
payments, then the recoupment must cease once the amount is
recovered, no more than 10% of the amount owed may be recouped in a
single calendar year, and the periodic payment may not be decreased
to less than 90% of the amount otherwise payable by the plan. The
Secretary of Labor is directed to establish rules for recouping
overpayments from other forms of payment. Third, a fiduciary may
not threaten litigation as a means to recoup the overpayment,
unless the fiduciary determines that there is a reasonable
likelihood of success in such litigation, and except in limited
circumstances, a fiduciary may not engage a collection agency to
recover the overpayment. Fourth, overpayments made to a participant
may not be recouped after their death from a spouse or other
beneficiary, although presumably the fiduciary could still make a
claim against the participant's estate. Finally, any
overpayments that are more than three years old may not be
recouped, unless caused by the individual's fraud or
misrepresentation. If overpayments will be recouped, then the
recipient must have the right to dispute the recoupment pursuant to
the plan's ERISA claims and appeals procedures. If the
overpayment was rolled over and the recipient files a claim
disputing the overpayment, the plan seeking to recoup the
overpayment must notify the plan or IRA that received the rollover
of such dispute, and the receiving plan or IRA vendor must place a
hold on that money pending resolution of the dispute. The Act also
provides that inadvertent overpayments that are rolled over will no
longer be considered to be ineligible rollovers.
- Expansion of Correction of Plan Errors: Within
two years, the IRS is directed to revamp the Employee Plans
Compliance Resolution System (EPCRS), which is a program permitting
the correction of certain retirement plan operational and document
errors. The mandatory revamp includes permitting self-correction of
most errors, which will result in fewer errors needing to be filed
with the IRS for correction, and expansion of the self-correction
of certain loan errors. These changes will become effective once
published in updated EPCRS rules.
- Extension of Favorable Corrections for Auto-Enroll Plans: Currently, under EPCRS, if a plan has an auto-enrollment or auto-escalation feature and there is an operational error relating to such auto-enrollment or auto-increase (including implementing participant affirmative elections), the plan sponsor does not have to make a corrective contribution for the employee's missed deferrals if the error is corrected by 9½ months after the plan year in which the error occurs, or if earlier, shortly following the date the employee notifies the plan administrator of the error. This extended time period to make a correction without having to fund the missed deferrals expires under EPCRS on December 31, 2023. The Act makes this extended correction period permanent. Consistent with the current EPCRS rules, the plan sponsor will still have to fund the missing matching contributions (and related earnings) and provide a notice to the affected employee about the error.
Other Changes
- Paper Statements Required: Under current law,
defined contribution plans are generally required to provide
quarterly account balance statements and defined benefit plans are
generally required to provide a pension benefit statement once
every three years (unless the defined benefit plan provides an
annual notice about the availability of a pension benefit
statement). Under the Act, starting with the 2026 plan year, a
defined contribution plan must provide at least one of those
statements each year in a paper format, and a defined benefit plan
must provide at least one of those pension benefit statements every
three years in a paper format. Exceptions apply for plans that
deliver these statements in accordance with certain electronic
delivery requirements or if the recipient requests electronic
delivery.
- Lost Participant Database: Within two years following the date of enactment, the Secretaries of the DOL and the IRS are required to establish an online searchable database so that individuals can see if they have money owed under a retirement plan. Plan sponsors will be required to provide information needed to populate the database.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.