Increased Retirement Savings; Enhanced Self-Correction of Operational Failures; Decreased Costs to Implement a Plan
The SECURE 2.0 Act of 2022 (Act) was signed into law on December 29, 2022. The Act strives to increase retirement savings, improve retirement plan operation and correction rules, and decrease the cost of setting up a retirement plan. Plan amendments required by the Act generally are not due until the end of the first plan year beginning on or after January 1, 2025; however, plans must be operated in accordance with the effective date of each new provision. Following is a summary of some of the significant provisions that are most likely to affect our clients:
Automatic Enrollment/Auto Escalation
Effective for plan years beginning after December 31, 2024, new 401(k) and 403(b) plans must automatically enroll participants when they become eligible; employees may opt out of coverage. The initial automatic enrollment amount must be at least 3 percent but not more than 10 percent. Each year thereafter that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent.
All 401(k) and 403(b) plans in effect on the date of enactment are grandfathered; small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than three years), church plans, and governmental plans are exempted from this provision.
Required Minimum Distributions (RMDs)
The RMD age will increase in 2023 and again in 2033. The SECURE Act of 2019 increased the required minimum distribution age from 70 ½ to 72. SECURE 2.0, Section 107 further increases the required minimum distribution age to 73 starting on January 1, 2023, and again increases the age to 75 starting on January 1, 2033.
Starting in 2024, Roth accounts will be exempt from the RMD rules while the participant is alive.
Section 302 reduces the penalty for failure to take required minimum distributions from 50 automatically to 25 percent, with a potential reduction to 10% if it is corrected by the end of the second year after the RMD should have been taken.
Catch-up Contributions
The catch-up contribution limit will increase for taxable years beginning after December 31, 2024. Under current law, employees who have attained age 50 are permitted to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2022 and 2023 is $6,500, except in the case of SIMPLE plans for which the limit is $3,000. Effective for taxable years beginning after December 31, 2024, SECURE 2.0, Section 109 increases the limits for individuals who have attained ages 60, 61, 62 and 63 to the greater of $10,000 or 50 percent more than the regular catch-up amount. The increased amounts are indexed for inflation after 2025.
Starting in 2024, all catch-up contributions must be Roth contributions for participants with compensation equal to or in excess of $145,000 in the prior year.
Changes to the Long Term, Part Time (LTPT) Employee Rules
The Act modifies the eligibility measuring period for long-term, part-time employees from three years to two years and extends the long-term, part-time employee provisions to 403(b) plans that are subject to ERISA.
The SECURE Act required employers (except collectively bargained plans) to allow long-term, part-time workers to participate in the employers’ 401(k) plans, which involved a dual eligibility requirement under which an employee must complete either 1 year of service (with the 1,000-hour rule) or 3 consecutive years of service (where the employee completes at least 500 hours of service).
SECURE 2.0, Section 125 reduces the 3-year eligibility period for LTPT employees to 2 years, effective for plan years beginning after December 31, 2024. Section 125 also provides that pre-2021 service is disregarded for vesting purposes, just as such service is disregarded for eligibility purposes under current law, effective as if included in the SECURE Act to which the amendment relates. Additionally, top heavy status is not triggered by the lack of a safe harbor employer contribution to he LTPT employees. This provision also extends the long-term part-time coverage rules to 403(b) plans that are subject to ERISA.
Student Loan Payments
For plan years beginning after December 31, 2023, employers may make matching contributions under a 401(k) or 403(b) plan on employees’ qualified student loan payments. Employees who receive such matching contributions are required to certify annually to the employer that such payment has been made on such loan.
Withdrawals for Certain Emergency Expenses
Effective after December 31, 2023, Section 115 of the Act provides an exception from the 10% tax on certain early distributions that are used for emergency expenses which are unforeseeable or immediate family needs relating to personal or family emergency expense. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within 3 years. No further emergency distributions are permissible during the 3-year repayment period unless repayment occurs.
Plan administrators generally may rely upon a participant’s self-certification; however, the IRS is authorized to issue guidance to address situations in which a plan administrator has actual knowledge to the contrary or there are employee misrepresentations.
Increased Dollar Threshold for Mandatory Distributions
Effective January 1, 2024, the involuntary cash-out distribution threshold will increase from $5,000 to $7,000.
Under current law, an employer is permitted to distribute a participant’s account balance without participant consent if the balance is under $5,000 and the balance is immediately distributable (e.g., after a termination of employment). Current law also requires an employer to roll over this distribution into a default IRA if the account balance is at least $1,000 and the participant does not affirmatively elect otherwise. Effective January 1, 2024, the involuntary cash-out distribution threshold will increase from $5,000 to $7,000.
Pension Linked Emergency Savings Accounts (ESA)
Beginning in 2024, DC plans may include an ESA for non-highly compensated employees; accounts are part of the plan document but accounted for separately. Employers may automatically opt their employees into these accounts, and all contributions must be made on an after-tax basis.
Secure 2.0, Section 127 provides employers the option to offer to their non-highly compensated employees’ pension-linked emergency savings accounts. Employers may automatically opt employees into these accounts at no more than 3 percent of their salary, and the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer). Once the cap is reached, the additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance attributable to contributions falls below the cap. Contributions are made on a Roth-like basis and are treated as elective deferrals for purposes of retirement matching contributions with an annual matching cap set at the maximum account balance – i.e., $2,500 or lower as set by the plan sponsor. The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan (if they have one) or IRA.
Recovery of Retirement Plan Overpayments
Effective immediately, retirement plan fiduciaries have the discretion to not recoup overpayments mistakenly made to retirees.
Sometimes retirees mistakenly receive more money than they are owed under their retirement plans. These mistakes cause problems when they occur over time, and plan fiduciaries later seek to recover the overpayments from unsuspecting retirees. When an overpayment has lasted for years, plans often compel retirees to repay the amount of the overpayment, plus interest, which can be substantial. Even small overpayment amounts can create a hardship for a retiree living on a fixed income. To alleviate the situation for both parties, Section 301 allows retirement plan fiduciaries the latitude to decide not to recoup overpayments that were mistakenly made to retirees.
If plan fiduciaries choose to recoup overpayments, limitations and protections apply to safeguard innocent retirees. Specifically, plan fiduciaries can seek the return of overpayments if:
- no interest or other costs apply to the overpayment;
- overpayments are recouped by offsetting annuity payments;
- no more than a 10% reduction applies; and
- no recovery from a surviving spouse or other beneficiary is permitted.
Further, overpayments are subject to a 3-year limitations period, so the return of an overpayment cannot be sought if the participant or beneficiary is not notified in writing within 3 years after the overpayment initially occurred. These parameters protect both the benefits of future retirees and the benefits of current retirees. Rollovers of the overpayments also remain valid.
Enhancement of 403(b) Plans
Hardships: The Act conforms the current hardship distribution rules for 401(k) plans to 403(b) plans. It provides that in addition to elective deferrals, a 403(b) plan may distribute, on account of an employee’s hardship, qualified nonelective contributions, qualified matching contributions, and earnings on any of these contributions (including on elective deferrals)
Investments: Under current law, 403(b) plan investments are generally limited to annuity contracts and publicly traded mutual funds. This limitation cuts off 403(b) plan participants – generally, employees of charities and public schools, colleges, and universities– from access to collective investment trusts, which are often used by 401(a) plans to expand investment options for plan participants at a lower overall cost. Section 128 would permit 403(b) custodial accounts to participate in group trusts with other tax-preferred savings plans and IRAs
LTPT: The long-term, part-time employee provision is extended to 403(b) plans that are subject to ERISA
MEPs and PEPs: Beginning in 2023, 403(b) plans can join a multiple employer plan (MEP) or pooled employer plan (PEP)
Annual Audits for Groups of Plans
The Act clarifies that each plan filing under a group of plans (added by the SECURE Act) is required to submit audited financial statements if it has 100 participants or more. Plans with fewer than 100 participants that are included in a group of plans are not required to submit audited financial statements.
Enhanced Self-Correction Options
Mistakes happen, and honest mistakes are now eligible for self-correction regardless of their significance or when they happened, subject to certain parameters. Stay tuned for our next blog explaining how SECURE 2.0 has enhanced self-correction options.
