The SECURE 2.0 Act of 2022 (SECURE 2.0), passed by Congress just hours before the government shutdown as part the Consolidated Appropriations Act, 2023 and expected to be signed into law by President Joe Biden imminently, contains sweeping changes relating to qualified retirement plans.
What You Need to Know
1. Significant Changes
- increasing the age for required minimum distributions from age 72 to 73 in 2023 (for individuals who attain age 72 in 2023 or later) and to age 75 in 2033;
- eliminating required minimum distributions from Roth accounts in 401(k) and 403(b) plans for taxable years after December 31, 2023;
- permitting plans to make matching contributions with respect to certain student loan repayments after December 31, 2023;
- requiring catch-up contributions made after December 31, 2023, to be made on an after-tax Roth basis for participants whose prior year’s wages are $145,000 or more (subject to cost-of-living adjustments in subsequent years);
- increasing the catch-up contribution limit for participants who are ages 60 to 63 after December 31, 2024, to the greater of (a) $10,000 and (b) 150% of the indexed catch-up contribution limit for 2024 (for non-SIMPLE plans only), as adjusted annually;
- increasing the involuntary cash-out limit, which is the maximum benefit permitted to be distributed to a terminated participant without consent, from $5,000 to $7,000 after December 31, 2023;
- requiring most new 401(k) and 403(b) plans established on or after the date of enactment of SECURE 2.0 to automatically enroll employees and automatically escalate their contributions each year, effective after December 31, 2024;
- directing the Department of Labor to create a Retirement Savings Lost and Found no later than two years after date of enactment of SECURE 2.0 to help individuals locate their pension or 401(k) benefits; and
- changing the Saver’s Credit, effective after December 31, 2026, to a federal matching contribution that must be deposited into an individual’s retirement plan (or individual retirement account, as applicable).
2. Other Significant Provisions
Effective upon enactment:
- eliminates early withdrawal penalties for distributions to employees who are terminally ill and, for distributions of up to $22,000, to certain participants living in federally declared disaster areas;
- allows plans to permit participants to elect to have matching contributions or nonelective contributions be treated as after-tax Roth contributions; and
- allows pension plan fiduciaries to forego recovering inadvertent retirement benefit overpayments from participants.
Effective in 2023:
- reduces notices to unenrolled participants to only an annual reminder of plan eligibility, and any notice requested by the employee, for all defined contribution plans;
- permits plan administrators to rely on employee self-certifications regarding hardship distributions;
- allows employers to provide a “de minimis financial incentive”, such as a gift card, for contributing to a 401(k) or 403(b) plan;
- for employers with 50 or fewer employees, increases credits for plan startup costs from 50% to 100%, and adds an additional credit of up to $1,000 per employee with wages of $100,000 or less, as increased for cost of living (with a phased reduced credit for employers with more than 50 employees and not more than 100 employees); and
- creates a new employer tax credit for employers with defined contribution plans that provide certain favorable benefits to military spouses.
Effective in 2024:
- allows plans to permit domestic abuse victims to withdraw up to $10,000 without penalty, with repayment of such withdrawals permitted within three years;
- provides a 9-1/2 month grace period to self-correct reasonable administrative errors related to automatic enrollment and escalation;
- sets the variable-rate Pension Benefit Guarantee Corporation (PBGC) premium for underfunded single-employer plans at an unindexed rate of $52 per $1,000 of unfunded vested benefits;
- permits plans to allow a penalty-free emergency withdrawal of up to $1,000 annually with repayment permitted within three years (allowing only one withdrawal during that three-year period if the prior withdrawal has not been repaid);
- requires additional information to be included in defined benefit annual funding notices;
- permits a surviving spouse to elect to be treated as the deceased participant for required minimum distribution rules;
- permits an employer with no retirement plan to offer a “starter 401(k) plan” or safe harbor 403(b) plan requiring employees to be default-enrolled into the plan with automatic salary deferrals;
- allows plans to include a short-term emergency savings account for non-highly compensated employees funded with Roth contributions; and
- allows beneficiaries of 529 plans in existence for over 15 years to roll over certain amounts to Roth IRAs.
Effective in 2025:
- requires part-time employees who work at least 500 hours in two (rather than three under current law) consecutive years to be eligible to elect salary deferral contributions.
In addition, SECURE 2.0:
- allows penalty-free distributions of up to $2,500 a year for payment of certain long-term care insurance, effective for distributions made after three years following the date of enactment of SECURE 2.0;
- requires a plan to provide a paper benefit statement once a year for defined contribution plans, and once every three years for defined benefit plans unless a participant elects electronic delivery effective in 2026;
- clarifies that the permissible repayment period for birth or adoption distributions permitted under the 2019 SECURE Act is three years (and no later than December 31, 2025 for prior distributions); and
- requires the Department of Labor, the Department of the Treasury, and PBGC to undertake certain actions including (a) the three agencies’ preparing a joint report to Congress with recommendations for improving and simplifying reporting and disclosure requirements, (b) the Department of Labor developing a benchmark for fee disclosures that is a blend of broad-based securities markets for investment options that contain a mix of asset classes, (c) the Department of the Treasury expanding self-corrections under the Employee Plans Compliance Resolution System, and (d) the Department of Labor and the Department of the Treasury adopting regulations allowing the consolidation of defined contribution plan notices.
What You Need to Do
1. Determine which changes apply to your employee benefit plan and when they need to be implemented: Certain changes take effect upon enactment, so it is important for plan sponsors to determine as soon as possible whether immediate action will be required. Note that many changes do not become effective until after 2023.
2. Consider plan document amendments: Plan amendments made pursuant to SECURE 2.0 are not required until the last day of the first plan year beginning on or after January 1, 2025 (i.e., December 31, 2025, for calendar year plans), as long the plan is operated in compliance with any applicable changes. However, many plan sponsors may choose to make plan amendments sooner than this deadline to reflect recordkeeper changes and other discretionary changes that are required to be documented in the year in which they are implemented.
Because not all of the SECURE 2.0 changes are described in this alert, please contact us with questions regarding how the SECURE 2.0 changes affect your employee benefit plans.
Associate Joel Mackler contributed to this Sidley Update.
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