U.S. IRS Provides Guidance on Certain SECURE 2.0 Provisions: Key Details to Know

The Internal Revenue Service (IRS) recently issued Notice 2024-2, which contains eagerly awaited guidance to tax-qualified retirement plans regarding the SECURE 2.0 Act of 2022 (SECURE 2.0). This overview summarizes this key guidance, including updated amendment deadlines, certain required actions that must be taken to comply with various SECURE 2.0 provisions, and discretionary actions that may be taken under SECURE 2.0.

Provisions Relating to Plan Amendments. The notice provides for the following extended deadlines for both required and discretionary retirement plan amendments:

• General Amendment Deadlines for Qualified Plans: December 31, 2026
• Amendment Deadline for Collectively Bargained Plans: December 31, 2028
• Amendment Deadline for Governmental Plans: December 31, 2029

Required Actions Under SECURE 2.0

Expanding Automatic Enrollment in Retirement Plans. SECURE 2.0 requires that employers with 401(k) and 403(b) plans established after December 29, 2022, automatically enroll participants in such plans, effective for plan years beginning after December 31, 2024. The notice provides guidance on which plans are subject to this requirement in general and specific guidance for plan mergers and spinoffs.

• Preenactment Status. Generally, the plan must be “established” before December 29, 2022 (a “pre-enactment” plan), to be excepted from the automatic enrollment requirement. A plan is considered “established” on the date that the plan terms setting forth the deferred arrangement are adopted initially, even if these terms become effective after the adoption date.
• Mergers. In the case of a merger of two preenactment plans, the merger will not affect the preenactment status of such plans. However, a merger of a “post-enactment” plan with a preenactment plan will not alter the postenactment status of the plan unless the merger is in connection with a transaction involving the plan sponsors and the preenactment plan is designated as the ongoing plan and certain other conditions are satisfied.
• Plan Spinoffs. If the plan from which the new plan was spun off was a preenactment single employer plan, then the spun-off plan is also treated as a preenactment plan. However, if the plan from which the new plan was spun off was a preenactment multiple employer plan maintained (i.e., maintained by more than one unrelated employer), then the spun-off plan is treated as a preenactment plan only if the original plan was treated as a preenactment plan of the employer sponsoring the spun-off plan.

Discretionary Actions Under SECURE 2.0

Small Immediate Financial Incentives for Contributing to a Plan. SECURE 2.0 enables employers to provide de minimis financial incentives, not paid for with plan assets, to employees to incentivize participation in their 401(k) or 403(b) plan. For example, an employer might offer all non-participating employees a $100 gift card if they enroll in the employer’s 401(k) plan by a specified date.  An incentive is de minimis if it does not exceed $250 in value, and a matching contribution of any amount cannot be considered de minimis. Moreover, such incentive can only be available to employees who have not already made a deferral election under the plan. The notice further clarifies that such incentive is not treated as a plan contribution. Such incentive is includible in the employee’s gross income and wages and is subject to withholding and reporting requirements for tax purposes unless another exception applies (e.g., under the de minimis fringe benefit rules).

Exceptions to Penalty on Early Distributions From Qualified Plans for Individuals With a Terminal Illness. SECURE 2.0 provides an exception to the 10% additional tax on an early distribution from a qualified retirement plan in the case of a distribution to a terminally ill individual, effective for distributions made after December 29, 2022. This provision permits a terminally ill employee to receive a distribution (a “terminal illness distribution”) on or after the date on which the employee has been certified as having a terminal illness. The notice offers further clarification on who qualifies as terminally ill and clarifies that there is no limit on the distribution amount an employee may receive. Under the notice, even if a plan does not provide for terminal illness distributions, the employee may treat an otherwise permissible in-service distribution for tax purposes as a terminal illness distribution if the applicable criteria are met. Last, the notice clarifies that a participant who is eligible for a terminal illness distribution must otherwise be eligible for a permissible in-service distribution from the plan, such as on account of a hardship or disability.

Changes in Accrual Rule Compliance for Cash Balance Plans. SECURE 2.0 alters the application of the interest crediting rate rules to cash balance plans, effective for plan years beginning after December 29, 2022. Cash balance plans (other than statutory hybrid plans) that provide for pay credits to participants that increase with a participant’s age or service and provide for a variable interest crediting rate no longer risk violating any accrual rules under the Internal Revenue Code (the Code) if the interest rate falls below a certain threshold. Accordingly, plans no longer need to provide for a fixed annual minimum interest crediting rate. A cash balance plan may be amended to affect future interest crediting rates as long as certain requirements stated in the Notice are satisfied.

Treatment of Employer Matching or Nonelective Contributions as Roth Contributions. SECURE 2.0 permits defined contribution plans to provide participants with the option of receiving matching contributions or nonelective employer contributions as Roth contributions, effective December 29, 2022. These contributions may be designated as Roth contributions only if the employee is fully vested in the matching/nonelective contribution at the time it is allocated to the employee. An employer may permit an elective contribution to be a Roth contribution without permitting a matching or nonelective contribution to be designated a Roth contribution.

Please contact a member of our team if you would like to discuss any of the guidance set forth in the notice. Sidley will provide guidance via additional client alert(s) on any additional guidance issued by the IRS relating to SECURE 2.0.

Knowledge management lawyer Katie Dean contributed to this Sidley Update.