16 Feb SECURE 2.0: A Summary of Key Changes Impacting Employer-Provided Retirement Plans
President Biden signed the 2023 Consolidated Appropriations Act (CAA) into law on Dec. 29. The law, which passed the House and Senate on Dec. 23 and Dec. 22, respectively, contains significant changes to employer-provided retirement plans and individual retirement plans, referred to in the CAA as SECURE 2.0 Act of 2022 (SECURE 2.0). These provisions largely build upon the changes made under the SECURE Act, which was signed into law on Jan. 1, 2020. This article addresses some of the key provisions under SECURE 2.0 that will impact employer-provided retirement plans.
Changes to Required Minimum Distributions
- For calendar year 2023, the required minimum distribution (RMD) age increases to age 73 for a person who attains age 72 after Dec. 31, 2022 and age 73 before Jan. 1, 2033. It will increase again to age 75 in 2033 for an individual who attains age 74 after Dec. 31, 2032.
- Starting in 2024, Roth accounts in employer-sponsored plans, such as 401(k) plans, will be exempt from the RMD rules while the participant is alive.
- Beginning after the effective date of the CAA, the excise tax imposed on participants for failing to take an RMD will decrease from 50% to 25%, with a further reduction to 10% if corrected within a two-year correction window.
- The CAA will allow a spousal beneficiary of an employer-provided plan benefit to elect to be treated as an employee for purposes of RMDs, and if the spouse is the sole designated beneficiary of the participant’s account, the rate of distributions will be determined under the uniform life table.
Increase to Catch-up Contribution Limits
- Beginning in 2025, catch-up contributions for participants between the ages of 60 and 63 in non-SIMPLE plans will increase to the greater of $10,000 or 150% of the regular catch-up amount. Further, starting in 2024, all catch-up contributions to non-SIMPLE plans must be Roth contributions for participants with compensation equal to or in excess of $145,000. Beginning in 2025, the catch-up contribution limit for participants between the ages of 60 and 63 in a SIMPLE plan will increase from $3,000 to the greater of $5,000 or 150% of the regular catch-up amount.
403(b) Plans
- The CAA will conform the current hardship distribution rules for 401(k) plans to 403(b) plans.
- 403(b) plans will now be allowed to invest in collective investment trusts (CIT).
- Beginning in 2023, 403(b) plans can join a multiple employer plan (MEP) or pooled employer plan (PEP).
Roth Elections for Matching Contributions
- Effective immediately, participants may make a Roth election to employer matching contributions.
New 401(k) and 403(b) Plans Must Include Automatic Enrollment and Automatic Escalation
- Beginning in 2025, most new 401(k) and 403(b) plans must meet the requirements for an eligible automatic contributions arrangement (EACA), including automatic enrollment with a default rate of between 3% and 10% with a 90-day unwind feature, and automatic escalation of 1% per year up to maximum of at least 10%.
Creation of a New Retirement Savings Lost-and-Found Data Base
- To better locate lost plan participants, the CAA directs the Department of Labor, within two years from its effective date, to form an online searchable database to gather information to assist participants and beneficiaries with locating their retirement plan benefits.
Increased Dollar Threshold for Mandatory Distributions
- For distributions after Dec. 31, 2023, the involuntary distribution threshold will increase from $5,000 to $7,000.
Student Loan Repayments Treated as Elective Deferral Contributions
- Beginning in 2024, employers can make matching contributions based on an employee’s qualified student loan payments, including under a safe-harbor 401(k) plan.
Emergency Withdrawals
- Beginning in 2024, a participant may make a withdrawal of up to $1,000 per year from their retirement account for certain emergencies. The withdrawal will be taxable and may be repaid within three years, but it will not be subject to the 10% penalty for early withdrawals. Only one withdrawal is permitted per the three-year repayment period if the first withdrawal has not been repaid.
Creation of “Pension Linked Emergency Savings Accounts”
- Beginning in 2024, the CAA allows employers to create an Emergency Savings Account (EAS) as part of a defined contribution plan. For non-highly compensated employees, employers may enroll such individuals in an EAS up to 3% of their compensation, but maximum contributions cannot exceed $2,500, which is indexed for inflation. All contributions must be made on an after-tax basis. Each month, participants may take withdraws from their EAS and the first four withdrawals for a year cannot be subject to distribution fees.
Changes to Long-Term, Part-Time Employees
- The CAA modifies the measuring period for long-term, part-time employees from three years to two years. Currently, employees who work at least 500 hours per year for at least three consecutive years with the employer and satisfies the minimum age requirement must be permitted to make 401(K) plan contributions. The CAA extends the long-term, part-time employee provision to 403(b) plans that are subject to ERISA.
Expansion of EPCRS
- The CAA expands the IRS self-correction program to allow certain inadvertent failures to be corrected at any time. Currently, plan sponsors can only correct so-called significant failures within three years from the date of the failure. This change will take effect upon the effective date of the CAA.
Recovery of Retirement Plan Overpayments
- Effective upon enactment, qualified retirement plans will not be disqualified if the plan fails to recover an inadvertent benefit overpayment or otherwise amends the plan to increase the benefit. There is also fiduciary relief for the employer’s failure to make the plan whole. Plans are limited in their ability to offset future benefits to recover the overpayment and to recover the overpayment directly from the participant.
Expansion of 1042 Elections
- Beginning in 2028, owners of an S corporation may defer recognizing taxable income on the sale of their company to an ESOP that owns at least 30% of the corporation’s stock if the sales proceeds are reinvested into qualified replacement property. Unlike with C corporations, however, only 10% of the sale proceeds of the sale to an S corporation ESOP may be deferred.
Enhanced Tax Credits for New Smaller Plans
- Starting in 2023, employers with 50 or fewer employees, can qualify for a start-up tax credit of 100%, which was previously 50%.
Changes to Family Attribution Rules
- Beginning in 2024, the spousal attribution rules will not apply to spouses with separate businesses in community property states. This change will affect controlled groups rules, which can be a complex analysis for individuals who own multiple trades or businesses.
Small Financial Incentives for Contributing to a 401(k) or 403(b) Plan
- For plan years beginning after enactment of the CAA, participants in a 401(k) pr 403(b) plan may receive de minimis financial incentives, not paid with plan assets, for contributing to the plan.
Generally, the majority of these changes will not require retirement plans to be formally amended until the end of 2025. Additionally, SECURE Act 2.0 has also extended certain amendment deadlines for changes made under the SECURE Act.
By Seth I. Corbin, Michael G. McNally and Sheldon S. Miles of Fox Rothschild