On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023 into law, which included the SECURE 2.0 Act of 2022 (“SECURE 2.0”). SECURE 2.0, which contains over 90 provisions and builds upon the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act of 2019”), makes significant changes to increase retirement plan participation and preserve retirement savings.
- Automatic Enrollment Required for New Retirement Plans (Section 101)
- Increased Age for Required Beginning Date for Required Minimum Distributions (RMDs) (Section 107)
- Increased Catch-Up Contribution Limit Applies at Ages 60-63 (Section 109)
- Allowing Matching Contributions for Student Loan Payments (Section 110)
- Tax Credit for Military Spouse Retirement Plan Eligibility and Employer Contributions (Section 112)
- De Minimis, Immediate Financial Incentives for Contributing to a Plan Permitted (Section 113)
- Withdrawals for Certain Emergency Personal Expenses (Section 115)
- Additional Nonelective Contributions to SIMPLE Plans Permitted (Section 116)
- Contribution Limit Increase for SIMPLE Plans (Section 117)
- Automatic Portability Transactions (Section 120)
- “Starter” 401(k) (and Safe Harbor 403(b)) Plans for Employers with No Retirement Plan (Section 121)
- Coverage of Part-Time Workers (Section 125)
- Emergency Savings Accounts Linked to Individual Account Plans (Section 127)
- 403(b) Plans may Participate in Group Trusts (Section 128)
- Recovery of Retirement Plan Overpayments (Section 301)
- Reduction in Excise Tax on Failure to Take RMDs (Section 302)
- Plan and Employer Obligations under the Retirement Savings Lost and Found Provision (Section 303)
- Increasing Dollar Limit for Involuntary Cashouts (Section 304)
- Expansion of EPCRS (Section 305)
- Eliminate “First Day of the Month” Requirement for Governmental 457(b) Plans (Section 306)
- Top-Heavy Rules and Otherwise Excludable Employees (Section 310)
- Recontribution of Qualified Birth or Adoption Distributions Limited to 3 Years Following Distribution (Section 311)
- Self-Certification of Deemed Hardship Distribution Conditions (Section 312)
- Withdrawals for Domestic Abuse (Section 314)
- Amendments to Increase Benefits for Prior Plan Year (Section 316)
- Retroactive First-Year Elective Deferrals for Solo 401(k) Plans (Section 317)
- Eliminating Notices to Unenrolled Participants (Section 320)
- IRS to Issue Model Forms for Rollovers (Section 324)
- No Pre-Death RMDs for Roth Accounts in an Employer Retirement Plan (Section 325)
- No Early Withdrawal Penalty for Terminal Illness Distribution (Section 326)
- Surviving Spouse Can Elect to be Treated as an Employee for RMD Rules (Section 327)
- Permitted Distributions for Qualified Federally Declared Disasters (Section 331)
- Purchase of Long-Term Care Contracts from Retirement Plan Distributions (Section 334)
- Paper Statements Required in Certain Cases (Section 338)
- Tribal Courts Authorized to Issue Qualified Domestic Relations Orders (Section 339)
- Consolidation of Defined Contribution Plan Notices (Section 341)
- Disclosures for Temporary Lump Sum Payment Option (Section 342)
- Defined Benefit Plan Annual Funding Notices (Section 343)
- Correction of Automatic Enrollment Failures (Section 350)
- SIMPLE and SEP Roth IRAs (Section 601)
- Hardship Distributions from 403(b) Plans (Section 602)
- Catch-Up Contributions Must be Roth Contributions (Section 603)
- Matching and Nonelective Roth Contributions Permitted (Section 604)
- Plan Amendments
Automatic Enrollment Required for New Retirement Plans (Section 101)
New 401(k) and 403(b) plans must include an automatic enrollment feature to encourage greater employee participation. 401(k) plans and 403(b) plans established on or after December 29, 2022 (the “Enactment Date”) must automatically enroll participants at an initial default contribution rate of 3% to 10%, unless the participant makes an affirmative election. Each participant’s deferral percentage is subject to a 1 percentage point automatic escalation at the beginning of each plan year (starting after each completed year of participation) until the deferral percentage reaches at least 10% but no more than 15% (unless the participant elects otherwise).
The following plans are excluded from this new automatic enrollment requirement: plans established by small employers (10 or fewer employees), new businesses (employers, including predecessor employers, in existence fewer than three years), SIMPLE 401(k) plans, 401(k) and 403(b) plans established prior to the Enactment Date, governmental plans, and church plans.
Employers adopting a new or pre-existing multiple employer plan (MEP) after the Enactment Date are generally subject to this new requirement (unless the employer is a new employer or small employer as described above).
This will be a significant administrative burden for payroll departments, especially with respect to ensuring the proper administration of automatic escalations. It is likely that errors will be made, which will have to be corrected (although SECURE 2.0 and the Employee Plans Compliance Resolution System (EPCRS) provide favorable correction methods for errors that are quickly identified, as described in Section 350). Also, guidance will be needed on the application of this section with respect to plan mergers and spinoffs. It is possible that the IRS will take an expansive view of this section, given the government’s encouragement of the use of automatic enrollment arrangements.
Increased Age for Required Beginning Date for Required Minimum Distributions (RMDs) (Section 107)
SECURE 2.0 changes the age component of the required beginning date definition to age 73 for those who attain age 72 after December 31, 2022, and age 73 before January 1, 2033. SECURE 2.0 further increases the age to age 75 for those who attain age 74 after December 31, 2032. (The IRS is aware that individuals who were born in 1959 fall within both rules and that a correction is needed.) These increases follow the changes under the SECURE Act of 2019, which increased the required beginning date for RMDs from age 70 ½ to age 72 for those who were not 70 ½ before January 1, 2020.
The increased age also affects surviving spouses who are sole designated beneficiaries. As a result, if an employee dies before the required beginning date, the surviving spouse is not required to begin taking distributions until the end of the calendar year containing the applicable dates described above. The change in age also applies when determining who is a 5% owner for purposes of the required beginning date definition.
Increased Catch-Up Contribution Limit Applies at Ages 60–63 (Section 109)
Beginning in 2025, participants aged 60, 61, 62, and 63 may make additional catch-up contributions above the usual catch-up contribution limit that applies to participants who are age 50 or older. For 401(k), 403(b), and governmental 457(b) plans (other than SIMPLE plans), the catch-up contribution limit at these ages is up to the greater of $10,000 or 150% of the regular catch-up contribution limit for 2024. For SIMPLE plans, the contribution limit is increased to the greater of $5,000 or 150% of the regular catch-up contribution limit for 2025. (It is not clear why the year for the 150% calculation is different and it is possible that one of those years is a typo.) Beginning in 2026, these catch-up contribution limits are adjusted for inflation.
For plans that use the model IRS catch-up contribution language, this new limit will apply automatically under that plan language and will not require a plan amendment. If an employer does not want to allow participants to make these additional catch-up contributions, it will have to amend the plan to prevent the change from automatically occurring. That amendment will likely have to be adopted prior to 2025.
Effective for taxable years beginning on or after January 1, 2025.
Allowing Matching Contributions for Student Loan Payments (Section 110)
Employers may amend their retirement plans to treat participants’ “qualified student loan payments” as elective contributions for the purpose of making matching contributions on such payments. This optional feature is permitted for 401(k) plans, 403(b) plans, SIMPLE IRAs, and governmental 457(b) plans. For payments to be considered elective contributions, they must repay a qualified education loan incurred to pay for qualified higher education expenses and not exceed the Code Section 402(g) annual deferral limit when combined with the participant’s other elective contributions. Employers may rely on an employee’s self-certification that they made such qualified student loan payments.
Plans that adopt this feature must specify that matching contributions made on such student loan payments must generally be offered to all participants who are eligible to receive matching contributions on regular elective contributions (and to only such participants) and be made at the same rate and vest in the same manner as other matching contributions under the plan.
Guidance will be issued to (1) permit such matching contributions to be made at a different frequency than other matching contributions under the plan (but not less frequently than annually); (2) allow employers to establish reasonable procedures under which participants claim the match (the claim deadline cannot be earlier than three months after the end of each plan year); and (3) provide model plan amendments.
Given the ever-increasing costs of higher education, it seems likely that this is a feature that will be requested by employees and could be used as a recruiting tool.
Tax Credit for Military Spouse Retirement Plan Eligibility and Employer Contributions (Section 112)
Certain small employers may claim a general business credit as a result of allowing employees who are military spouses to participate in the employer’s defined contribution retirement plan and providing employer contributions to such employees. A small employer is one with no more than 100 employees who received $5,000 or more in compensation from the employer in the previous year (and taking into account all affiliated service group and controlled group members). To be eligible for the credit, the employer’s defined contribution retirement plan must (1) not require military spouses to be employed more than two months before becoming eligible to participate, (2) provide that military spouses are immediately eligible to receive employer contributions in the same amount as similarly situated participants who are not military spouses and who have two years of service, and (3) fully vest such employer contributions immediately.
The amount of the credit is the sum of (a) $200 for each military spouse who is an employee of the employer and who participates in the plan during the taxable year, plus (b) the amount of the employer contributions (excluding elective deferrals) made for such employee up to $300 per year. The employer may receive a credit for a military spouse only for the first three taxable years of such employee’s participation. The employer may rely on the employee’s self-certification that they are a military spouse if the certification provides specified information. A military spouse does not include a highly compensated employee.
This credit is intended to encourage small employers to design their defined contribution plans to not impose eligibility and vesting service requirements that negatively impact military spouses, who move frequently.
De Minimis, Immediate Financial Incentives for Contributing to a Plan Permitted (Section 113)
Prior to SECURE 2.0, employers were prohibited from offering cash, gifts, or prizes to incentivize employees to enroll in and contribute to the employer’s 401(k) or 403(b) plan. Employers may now offer small financial incentives to encourage elective deferrals to 401(k) or 403(b) plans. SECURE 2.0 does not provide detail as to what constitutes a small financial incentive other than that it must be “de minimis.” (The Senate Finance Committee report does list gift cards in small amounts as an example of a de minimis financial incentive.) The incentives must not be paid with plan assets. Further guidance on what incentives are “de minimis” will be welcome.
It is not clear whether these de minimis financial incentives will have to be reflected in the plan document or will operate completely outside the plan.
Withdrawals for Certain Emergency Personal Expenses (Section 115)
Participants may take one in-service withdrawal per calendar year of up to $1,000 from profit sharing, 401(k), 403(b), and governmental 457(b) plans for personal and family emergency expenses. Such distributions are not subject to the additional 10-percent tax that generally applies to early distributions (those generally taken before age 59½). The employee may repay an emergency distribution at any time during the three-year period following the distribution. If the employee does not fully repay the emergency distribution as permitted above or make subsequent elective deferrals to the plan in excess of the emergency distribution amount, the employee is barred from taking any additional emergency distributions for three calendar years following the original emergency distribution.
The plan administrator may rely on the employee’s written certification that the distribution is for the purpose of meeting unforeseeable or immediate financial needs arising from the employee’s personal or family emergency expenses.
This is a new distributable event and employers will need to decide whether to amend their profit sharing, 401(k), 403(b), and governmental 457(b) plans to allow for in-service withdrawals for emergency personal expenses.
Additional Nonelective Contributions to SIMPLE Plans Permitted (Section 116)
Employers sponsoring SIMPLE 401(k) plans and SIMPLE IRAs may make additional nonelective contributions in a uniform manner of up to the lesser of 10% of compensation or $5,000 (adjusted for inflation) for each eligible employee earning at least $5,000 annually.
Contribution Limit Increase for SIMPLE Plans (Section 117)
The annual contribution limit applicable to SIMPLE 401(k) plans and SIMPLE IRAs is increased. For employers with 25 or fewer employees, the 2024 SIMPLE contribution limit and catch-up contribution limit at age 50 are increased by 10%. An employer with 26 to 100 employees may also offer these higher contribution limits if the employer provides a 4% matching contribution or a 3% nonelective contribution (i.e., 1 percentage point above the employer contribution rates required for SIMPLE plans).
Automatic Portability Transactions (Section 120)
Retirement plan service providers may now offer an automatic transfer of amounts held in a default IRA (as a result of a mandatory cashout distribution from a former employer’s plan where the participant did not make an election) to the employer-sponsored defined contribution retirement plan in which the individual actively participates. Service providers who offer such services must acknowledge their status as fiduciaries and comply with requirements to provide pre- and post-transfer notices, conduct monthly (or more frequent) searches for transferrable IRAs and recipient plans, execute transfers as soon as practicable, retain records, conduct annual audits, restrict data usage, and maintain a website with information pertaining to such transactions. Further, service providers must ensure their fees are properly disclosed and do not exceed what is considered “reasonable compensation” under ERISA.
“Starter” 401(k) (and Safe Harbor 403(b)) Plans for Employers with No Retirement Plan (Section 121)
Employers who do not maintain a retirement plan may adopt a starter 401(k) or safe harbor 403(b) “deferral-only” plan. Such deferral-only plans must automatically enroll eligible employees at a deferral rate of 3% to 15% of compensation, unless a participant elects otherwise. These elective contributions are subject to the IRA contribution limits (i.e., for 2023, a $6,500 annual limit, plus $1,000 of catch-up contributions). Employer contributions would not be permitted. Starter 401(k) plans are not subject to the ADP test or the top-heavy plan rules. Safe harbor 403(b) plans are not subject to the universal availability requirement.
Coverage of Part-Time Workers (Section 125)
SECURE 2.0 modifies the rules introduced by the SECURE Act of 2019 which established an additional path to eligibility for 401(k) plans (except for collectively bargained employees and nonresident aliens with no U.S. source earned income). Under the SECURE Act of 2019 rules, a long-term, part-time employee may become eligible to make elective contributions under the 401(k) plan if the employee completes three consecutive years of service (at least 500 hours of service per year) and has met the minimum age requirement (age 21) by the close of the third consecutive year. Under the SECURE Act of 2019, 12-month periods before January 1, 2021, could be disregarded for purposes of eligibility, but not vesting.
SECURE 2.0 reduces the service requirement from three consecutive years to two consecutive years. SECURE 2.0 also allows 401(k) plans to disregard pre-2021 periods of service for vesting purposes. Finally, SECURE 2.0 provides that ERISA 403(b) plans are subject to the same part-time worker rules that apply to 401(k) plans (except that pre-2023 service may be disregarded for eligibility and vesting purposes). (Guidance will be needed regarding how this new rule coordinates with the universal availability requirement applicable to 403(b) plans.)
Generally effective for plan years beginning on or after January 1, 2025, though the provision for 401(k) plans to disregard pre-2021 service for vesting purposes is effective as if included in the SECURE Act of 2019.
Emergency Savings Accounts Linked to Individual Account Plans (Section 127)
Employers who maintain profit sharing, 401(k), 403(b), or governmental 457(b) plans may establish linked emergency savings accounts (ESAs) for non-highly compensated employees. ESAs may be funded only with Roth-like participant contributions and cannot receive contributions that would cause the portion of the ESA attributable to contributions to exceed $2,500 (adjusted for inflation) at any time, unless the employer sets a lower ESA balance cap. Employers may automatically enroll employees in the ESA feature and set a default contribution percentage of up to 3% of compensation, unless a participant elects otherwise. SECURE 2.0 also provides an exception to state anti-garnishment laws in order to permit implementation of the automatic contribution arrangement. An initial and annual notice must be sent to participants describing the ESA. The ESA must be held as cash, in an interest-bearing deposit account, or in specified investment products.
Participants may withdraw from the ESA at least monthly, and no withdrawal fees or charges may be assessed on the first four withdrawals of each year (reasonable fees and charges may be assessed on additional withdrawals in such year). Withdrawals are not subject to the 10% early distribution tax. Excess contributions to the ESA may be redirected to another Roth account (if one exists) under the plan, or further contributions may be halted until the ESA account balance attributable to participant contributions falls below the $2,500 balance cap. If the employer makes matching contributions on elective contributions under the plan, the employer must also make matching contributions on contributions to the ESA. Such matching contributions are subject to the $2,500 balance cap and are contributed to the matching account (not the ESA). An employee with an ESA balance at termination of employment may roll over the ESA balance to another designated Roth account or receive such amount in cash.
We will have to wait and see if third party administrators (TPAs) are interested in administering this provision, especially given the number of potential distributions and the inability to charge a fee for the first four distributions each year. TPAs will most likely include any increased administrative costs as part of their overall plan fees.
403(b) Plans may Participate in Group Trusts (Section 128)
403(b) plans with custodial accounts may now invest in Revenue Ruling 81-100 group trusts (i.e., collective investment trusts).
While SECURE 2.0 amends the Code to permit 403(b) plans to access collective investment trusts, current securities laws still restrict such investments for most plans. Plan administrators of 403(b) plans should not invest in collective investment trusts until a corresponding securities law exemption is enacted.
Recovery of Retirement Plan Overpayments (Section 301)
Retirement plan fiduciaries now have latitude in deciding whether to recoup inadvertent overpayments (although it is not clear whether such discretion extends to overpayments resulting from violations of the Code Section 401(a)(17) compensation limit or the Code Section 415 limit). However, SECURE 2.0 provides restrictions on the manner in which a plan fiduciary may seek the recovery of overpayments from participants and beneficiaries. For example, no interest or other additional amounts can be requested, limitations apply to the recovery of overpayments of annuity benefits, the fiduciary cannot threaten litigation (unless the recovery amount would exceed the cost of recovery), the fiduciary generally cannot use a collection agency, recovery of overpayments made to a participant cannot be sought from the beneficiary, recovery generally cannot be sought more than 3 years after the first overpayment, the individual may contest recoupment under the plan’s claims procedure, and the fiduciary may take hardship factors into account when determining the amount to recoup. Some of these restrictions do not apply if the individual bears responsibility for the overpayment or knew that the benefit payment was materially greater than the correct amount. Plan fiduciaries must still address impermissible forfeitures and satisfy minimum funding requirements applicable to the plan.
Reduction in Excise Tax on Failure to Take RMDs (Section 302)
Individuals who fail to take an RMD are subject to an excise tax on the missed distribution. SECURE 2.0 reduces the applicable excise tax from 50% to 25% of the missed RMD.
Individuals may further reduce the excise tax from 25% to 10% if they receive the entire missed RMD from the plan and submit a return reflecting the corrective distribution and applicable excise tax within the correction window. Absent IRS action, the correction window ends on the last day of the second taxable year that begins after the taxable year the excise tax is imposed.
Plan and Employer Obligations under the Retirement Savings Lost and Found Provision (Section 303)
Within two years after the Enactment Date, the DOL must establish a searchable online database that allows individuals to find contact information for the plan administrator of plans in which the individual is or was a participant or beneficiary. Plan administrators of plans subject to ERISA’s vesting rules will need to submit certain plan information to the DOL beginning with the plan year that begins on or after January 1, 2024. DOL regulations addressing the plan administrator reporting requirements are expected.
Increasing Dollar Limit for Involuntary Cashouts (Section 304)
SECURE 2.0 increases the involuntary cash-out limit from $5,000 to $7,000 (for purposes of both the consent rules and automatic rollovers to IRAs).
This change will be inapplicable to plans that previously reduced the involuntary cash-out amount to $1,000 in order to avoid the automatic rollover rules. But plans that use a $5,000 involuntary cash-out amount will likely welcome the increase to $7,000.
Expansion of EPCRS (Section 305)
SECURE 2.0 expands EPCRS. First, plan sponsors may self-correct an “eligible inadvertent failure,” provided the self-correction commences before the IRS identifies the failure and is completed within a reasonable period after such failure is identified. (Thus, the self-correction period that applies to significant operational failures and plan document failures under EPCRS will be inapplicable to the above eligible inadvertent failures.) An eligible inadvertent failure is one that occurs despite the existence of practices and procedures, but does not include a failure that is egregious or relates to the diversion or misuse of plan assets or an abusive tax avoidance transaction. This new self-correction rule for eligible inadvertent failures applies to qualified plans, 403(b) plans, SEPs, and SIMPLE IRAs. Second, eligible inadvertent failures regarding plan loans may be self-corrected under EPCRS. The DOL must treat self-corrected eligible inadvertent plan loan failures as self-corrected under the Voluntary Fiduciary Correction Program (though the DOL may impose reporting or other procedural requirements for such corrections).
This section is good news for plan sponsors. Being able to self-correct an error is much less expensive and time-consuming than having to file a voluntary correction program application with the IRS. In order to ensure eligibility for self-correction, this section should encourage plan sponsors to have practices and procedures designed to facilitate compliance and to promptly self-correct identified errors.
The effective date of this section is unclear. It might be effective as of the Enactment Date, but the IRS may take the position that it is not effective until EPCRS is updated. The conservative course is to continue to rely on the current EPCRS rules until a new EPCRS is released.
Eliminate “First Day of the Month” Requirement for Governmental 457(b) Plans (Section 306)
Participants in governmental 457(b) plans may now make deferral election changes at any time prior to when the compensation deferred is currently available to the participant. Participants in 457(b) plans maintained by tax-exempt employers must still comply with the pre-SECURE 2.0 rule and make all deferral elections prior to the beginning of the month in which the election will apply.
Top-Heavy Rules and Otherwise Excludable Employees (Section 310)
Participants who do not meet the Code’s age and service requirements (i.e., age 21 and 1 year of service) will be excluded in determining whether a top-heavy defined contribution plan satisfies the requirement to provide a top-heavy minimum contribution.
This provision could encourage plan sponsors of top-heavy defined contribution plans to allow otherwise excludable employees to participate, because a top-heavy minimum contribution will not be required for them.
Recontribution of Qualified Birth or Adoption Distributions Limited to 3 Years Following Distribution (Section 311)
Under the SECURE Act of 2019, qualified birth or adoption distributions may be repaid by a participant at any time and treated as a direct rollover to the plan. SECURE 2.0 limits the time period under which participants may repay a qualified birth or adoption distribution to the three-year period that begins on the day following the distribution.
This new limitation coordinates the repayment period with the period during which a participant can file an amended tax return to claim a refund of the taxes paid with respect to the distribution.
The three-year repayment limitation is effective for any distributions made after the Enactment Date. For distributions made on or before the Enactment Date, the repayment must be made no later than December 31, 2025.
Self-Certification of Deemed Hardship Distribution Conditions (Section 312)
For 401(k) and 403(b) plans, employers may rely on a participant’s self-certification in determining that a hardship distribution is on account of an immediate and heavy financial need, not in excess of the amount necessary to satisfy the financial need, and not able to be avoided using alternative means reasonably available to the participant. SECURE 2.0 establishes similar rules applicable to distributions from a governmental 457(b) plan due to an “unforeseeable emergency” of a participant. The Treasury may issue regulations that would permit the plan administrator to reject a participant’s self-certification if the plan administrator has actual knowledge to the contrary. The regulations may also create procedures for addressing participant misrepresentations.
This section makes it much easier for participants to request hardship distributions. Participants no longer have to produce documentation in support of a hardship distribution request and plan administrators no longer have to confirm that the participant is eligible to receive a hardship distribution.
Withdrawals for Domestic Abuse (Section 314)
Profit sharing, 401(k), 403(b), and governmental 457(b) plans (other than plans to which the joint and survivor annuity rules apply) are now permitted to make in-service distributions to participants who are survivors of domestic abuse. Such distributions are not subject to the additional 10-percent tax that generally applies to early distributions. The distribution may be taken during the one-year period beginning on any date on which the participant is a victim of domestic abuse. Participants may self-certify that they are eligible for such distribution. A participant may withdraw the lesser of $10,000 (adjusted for inflation beginning in 2025) or 50 percent of the vested accounts (determined on a controlled group basis). Similar to the rules for qualified birth or adoption distributions, the employee may recontribute some or all of the distributed amount within the three-year period beginning on the day following the distribution.
This is a new distributable event and employers will need to decide whether to amend their eligible defined contribution plans to allow in-service withdrawals to victims of domestic abuse.
Amendments to Increase Benefits for Prior Plan Year (Section 316)
Employers sponsoring a qualified plan must generally adopt a discretionary plan amendment by the last day of the plan year in which the amendment is effective. SECURE 2.0 extends the amendment deadline in the case of an employer that adopts a discretionary plan amendment that increases benefits (other than increasing matching contributions). Such amendments must be adopted before the tax return filing deadline of the employer (including extensions) for the year in which the amendment is effective.
Retroactive First-Year Elective Deferrals for Solo 401(k) Plans (Section 317)
Under the SECURE Act of 2019, an employer could adopt a new qualified plan after the end of the taxable year but before the employer’s tax filing deadline for that taxable year (including extensions) and make the plan retroactively effective as of a date within that taxable year. The employer could then make employer contributions for that taxable year by the tax filing deadline (including extensions). If the plan that was adopted after the end of the taxable year was a 401(k) plan, however, the SECURE Act of 2019 did not allow elective contributions to be made for that first year. SECURE 2.0 changes this rule with respect to the retroactive adoption of a 401(k) plan by a sole proprietorship (or single-member LLC) for which the owner is the only employee, allowing elective contributions for the first plan year to be made no later than the owner-employee’s tax filing deadline in the following year (disregarding extensions).
Eliminating Notices to Unenrolled Participants (Section 320)
SECURE 2.0 aims to reduce the number of notices sent to employees who have not elected to participate in an employer’s defined contribution retirement plan. An “unenrolled participant” is an employee who is eligible to participate in the plan, has been provided the plan’s summary plan description (and other required notices in connection with initial eligibility), and is not participating in the plan. Subsequent Code and ERISA notices need not be provided to such unenrolled participants if the plan provides: (1) an annual reminder notice which informs the unenrolled participants of their eligibility to participate in the plan, the benefits and features of the plan, and applicable election deadlines, and (2) documents upon request. The annual reminder notice must be sent within a reasonable period before the beginning of each plan year (or in connection with an annual open season election period, if there is one).
Note that defined contribution plans with nonelective contributions will not be able to take advantage of this new rule.
IRS to Issue Model Forms for Rollovers (Section 324)
SECURE 2.0 directs the Secretary of Treasury to issue model forms that can be used by distributing and receiving retirement plans to process rollovers of eligible rollover distributions.
No Pre-Death RMDs for Roth Accounts in an Employer Retirement Plan (Section 325)
SECURE 2.0 removes the pre-death RMD requirement for designated Roth accounts in an employer’s retirement plan (thus making the rule the same as it is for Roth IRAs).
Effective for distributions which are required on or after January 1, 2024. For distributions required to be made for years beginning before January 1, 2024, (even if permitted to be paid on or after such date) the regular pre-death RMD rules still apply. (Thus, the pre-death RMD rules apply to the Roth accounts for the 2023 calendar year with respect to a participant who has an April 1, 2024, required beginning date.)
No Early Withdrawal Penalty for Terminal Illness Distribution (Section 326)
Employees who are diagnosed with a terminal illness and receive distributions from a retirement plan are not subject to the additional 10-percent tax that generally applies to early distributions (those generally taken before age 59½). The exception applies to distributions taken on or after the date on which a physician certifies that the employee has a terminal illness (one that is reasonably likely to result in death within 84 months). Similar to the rules for qualified birth or adoption distributions, the individual may recontribute some or all of the distributed amount within the three-year period beginning on the day following the distribution.
Unlike the other permitted early distribution events added by SECURE 2.0, the employee may not self-certify that they have been diagnosed with a terminal illness. Instead, the employee must furnish evidence of a certified physician’s diagnosis to the plan administrator in order to take a penalty-free distribution.
Note that this section does not create a new distributable event. An in-service distribution is permitted only if the terminally ill employee is otherwise entitled to receive a distribution under the terms of the plan.
Surviving Spouse Can Elect to be Treated as an Employee for RMD Rules (Section 327)
Under current law, spouses who are the sole designated beneficiary of their deceased spouse’s IRA may irrevocably elect to be treated as the IRA account holder for purposes of the RMD rules. SECURE 2.0 makes similar changes for retirement plans, so that surviving spouses do not need to roll over their benefits to an IRA in order to receive such treatment.
If the participant dies before the required beginning date, SECURE 2.0 permits a spouse who is the sole designated beneficiary to elect to be treated as the deceased employee for purposes of determining the distribution period under the life expectancy rule. The election must be irrevocable (unless the IRS permits the revocation) and provided to the plan administrator. Certain provisions of pre-SECURE 2.0 law that had applied automatically (i.e., the date distributions must begin to the surviving spouse and the consequences of the spouse dying before distributions begin) will now apply only if the surviving spouse makes the election described above.
If the participant dies on or after the required beginning date and the surviving spouse is the sole designated beneficiary and makes the election described above, then the distribution period is determined under the uniform lifetime table.
Effective for calendar years beginning on or after January 1, 2024.
Permitted Distributions for Qualified Federally Declared Disasters (Section 331)
In the past, Congress has permitted in-service, penalty-free distributions from retirement plans as the result of federally declared disasters on a case-by-case basis. SECURE 2.0 allows profit sharing, 401(k), 403(b), money purchase pension, and governmental 457(b) plans to add a permanent in-service distribution right for individuals who are in an area affected by a federally declared disaster and who suffer an economic loss because of the disaster. An affected individual may take a distribution of up to $22,000 per qualifying disaster without being subject to the 10% additional tax on early distributions. This is a new distributable event for the above plans.
Individuals who take a disaster distribution may repay the distribution over the three-year period beginning on the day following the distribution, with such repayments deemed as eligible rollovers into the retirement plan or IRA. Further, income tax due as a result of such distributions is spread over three years, unless the individual elects immediate inclusion.
SECURE 2.0 further provides that if a participant receives a hardship distribution of elective deferrals from a 401(k) or 403(b) plan to purchase or build a home in a disaster area and cannot complete the purchase or use the home because of the disaster, a plan can allow the participant to repay the distribution.
SECURE 2.0 also increases the maximum plan loan amount permitted for individuals affected by federally declared disasters to the lesser of $100,000 or 100% of the vested accounts and extends the repayment due dates for one year. (Relief similar to that provided for previous federally declared disasters will be needed from the prohibited transaction rules, which prohibit a plan loan in excess of 50% of the vested accounts.)
Purchase of Long-Term Care Contracts from Retirement Plan Distributions (Section 334)
Defined contribution retirement plans may allow a new, in-service distribution right for a participant to purchase certain long-term care insurance contracts. The maximum permitted distribution amount is the lowest of (1) the amount paid by or assessed to the employee during the year for long-term care insurance; (2) 10% of the employee’s vested accounts; and (3) $2,500 (adjusted for inflation beginning in 2025). Distributed amounts will not be subject to the additional 10% tax on early distributions. Employees who take such distributions will need to provide supporting documentation for the purchase of long-term care insurance, and distributions may be made only for purchases of insurance offered by insurers who file the required statement of information with the Treasury.
Paper Statements Required in Certain Cases (Section 338)
ERISA requires defined contribution plans with participant-directed investments to provide benefit statements at least once each calendar quarter. Defined contribution plans without participant-directed investments must provide benefit statements at least once each calendar year. Defined benefit plans must provide benefit statements at least once every three years. Prior to SECURE 2.0, these statements were permitted to be provided electronically under DOL regulations. SECURE 2.0 amends ERISA to require defined contribution plans to provide at least one benefit statement in paper form each calendar year. Defined benefit plans must provide at least one paper benefit statement every three calendar years. These revised paper benefit statement requirements do not apply to a plan that complies with the DOL’s 2002 electronic delivery safe harbor regulations or to participants who opt-in to electronic delivery.
Tribal Courts Authorized to Issue Qualified Domestic Relations Orders (Section 339)
Tribal courts are now included in the list of courts authorized to issue qualified domestic relations orders.
Consolidation of Defined Contribution Plan Notices (Section 341)
SECURE 2.0 directs the Secretaries of Labor and Treasury to adopt regulations providing that defined contributions plans subject to ERISA may consolidate two or more notices required by ERISA and the Code. The notices include QDIA notices, automatic contribution arrangement notices, and annual safe harbor notices.
Disclosures for Temporary Lump Sum Payment Option (Section 342)
This provision adds new notice and disclosure requirements for defined benefit plans that are amended to offer a period of time during which a participant or beneficiary may elect to receive a lump sum instead of future monthly benefit payments. Such plans must provide a notice to participants and beneficiaries at least 90 days before the first day of the election period. The notice must describe the benefit options available, how the lump sum was calculated, a comparison of the relative value of the lump sum and annuity options, potential increased cost of purchasing a commercial annuity outside the plan, risks of accepting the lump sum, general tax rules applicable to the lump sum option, information about how and when the election must be made, and the plan administrator’s contact information.
Plan administrators must also provide a notice to the DOL and PBGC at least 30 days prior to the election period and must report to the DOL and PBGC within 90 days after the election period ends regarding the number of individuals who elected a lump sum.
DOL is required to issue regulations not earlier than one year after the Enactment Date. The DOL must also provide model notices for plan administrators to use in complying with these new requirements.
This provision adds additional steps for employers trying to de-risk their defined benefit plans through a lump sum window.
Defined Benefit Plan Annual Funding Notices (Section 343)
Administrators of defined benefit plans subject to Title IV of ERISA must provide additional information in annual funding notices provided to plan participants, beneficiaries, unions, and the PBGC. The additional information is intended to help a notice recipient better understand the plan’s funding status.
Correction of Automatic Enrollment Failures (Section 350)
Currently, EPCRS contains a temporary safe harbor correction method for missed elective deferrals in a 401(k) or 403(b) plan that has an automatic contribution feature. Under the safe harbor, no corrective contributions are required for the missed elective deferrals if, in general, correct deferrals begin within 9½ months after the end of the plan year containing the first missed deferral, a notice is provided to the affected participant within 45 days after correct deferrals begin, and corrective contributions are made for any missed matching contributions. This safe harbor only applies for errors that begin on or before December 31, 2023.
SECURE 2.0 codifies and expands the safe harbor correction method available under EPCRS. The new correction method is now permanent and applies to 401(k) plans, 403(b) plans, IRAs, and governmental 457(b) plans. The correction may be made even if the IRS has identified the error, or the participant has terminated employment. The correction must be made in a nondiscriminatory manner.
SIMPLE and SEP Roth IRAs (Section 601)
Prior to SECURE 2.0, SIMPLE and SEP IRAs were not permitted to be designated as Roth IRAs. Employees may now elect to have contributions to either a SEP or SIMPLE IRA treated as designated Roth contributions.
Hardship Distributions from 403(b) Plans (Section 602)
Previous law changes enabled 401(k) plans to make hardship distributions from multiple contribution sources and earnings, instead of just elective contributions (excluding earnings). The hardship rules for 403(b) plans, however, were not similarly expanded and thus hardship distributions were generally permitted from only elective contributions (excluding earnings). SECURE 2.0 expands the hardship distribution rules for 403(b) plans to match the rules for 401(k) plans. Thus, hardship distributions from a 403(b) plan may be taken from qualified nonelective contributions, qualified matching contributions, elective contributions, and any earnings on the foregoing.
This provision will now allow safe harbor 403(b) plans to make hardship distributions from their safe harbor contributions accounts.
Catch-Up Contributions Must be Roth Contributions (Section 603)
Catch-up contributions to 401(k), 403(b), and governmental 457(b) plans made by eligible participants with compensation in excess of $145,000 (adjusted annually beginning in 2025) in the prior calendar year must be made as Roth contributions. If a plan has an eligible participant whose prior year compensation exceeds $145,000, then the plan must permit all eligible participants to make their catch-up contributions as Roth contributions. These new requirements do not apply to SEPs or SIMPLE IRAs.
This will be a significant change for plans that do not currently offer Roth contributions. It will also require plans to track a new compensation amount.
Matching and Nonelective Roth Contributions Permitted (Section 604)
SECURE 2.0 permits qualified plans, 403(b) plans, and governmental 457(b) plans to treat employer matching and nonelective contributions as designated Roth contributions at the participant’s election. Such contributions are includable in income upon contribution and must be immediately vested (these rules track the existing treatment of Roth elective contributions).
This section allows participants to bypass a plan’s in-plan Roth rollover feature (which permits a participant to periodically convert pre-tax accounts to Roth accounts) by having the employer contributions automatically treated as Roth contributions when made to the plan. Although this provision is effective immediately, additional guidance will be needed in order to implement it from an income and employment tax withholding and reporting standpoint.
Plan sponsors must generally amend their plans for required and optional SECURE 2.0 changes no later than the last day of the first plan year that begins on or after January 1, 2025. Governmental and applicable collectively bargained plans must be amended no later than the last day of the first plan year that begins on or after January 1, 2027.
Please contact a member of the Benefits Team if you have any questions about how SECURE 2.0 applies to your plans.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.