Secure Act 2.0 (December, 29 2022)
New Law Passed by Congress Effects all Retirement Plans
On December 29, 2022, President Joe Biden signed the Consolidated Appropriations Act. Part of this legislation included the SECURE 2.0 ACT of 2022. It will be referred to as SECURE 2.0.
The SECURE 2.0 includes many provisions designed to enhance the retirement savings of American workers. While some of its provisions take effect immediately, most do not become effective until plan years after December 31, 2023. SECURE 2.0 has more than ninety sections. This article summarizes the provisions most applicable to a majority of retirement plans.
Purpose of SECURE 2.0
Congress determined that many Americans reach retirement age with little to no savings. Consequently, SECURE 2.0 seeks to (1) increase opportunities to participate in employer-sponsored retirement plans; (2) incentivize employers to sponsor retirement plans; (3) ease the regulatory burden of sponsoring retirement plans; and (4) better educate Americans about retirement plans and saving for retirement.
To promote employees to enroll new plans started after December 2022 will be required to auto enroll their eligible employees as of January 1, 2025.
Effective Dates: Each of SECURE 2.0’s provisions have its own effective date. The effective dates range from the date of SECURE 2.0’s enactment (December 29, 2022) to 2028 and beyond, with the bulk of the provisions taking effect in 2024.
Summary of SECURE Act Provisions
Provisions Effective in 2024
Match for Student Loan Repayments
Emergency Savings Accounts (ESA)
Qualified Birth or Adoption Expenses
ROTH and Required Minimum Distributions (RMD)
Hardship Distributions for 403(b) Plans
Separate Top-Heavy Test for Excludable Employees Allowed
Increased Ability to Self-Correct Plan Failures
Increased Mandatory Cash-Out Limit and Portability
Extended Deadline for Discretionary Plan Amendments
Automatic portability of Account Balances
Treatment of partial annuitization
Defined Benefit and Cash Balance Pension Plans – Lump Sum Offers
Surviving Spouses May Elect to Be Treated as Employees
Provisions Effective in 2025 and thereafter
Overview (Provisions Effective in 2025 and thereafter)
Table of Contents
(Provisions Effective in 2023)
Start Up Plan tax credit- 100% of the fees up to $5000 for three years
Up to $1000 per participant as a tax credit for new defined contribution plans
Financial Incentives to Encourage Plan Participation - Gift cards to enroll
Qualified Birth Adoption – Up to $5000 available with 3 year limit on repayments
Natural Disaster Relief payment are available
No 10% Penalty for emergency withdrawals
Self-Certification for Hardship Distributions
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Catch Up ROTH Contributions
SECURE 2.0 has increased the catch up contributions for participants 50 or over in 2023 from $6500 to $7500. These catch up contributions are before tax contributions. This new law will now require that a participant whose compensation exceeds $145,000 (indexed for the cost of living periodically) for any plan year can only make catch-up contributions on a Roth after-tax basis. This after tax requirement was slated for 2024 and has been delayed by the IRS until 2026.
BEI Comment: This is both good news and bad news. Bad news if you feel you have lost a current tax deduction, and good news if you want to forego the current deduction for a ROTH after tax account. ROTH accounts are never taxed.
Match for Student Loan Repayments
SECURE 2.0 permits employers to make matching contributions to a defined contribution plan on qualified student loan payments by treating such payments as elective deferrals or elective contributions, as applicable, for purposes of nondiscrimination testing and safe harbor rules.
Plan sponsors (employer) can rely on an annual certification from a participant that eligible student loan payments have been made and are permitted to perform the actual deferral percentage (ADP) test separately on employees who receive matching contributions on qualified student loan payments. Effective for plan years beginning on or after January 1, 2024.
BEI Comment: You probably will want to get the loan statement as proof of payment.
Emergency Savings Accounts (ESA)
SECURE 2.0 permits employers to establish emergency savings accounts (ESAs) within a defined contribution plan to which non-highly compensated participants contribute separately.
Key Provisions of the ESA:
Participants must be able to take an ESA withdrawal at least monthly with the first four ESA withdrawals per year being free from additional fees.
- The ESA balance is capped at $2,500 (subject to annual inflation adjustments) or a lesser amount selected by the plan sponsor but cannot be subject to minimum contribution or balance requirements.
- ESA contributions are treated as Roth contributions (and the employer generally is required to make matching contributions to a non ESA account at the same rate that would otherwise apply to elective contributions, not to exceed the ESA balance maximum); and
- participants may be automatically enrolled to contribute up to 3% of compensation to an ESA.
BEI Comment: The recordkeeper will have to help with this type of account. Many questions to be answered. What happens to money contributed that exceeds $2500? IF they are treated as ROTH contributions does the plan need the standard ROTH provision in addition to the ESA account? Not allowing the participant to pay for the cost to process their withdrawal means someone other than the employee will have to pay for this service. Guess who?
Emergency Expense Withdrawals
SECURE 2.0 permits a participant to take a distribution of up to $1,000 (or if the participant’s vested account is less than $2,000, the amount in excess of $1,000 in the participant’s vested account) from the participant’s defined contribution plan account to address unforeseen emergency expenses without being subject to the 10% additional tax that would otherwise apply to early withdrawals.
Participants can repay an emergency distribution within three years and cannot take an additional emergency distribution during the corresponding three-year repayment period unless the emergency distribution is repaid.
Domestic Abuse Distribution
Starting in 2024, a participant who withdraws up to the lesser of $10,000 (indexed for inflation) or 50% of their vested balance and certifies that they have been the victim of domestic abuse by a spouse or domestic partner within the prior one year, may avoid the 10% early withdrawal tax on such amount and may repay such amount to the plan within three years. The distribution is not eligible for rollover. In addition, a plan sponsor may amend their plan to permit an in-service withdrawal for this circumstance. The distribution limit applies across all plans maintained within a single controlled group.
Qualified Birth or Adoption Expenses
The Employee Plans Compliance Resolution System (EPCRS) currently contains a temporary “safe harbor” correction provision that provides relief to plans with automatic enrollment and escalation features by permitting correction of elective deferral errors that are corrected within 9½ months of the plan year following the plan year in which the error occurred at QNEC rates, provided certain notice requirements are met. As included in EPCRS, this temporary safe harbor would expire on December 31, 2023. SECURE 2.0 extends this safe harbor correction permanently. Effective for any failures or corrections occurring on or after January 1, 2024.
ROTH and Required Minimum Distributions (RMD)
While RMDs are not required for Roth IRAs under current law until the owner of the Roth IRA dies, pre-death distributions are required for Roth money inside an employer’s 401(k) plan. Under SECURE 2.0, Section 325 eliminates the pre-death distribution requirement effective for taxable years beginning after Dec. 31, 2023, but does not apply to required distributions from years before Jan. 1, 2024, that are allowed to be paid on or after that date.
Hardship Distributions for 403(b) Plans
SECURE 2.0 conforms the hardship distribution eligibility provisions for 403(b) plans to match that of 401(k) plans to permit 403(b) plans to distribute QNECs, QMACs, and earnings.
Separate Top-Heavy Test for Excludable Employees Allowed
Under SECURE 2.0, employers may perform the required top-heavy test separately on non-excludable and excludable employees. Congress hopes that this will encourage smaller employers to permit employees under age 21 to begin saving for retirement by assuaging concerns about the amount of nonelective contributions that the employer would need to make if they failed top-heavy testing. This is effective for plan years beginning after Dec. 31, 2023.
Increased Ability to Self-Correct Plan Failures
The ability to self-correct a plan operational error is expanded to generally encompass all “eligible inadvertent failures.” These are failures that occur even though the plan sponsor has preestablished “practices and procedures” designed to facilitate compliance.
Self-correction is not available if:
- the IRS identifies the failure before the plan sponsor does;
- the failure is not corrected within a reasonable time period after discovery; - the failure is “egregious”; - the failure relates to the diversion or misuse of plan assets;
- or - the failure relates to an “abusive tax avoidance transaction.”
Self-corrections for failures relating to participant loans from a defined contribution plan require the Department of Labor (DOL) to consider any corresponding fiduciary duty breach as corrected under DOL’s voluntary fiduciary correction program. DOL is authorized to implement reporting requirements if a plan sponsor intends to use EPCRS self-correction for a breach of fiduciary duty.
As directed by SECURE 2.0, the IRS will issue guidance to provide specific correction methods for certain failures and general correction principles for failures without a specific correction method. Effective December 29, 2022. Government deadline: The IRS must provide updated EPCRS guidance by December 29, 2024.
BEI Comment: Common mistakes are reporting employee salaries or classifying participants incorrectly. This generally means compliance testing was done incorrectly or profit sharing and matching contributions are wrong.
Increased Mandatory Cash-Out Limit and Portability
SECURE 2.0 increases the mandatory cash-out limit from $5,000 to $7,000. This means employers may transfer former employees’ retirement accounts from the employer sponsored plan into an Individual Retirement Account (IRA) without the employee’s consent if the account balance is between $1,000 and $7,000, unless the participant elects otherwise.
SECURE 2.0 permits an automatic portability provider (“APP”) to rollover an automatic cash out IRA established with a participant’s prior employer-sponsored retirement plan into a subsequent eligible defined contribution employer-sponsored retirement plan. The word is that several of the largest recordkeepers will be working together to help accomplish portability.
Requirements: (1) the individual is an active participant in the subsequent plan; (2) the participant was given notice and did not opt out of the transaction; and (3) the APP acknowledges fiduciary status and satisfies certain additional elements.
Extended Deadline for Discretionary Plan Amendments
The deadline for certain discretionary amendments is extended to the employer’s tax return filing deadline (including extensions) with respect to the tax year in which the amendment takes effect if such amendment provides increased benefits to participants.
BEI Comment
Under current rules, if a plan sponsor wishes to amend its retirement plan to increase benefit accruals or contributions, the amendment must be adopted before the end of the year in which the increase is effective. For plan years beginning after December 31, 2023, the Act delays the amendment deadline for such increases, other than increases in matching contributions, until the employer’s tax filing deadline with respect to the year in which the increase is effective.
Family Attribution Rules
The SECURE 2.0 Act reformed the family attribution rule. Under the law certain related businesses must be aggregated when performing the coverage and nondiscrimination tests.
The aggregation rules are generally based on the degree of common ownership of the businesses. In determining the level of ownership in a business, the tax laws have certain attribution rules whereby an individual is deemed to own stock held by other individuals or entities. There are two stock attribution rules. The first update addresses inequities where spouses with separate businesses reside in a community property state. The second update modifies the attribution of stock between parents and minor children.
Automatic portability of Account Balances
Under current law, plan sponsors may make mandatory cash-outs of the small account balances of terminated participants for accounts under $5,000. This rule increases to $7,000 in 2024. Accounts over $1,000 must be rolled to a default IRA if the participant does not make an affirmative election with respect to the account. Beginning in 2024, SECURE 2.0 allows employers to contract with a service provider that will automatically transfer a default IRA to a participant’s new employer-sponsored retirement plan, unless the participant elects otherwise.
BEI Comment: The automatic transfer will be subject to a 60-day advance notice requirement, fee disclosures, individual opt-out rights, post-transaction notice requirements, and audit requirements. The objective of the change is to consolidate small account balances and reduce leakage from the retirement system. Look for all the major recordkeepers to join together to help with these transfers.
Treatment of partial annuitization
Current rules provide that if a participant partially annuitizes their account, the annuitized portion and remainder of the account are treated separately under the RMD rules. This treatment may result in a larger RMD requirement than if the participant did not partially annuitize their account. SECURE 2.0 permits a plan to allow the participant to aggregate distributions from the annuity and the remaining account in determining whether the RMD requirements are satisfied.
Defined Benefit and Cash Balance Pension Plans – Lump Sum Offers
SECURE 2.0 mandates that participants receive specific information in connection with a lump sum payout, including:
- the methodology for calculating the lump sum SECURE Act 2.0
- the other benefit options offered by the Pension Plan,
- the consequences of selecting the lump sum payment and,
- general tax rules applicable to the lump sum distribution.
SECURE 2.0 directs the U.S. Department of Labor (DOL) to create a model notice. Effective no earlier than the later of December 29, 2023, or the date on which DOL issues regulations, and no later than one year following the issuance of such regulations.
Surviving Spouses May Elect to Be Treated as Employees
Surviving spouses may elect to be treated as the deceased employee for purposes of minimum required distributions.
Overview (Provisions Effective in 2025 and thereafter)
- Long-term care contract distributions
- Higher catch-up limit for older employees
- Automatic enrollment expanded
- Exclusion from gross income of disability-related retirement payments for first responders
- Long Term Part Time employees (two years of employment and working 500 hours) must be given opportunity to be in a 401(k)
- Enhanced Savers Match provided by the government in 2027
More details on these provisions will be added at a later date.
Action Steps and Amendment Deadlines for Plan Sponsors
The changes outlined above will require all existing plans to make operational changes in order to administer their plans in compliance with mandatory provisions in the law, some of which take effect as early as 2023. Optional provisions can be implemented as they become effective and plan amendments scheduled at a later time.
Once decisions are made, plan sponsors (Employers) will need to ensure that the plan's service providers (Benefit Equity Inc as your TPA) and recordkeepers (the institutions you send your money to for investments) and payroll providers are able to administer the changes by the applicable effective dates. In addition, all plan changes will need to be clearly communicated to participants and plan amendments must be timely adopted.
The deadline to adopt plan amendments pursuant to the changes required or optionally permitted is the last day of the first plan year beginning on or after January 1, 2025 (December 31, 2025, for calendar year plans). For governmental plans, the deadline is the last day of the first plan year beginning on or after January 1, 2027 (December 31, 2027, for calendar year plans). However, plans must still operate in accordance with the provisions of SECURE 1.0 and SECURE 2.0 as of the applicable effective date.
SECURE 1.0 also has changes that we have previously communicated to you that are effective now but not yet documented by plan amendment. We intend to provide SECURE 1.0 amendments in 2023.
Please go to the Benefit Equity website for more information or contact your administrator at BEI or your financial advisor.
RMD Increases to age 73
SECURE 2.0 makes a series of changes to the required minimum distribution (RMD) rules, with most taking effect in 2023.
The changes include:
- Increasing the age at which the RMD rules apply from 72 to 73 (January 1, 2023) and then to 75 a decade later (January 1, 2033);
- Reducing the penalty if an individual fails to take any RMD, including an extra reduction if the individual timely corrects the failure;
- Exempting Roth contributions in an individual’s defined contribution plan account from the RMD rules prior to the participant’s death;
- Allowing a defined contribution plan (DC) participant’s surviving spouse beneficiary to elect to be treated as the participant for purposes of the RMD rules;
- Mitigating the RMD rules’ negative effects on “qualifying longevity annuity contracts” and adding provisions to encourage the sale of such contracts; and
- Addressing how the RMD rules can deter the use of annuities in connection with a retirement account.
Reduction in Excise Tax Penalty
Under current law, taxpayers are subject to a 50% excise tax on the amount of an RMD that they fail to take by the applicable deadline. The penalty tax is now reduced to 25%. The penalty tax is further reduced to 10% if the failure to take the RMD is corrected within a two-years.
ROTH Matching and Nonelective Contributions can be elected as after tax instead of before tax contributions
SECURE 2.0 provides that defined contributions plans may permit participants the option to elect to receive employer matching and nonelective contributions on a Roth after-tax basis.
Start Up Plan tax credit- 100% of the fees up to $5000 for three years
Modification of credit for small employer retirement plan startup costs.
The 3-year small business startup credit is currently 50 percent of administrative costs, up to an annual cap of $5,000. The law makes changes to the credit by increasing the startup credit from 50 percent to 100 percent for employers with up to 50 employees. This is not available for defined benefit plans.
How To Figure the Credit
For an eligible employer, the credit is 100% of the qualified startup costs paid or incurred during the tax year. The credit is limited to the greater of $500 or the lesser of $250 for each employee that is eligible to participate in the plan and not highly compensated (as defined in section 414(q)) or $5,000 for the first tax year and each of the following two tax years.
BEI Comment
This credit applies in 2023. If you are taking the 50% credit on your tax return from a prior year it is now 100%.
Up to $1000 per participant as a tax credit for new defined contribution plans
The amount of the additional credit generally will be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000.
- This full additional credit is limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees.
- The applicable percentage is 100 percent in the first and second years, 75 percent in the third year, 50 percent in the fourth year, 25 percent in the fifth year – and no credit for tax years thereafter. Section 102 is effective for taxable years beginning after December 31, 2022.
Solo 401(k) Plan Adoption for Sole Proprietors & Single Member LLC can be implemented up to tax filing due date
It used to be that an employer had to adopt a qualified retirement plan by the end of its tax year. SECURE Act 1.0 changed that to permit an employer to establish a new 401(k) plan before the due date of the employer’s tax return plus extensions. The SECURE Act 2.0 expands this provision and permits sole proprietors and single-member LLCs to establish and fund a new 401(k) plan up to the due date of its tax return. However, the plan must be established and funded before the employer’s original filing date. Sole proprietors and single-member LLCs cannot take advantage of any filing extensions.
Limited Participant Disclosures. You do not have to send disclosures for employees not participating if you told them initially
SECURE 2.0 simplifies a defined contribution plans (DC) obligation with respect to eligible employees who choose not to participate in the DC plan to only require providing (1) an annual notice of the individual’s eligibility to participant in the DC Plan and (2) any document requested by the individual that the individual would have been entitled to receive in the absence of SECURE 2.0’s reduced notice requirements. This simplification applies only with respect to those nonparticipating eligible employees who, in connection with their initial eligibility to participate, received all notices required to be furnished at that time, including the plan’s summary plan description. Effective for plan years beginning on or after January 1, 2023
Financial Incentives to Encourage Plan Participation - Gift cards to enroll
SECURE 2.0 alters the prohibition against conditioning any benefit (other than matching contributions) on whether an employee elects to participate in a defined contribution plan to allow employees to receive “de minimis financial incentives” to participate in the plan, but only if plan assets are not used to pay the incentive. SECURE 2.0 does not define de minimis but we believe that a “low-dollar gift card” should be permitted.
Qualified Birth Adoption – Up to $5000 available with 3 year limit on repayments
Timeframe for repaying Qualified Birth or Adoption Distribution (“QBAD”) limited to 3 years.
A participant who has taken a QBAD may repay that distribution to an eligible retirement plan accepting rollovers during the three-year period beginning on the day after the date on which the QBAD was received.
- Effective date: Plan years after December 31, 2019
- Applicable plans: 401(a), 401(k), 403(b), and governmental 457(b) plans and traditional IRAs
Natural Disaster Relief payment are available
SECURE 2.0 provides special rules permitting distributions of up to $22,000 to participants who reside within an area designated within a qualified federally declared disaster area or who suffered an economic loss because of the disaster that are exempt from the 10% additional tax that would otherwise apply to early withdrawals.
Participants can include a disaster distribution in income over a three year period and can repay the distribution within three years after the date the distribution occurred. Loans taken by participants from their defined contribution plan accounts relating to a disaster can have more generous terms than otherwise permitted – specifically, participants can borrow higher amounts and have longer periods to repay the loan. Effective for any disaster declared on or after January 26, 2021.
No 10% Penalty for emergency withdrawals
SECURE 2.0 adds several exceptions to the 10% additional tax that generally applies to early distributions:
- Participants who are terminally ill (effective for distributions after December 29, 2022)
- Participants who are victims of domestic abuse (effective for distributions on or after January 1, 2024
- For the payment of long-term care insurance premiums (effective for distributions after December 29, 2022).
Self-Certification for Hardship Distributions
SECURE 2.0 expands the availability of self-certification for hardship distributions.
Under current law, an employee is required to substantiate his or her expenses in order to be eligible to receive a distribution on account of financial hardship from a 401(k) plan or 403(b) plan, or to receive a distribution on account of an unforeseeable financial emergency from a 457(b) plan.
SECURE 2.0 removes the substantiation requirement and allows a plan administrator (Employer) to rely on the employee's written self-certification that:
- the circumstances for the hardship exist,
- the amount requested is not in excess of the amount required to satisfy the financial need, and
- the employee has no alternative reasonably available means to satisfy such a need.
Reliance on self-certification is not permitted if the plan administrator (Employer) has actual knowledge that is contrary to the employee's certification.
BEI Comment: While this provision will reduce the complexity of administering these types of distributions, it also may cause an increase in employees raiding their retirement accounts on the pretense of financial hardship because the application process will be easier.