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SECURE 2.0 Act of 2022 Makes Sweeping Retirement Plan Changes

January 5, 2023

 The 2022 holiday season brought a long-awaited gift from Congress; the retirement plan bill known as “SECURE 2.0” (successor to 2019’s Setting Every Community Up for Retirement Enhancement Act, the original “SECURE Act”) was passed by the House and Senate just before Christmas and was signed into law by President Biden on December 29, 2022.  While the primary focus of the new law is increasing access to (and use of) workplace retirement plans such as 401(k) plans, the law also includes many other provisions designed to improve plan operations, and in some cases generate tax revenue.  The provisions in the law are too many to describe all of them in detail; those that are expected to be of the most interest to employers and individuals, with applicable effective dates, are summarized below:    

Required Automatic Enrollment and Automatic Escalation:

Current Rule: Automatic enrollment is an arrangement under which 401(k) contributions at a specified rate are withheld from an employee’s pay and deposited into the plan, unless the employee affirmatively opts out.  Although automatic enrollment has become increasingly popular over the last several years (and has been shown to increase retirement plan savings for lower-paid workers in particular), plans have never been required to include this provision.     

New Rule:  SECURE 2.0 requires plans to include provisions for automatic enrollment, starting at an amount not less than 3% of compensation nor more than 10% of compensation, with automatic escalation of 1% per year until the deferral rate reaches an amount of at least 10% of compensation but not more than 15% of compensation.  All current 401(k) and 403(b) plans (in existence before the date of enactment) are grandfathered and need not include this provision.  In addition, there are exceptions for small businesses with 10 or fewer employees, new businesses (less than 3 years), church plans, and governmental plans.

Effective Date:  Plan years beginning after December 31, 2024.

Participation of Long-Term Part-Time Employees:

Current Rule:  Historically, 401(k) plans were permitted to impose an eligibility requirement of one year of service, defined to require 1,000 hours of service in a 12-month period, effectively excluding part-time employees who never satisfied the requirement.  The 2019 SECURE Act changed the rule to require eligibility for part-time employees who complete at least 500 hours of service in each of 3 consecutive years, although that eligibility can be limited to the 401(k) component of the plan (i.e., no employer contributions are required).  Since pre-2021 service was not required to be counted for purposes of the 3-year rule, the practical effective date of the 2019 SECURE Act change was January 1, 2024.   

New Rule: SECURE 2.0 reduces the 3 year requirement to 2 years.  It also extends the requirement to apply to 403(b) plans that are subject to ERISA.

Effective Date: Plan years beginning after December 31, 2024.

Retirement Plan Tax Credits for Small Employers:

Current Rule:  Under changes made by the 2019 SECURE Act, an employer with not more than 100 employees that adopted a new retirement plan could enjoy an annual tax credit for up to 3 years, equal to the lesser of 50% of the cost of establishing the plan or $5,000.  

New Rule:  SECURE 2.0 increases the percentage from 50% to 100% for employers with not more than 50 employees, and also establishes a tax credit for plan contributions made by small employers to a new plan.  The credit is equal to a percentage of the amount contributed by the employer up to a cap of $1,000 per employee (not counting contributions for employees with compensation in excess of $100,000, as indexed).  The percentage is 100% for each of the first two years, 75% for the third year, 50% for the fourth year, and 25% for the fifth year.  

Effective Date:  Tax years beginning after December 31, 2022.

De Minimis Incentives to Improve Retirement Plan Participation:

Current Rule:  Prior to SECURE 2.0, employers were prohibited from offering incentives or other benefits contingent upon employee contributions to retirement plans, other than matching contributions.

New Rule:  SECURE 2.0 now allows employers to offer “de minimis financial incentives,” such as gift cards in modest amounts, to encourage plan contributions by employees.  (The law does not define “de minimis”; presumably, the IRS will issue guidance to clarify.)

Effective Date:  Plan years beginning after December 31, 2022.

Emergency Savings Accounts:

Current Rule:  Although 401(k) and 403(b) plans are permitted to allow employees to take “hardship distributions” in certain cases, there is currently no mechanism for maintaining any kind of account specifically designed for emergency situations.

New Rule:  Going forward, plans will be permitted to include “emergency savings accounts” funded by after-tax Roth contributions made by Non-Highly Compensated Employees.  Balances in these accounts must be available for distribution at least once per month.  Contributions to the account cannot be made to the extent that they would cause the account balance to exceed $2,500 (adjusted for inflation).  Employee contributions to the account must be eligible for matching contributions at the same rate applicable to other employee contributions.  (Provisions for these accounts are optional and need not be included by employers in their plans.)

Effective Date:  Plan years beginning after December 31, 2023.

Withdrawals for Emergency Expenses:

Current Rule:  Generally, withdrawals from retirement accounts prior to age 59½ are subject to a 10% penalty, in addition to ordinary income tax, without regard to the reason for the withdrawal. 

New Rule:  Going forward, one emergency expense withdrawal up to a maximum of $1,000 will be permitted each year.  The participant must be permitted to repay the withdrawal to the plan within the following three years.  Additional emergency expense withdrawals within the three-year period are limited if repayment (or equivalent contributions) have not been made.

Effective Date:  Withdrawals taken after December 31, 2023.

Retirement Savings Lost and Found:

Current Rule:  Employees who change jobs and/or move often lose track of benefits in employer-sponsored retirement plans, and plan administrators struggle to locate them to pay the benefits to which they are entitled.  

New Rule:  SECURE 2.0 directs the establishment of an online searchable database that will allow plan participants (and beneficiaries of deceased participants) to search for contact information for administrators of plans in which they might have an interest.  Plan administrators will be required to share information with the Department of Labor to be included in the data base. 

Effective Date:  Within 2 years of enactment of SECURE 2.0 (i.e., by the end of 2024).

Increased Limits on Catch-Up Contributions for Ages 60 – 63:

Current Rule:  In addition to the regular 401(k) deferral limit ($22,500 in 2023), employees who have reached age 50 are permitted to make “catch-up” contributions to 401(k) plans, up to an additional limit ($7,500 in 2023). 

New Rule:  SECURE 2.0 increases the catch-up contribution limit to the greater of $10,000 or 150% of the regular catch-up limit for employees who attain ages 60, 61, 62, or 63 during the year.  (At ages 64 and older, the regular catch-up limit will remain available.)     

Effective Date:  Tax years beginning after December 31, 2024 (with adjustments for inflation for years after 2025).   

Catch-Up Contributions Required to be After-Tax Roth:

Current Rule:  In addition to the regular 401(k) deferral limit ($22,500 in 2023), employees who have reached age 50 are permitted to make “catch-up” contributions to 401(k) plans, up to an additional amount ($7,500 in 2023).  Currently, both regular and catch-up contributions can be made on either a traditional pre-tax basis or on an after-tax Roth basis, as elected by the employee. 

New Rule:  Going forward, all catch-up contributions by employees with annual compensation in excess of $145,000 (as indexed) will be required to be made on an after-tax Roth basis.  Employees with compensation below the threshold will still be permitted to make catch-up contributions on a pre-tax basis.

Effective Date:  Tax years beginning after December 31, 2023.

Matching and Nonelective Contributions Permitted to be After-Tax Roth:

Current Rule:  Currently, all matching and nonelective contributions (also known as profit sharing contributions) made by employers to 401(k) and 403(b) plans are required to be pre-tax contributions.

New Rule:  Going forward, plans will be permitted to allow employees to elect to designate the matching and nonelective contributions allocated to their accounts to be after-tax Roth contributions.  This provision is optional; employers who wish to avoid the additional administrative complication will be permitted to continue to make all employer contributions on a pre-tax basis.  Also, the new rule only applies to contributions that are fully vested when made.   

Effective Date:  Immediate upon enactment of SECURE 2.0. 

Matching Contributions for Student Loan Payments:

Current Rule:  Currently, employers are not permitted to make matching contributions to a 401(k) or 403(b) plan as a result of any action other than employee contributions to the plan.  In recent years, this rule has created concerns for those employees who not in a position to make employee contributions because they are saddled with student loan debt.

New Rule:  Going forward, employers will be permitted to make matching contributions to 401(k) and 403(b) plans based on student loan payments made by employees, essentially treating such payments as though they were employee contributions to the plan, and such matching contributions will be counted for purposes of nondiscrimination testing purposes.

Effective Date:  Plan years beginning after December 31, 2023. 

Participant Statements Required on Paper Annually:

Current Rule:  In recent years, the trend has been to allow employers to provide retirement plan notices and information to participants electronically, as permitted by applicable law.  This includes the 401(k) plan participant statements required to be provided on a quarterly basis. 

New Rule:  Unless a participant elects otherwise, plan administrators will be required to provide a paper benefit statement at least annually.

Effective Date:  Plan years beginning after December 31, 2025. 

Mandatory Cash-Out Threshold Increased to $7,000; Automatic Portability:

Current Rule:  If a former employee has a vested plan account balance that does not exceed $5,000, and if the former employee does not make an affirmative election to receive a distribution from the plan, the employer is permitted to force the former employee out of the plan by making a mandatory cash-out distribution.  If the vested account balance exceeds $1,000, the forced cash-out must be transferred to an IRA established by the plan administrator for the participant via an “automatic rollover.”    

New Rule:  SECURE 2.0 raises the mandatory distribution threshold from $5,000 to $7,000.  In addition, an amount transferred to an automatic rollover IRA can automatically be transferred to the retirement plan maintained by the employee’s new employer without any action required from the employee.   

Effective Date:  Distributions made after December 31, 2023. 

Further Increase in Age for Required Minimum Distributions:

Current Rule:  Historically, participants in retirement plans (including IRAs as well as employer-sponsored plans) had to commence required minimum distributions (RMDs) at age 70½, although non-owner employees were permitted to postpone RMDs from employer-sponsored plans until actual retirement.  The 2019 SECURE Act increased the applicable age to age 72, effective for individuals who had not reached age 70½ by December 31, 2019.

New Rule:  SECURE 2.0 further increases the RMD age to age 73 effective January 1, 2023 and then age 75 effective January 1, 2033.     

Effective Dates:  As stated above.   

Pre-Death Distributions From Roth Accounts No Longer Required:

Current Rule:  Required minimum distributions (RMDs) are not required to begin prior to the death of the owner of a Roth IRA.  On the other hand, pre-death RMDs are required to be made from Roth accounts within 401(k) plans. 

New Rule:  SECURE 2.0 puts Roth IRAs and Roth 401(k) accounts on equal footing, by eliminating the pre-death RMD requirement for 401(k) plans. 

Effective Date:  Tax years beginning after December 31, 2023. 

Plan Amendments:

Plan amendments to comply with the requirements of SECURE 2.0 need not be adopted before the end of the plan year beginning in 2025.  SECURE 2.0 also extended the deadlines for adopting amendments for other recent laws, including the 2019 SECURE Act and the 2020 CARES Act, to this same deadline.  However, as is always the case with extended amendment deadlines, employers might want to consider earlier amendments to ensure that plan language conforms to operational requirements, thereby reducing the risk of non-compliance.  Further, since new employee opportunities are meaningful only if employees are made aware of them, employee communications reflecting SECURE 2.0 changes (e.g., updated Summary Plan Descriptions) should also be considered.             

Please contact Gary Gunnett at (412) 288-2210 or ggunnett@hh-law.com with any questions on any of the above.

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