SECURE 2.0 Has Arrived – Here's What You Need to Know

9 min

On December 29, 2022, President Biden signed into law the Consolidated Appropriations Act, 2023. This legislation includes the highly anticipated SECURE 2.0 Act, which expands and supplements the original SECURE Act of 2019 (see our previous alert here discussing the SECURE Act). This client alert highlights certain key provisions of SECURE 2.0 impacting employer retirement plans.

  1. Expansion of Automatic Enrollment. SECURE 2.0 requires 401(k) and 403(b) plans established after December 29, 2022 to automatically enroll participants in the plan upon attaining eligibility. Participants are initially enrolled at a deferral rate of at least 3% but not more than 10%. The amount is gradually increased by 1% per year until it reaches at least 10% (but not more than 15%). Employees must be allowed to opt out. Effective for plan years beginning after December 31, 2024, with respect to plans established after December 29, 2022.
  2. Increase in Part-Time Worker Access to Retirement Plans. The original SECURE Act prohibits a 401(k) plan from imposing a service-based exclusion on an employee who completes at least 3 consecutive 12-month periods with at least 500 hours of service in each period (and who has reached age 21). Under SECURE 2.0, the same rule applies, except that the service-based exclusion threshold is reduced to 2 consecutive 12-month periods rather than 3. In addition, the rule is extended to 403(b) plans that are subject to ERISA (generally, non-governmental, non-church plans). Effective for plan years beginning after December 31, 2024. (The original SECURE Act rule still applies effective for the 2024 plan year.)
  3. Catch-up Contributions Limited to Roth Contributions for Certain Employees. SECURE 2.0 permits age 50 catch-up contributions to 401(k), 403(b), and government 457(b) plans to be made only on a Roth basis, not a pre-tax basis, for employees with compensation over $145,000 (indexed for inflation) for the preceding year. Note that this is similar to, but not the same as, the "highly compensated employee" threshold. Effective for taxable years beginning after December 31, 2023.
  4. Increase in Catch-up Limit for Individuals Ages 60-63. SECURE 2.0 increases the catch-up contribution limit for individuals who reach ages 60-63 by the end of the year. The new limit is equal to the greater of (1) $10,000 or (2) 150% of the catch-up limit for individuals between ages 50 and 59. These dollar amounts are indexed annually for inflation starting on January 1, 2026. Effective for taxable years beginning after December 31, 2024.
  5. Treatment of Student Loan Payments as Elective Deferrals for Employer Matching Contributions. SECURE 2.0 allows an employer to make matching contributions to 401(k), 403(b), and governmental 457(b) plans with respect to qualified student loan payments, which are payments made by an employee in repayment of a qualified education loan incurred by the employee to pay qualified higher education expenses. The annual deferral limit applies to elective deferrals and student loan payments on a combined basis. For purposes of nondiscrimination testing, employer contributions with respect to qualified student loan payments are treated as matching contributions, and plans are permitted to test separately the employees who receive matching contributions on student loan payments. An employer may rely on an employee's certification that student loan payments were made without further verification. Effective for contributions made for plan years beginning after December 31, 2023.
  6. Optional Treatment of Employer Matching Contributions and Nonelective Contributions as Roth Contributions. SECURE 2.0 allows an employer to make matching and nonelective contributions to 401(k), 403(b), and government 457(b) plans on a Roth basis. Such contributions must be 100% vested when made. Effective for contributions made after December 29, 2022.
  7. Increase in Age for Required Minimum Distribution. The original SECURE Act increased the required minimum distribution age from 70½ to 72 in 2020. SECURE 2.0 increases the required minimum distribution age to 73 as of January 1, 2023, and to 75 as of January 1, 2033.
  8. Recovery of Retirement Plan Overpayments. Effective immediately, SECURE 2.0 removes the long-standing requirement for 401(a), 403(a), 403(b), and governmental plan fiduciaries to recoup inadvertent overpayments paid to plan participants in order to comply with ERISA and/or the Internal Revenue Code (as applicable). In addition, inadvertent overpayments that were rolled over may continue to be characterized as eligible rollover distributions and no longer need to be disgorged or reported as ineligible for rollover. But a plan fiduciary may determine, in the exercise of its discretion, to pursue recovery of all or a portion of the overpayments subject to restrictions, including no payment of interest, collection costs, or fees. The relief from overpayment recovery does not apply where a participant or beneficiary is culpable, or to a fiduciary whose breach resulted in the overpayment. The statute also does not relieve plan sponsors of any minimum funding shortfall resulting from the overpayments, and plan sponsors must avoid impermissible forfeitures.
  9. Expansion of Employee Plans Compliance Resolution System. EPCRS has been significantly expanded to allow plan sponsors to use self-correction for inadvertent "significant operational failures" at any time, as long as the IRS has not identified the error before corrective actions are taken. The prior 3-year period for making self-correction of significant operational failures has been eliminated. Under SECURE 2.0, correction must occur within a reasonable period after the failure was identified. Inadvertent plan loan errors can also now be self-corrected. SECURE 2.0 also makes the safe harbors for employee elective deferral failures under automatic enrollment plans permanent if corrected prior to 9½ months after the end of the plan year in which the failures occurred. The changes are effective immediately. The IRS has a 2-year period to issue new EPCRS guidance.
  10. Withdrawals for Emergency Expenses. SECURE 2.0 adds a new distribution option for certain emergency expenses that create unforeseeable or immediate financial needs. Participants can make one $1,000 withdrawal to pay for these expenses without incurring a 10% early distribution penalty. The plan may rely upon the participant's written certification that they meet the requirements for the emergency personal expense distribution. There is a 3-year repayment window in which a distribution can be made to replace the funds, but no further withdrawals will be permitted during the 3-year window without repayment. Effective for distributions after December 31, 2023.
  11. Use of Retirement Funds in Connection with Qualified Federally Declared Disasters. SECURE 2.0 makes disaster-related distribution and loan relief automatic for affected individuals upon issuance of a federally declared disaster. Affected individuals may take a distribution of up to $22,000 from retirement plans. These distributions are taken into account as gross income over 3 years, but are not subject to the 10% additional tax under Code Section 72(t). Additionally, employers may increase the maximum loan amount for affected individuals and allow them an additional one-year period in which to repay loans. The expanded disaster-related rules are effective for disasters occurring on or after January 26, 2021.
  12. Increase in Dollar Threshold for Mandatory Distributions. SECURE 2.0 increases the cashout threshold for mandatory distributions to terminated participants from $5,000 to $7,000 for distributions made after December 31, 2023.
  13. De Minimis Financial Incentives for Contributing to a Plan. Under SECURE 2.0, employers may offer de minimis financial incentives, such as low-dollar gift cards, that are not paid for with plan assets, to incentivize employee participation in 401(k) and 403(b) plans. Guidance is needed to define de minimis. Effective for plan years beginning after December 29, 2022.
  14. Lower Excise Tax for Failure to Take Required Minimum Distributions. SECURE 2.0 reduces the excise tax for participants who fail to take required minimum distributions on a timely basis from 50% to 25% of the amount that should have been distributed. Additionally, if the failure is corrected in a timely manner (as defined in the statute), the excise tax is further reduced to 10%. Effective for taxable years beginning after December 29, 2022.
  15. Pension-Linked Emergency Savings Accounts. Under SECURE 2.0, employers may offer non-highly compensated employees a "pension-linked emergency savings account" and automatically enroll them at no more than 3% of the employee's compensation. Employee contributions are capped at $2,500, and are treated as Roth contributions for which the requirements are automatically met for tax-free withdrawal. If the plan provides matching contributions for elective deferrals, pension-linked emergency savings account contributions must also be matched at the same rate (not in excess of $2,500), with matching contributions made to the plan's matching contribution subaccount. Distributions are exempt from the 10% penalty on early withdrawal. Effective for plan years beginning after December 31, 2023.
  16. Qualified Birth or Adoption Distribution Repayment Limit. The original SECURE Act allowed participants to make a qualified birth or adoption distribution (QBAD) of up to $5,000 from their retirement plan for expenses related to birth or adoption without incurring the 10% additional tax under Code Section 72(t). These distributions are treated as rollover eligible, and they can be recontributed to the retirement plan at any time. SECURE 2.0 amends the QBAD provisions to limit the recontribution period to 3 years. This change brings the QBAD provisions in line with the Code limitations, which prevent the issuance of refunds 3 years after the filing of the tax return. Effective for distributions made after December 29, 2022, and retroactively to the 3-year period beginning the day after the distribution was received.
  17. Starter 401(k) Plans for Employers with no Retirement Plan. SECURE 2.0 permits an employer that is not sponsoring a retirement plan to offer a starter 401(k) or safe harbor 403(b) plan to its employees that is exempt from certain nondiscrimination requirements. These plans require that all employees be automatically enrolled in the plan at a deferral rate ranging from 3% to 15% of their compensation, although employees can opt out. The limit on annual deferrals is the same as the IRA contribution limit ($6,500 for 2023), with an additional $1,000 in catch-up contributions available to individuals who are age 50 or older. Effective for plan years beginning after December 31, 2023.
  18. Application of Code Section 415 Limits to Rural Electric Cooperatives. Previously, the amount of benefits that a defined benefit pension plan may pay to a participant is limited to the actuarial equivalent of a life annuity with annual payments equal to the lesser of $265,000 (for 2023) or 100% of the participant's compensation. SECURE 2.0 eliminates the compensation-based limit for non-highly compensated employees who are participating in a rural electric cooperative plan. Effective for limitation years ending after December 29, 2022.

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Please contact the members of Venable's Employee Benefits and Executive Compensation Practice Group for additional information about these changes and how they may impact your retirement plans.