Client Alert

SECURE 2.0 Act Signed Into Law – What Employers Should Know

The SECURE 2.0 Act of 2022 was signed into law by President Biden on December 29, 2022.  The SECURE 2.0 Act includes many changes relating to retirement plans and also builds upon the 2019 SECURE Act.  Following is a brief summary of some of the key provisions that employers should be aware of.

Childbirth and Adoption Expenses. The optional repayment period for repaying hardship withdrawals for childbirth and adoption expenses is changed from being unlimited to three years.

Changes to RMDs

• Effective January 1, 2023, the required beginning date for commencing required minimum distributions (“RMDs”) from qualified plans (e.g., defined benefit plans, money purchase, 401(a), 401(k)), 403(b) and 457(b) plans) will increase from: (1) age 72 to age 73 for individuals reaching 72 after December 31, 2022 and age 73 before January 1, 2033; and (2) age 73 to age 75 for individuals attaining age 74 after December 31, 2032.
• Beginning in 2023, the penalty for failing to take an RMD will decrease to 25% of the RMD amount not taken, from 50% currently.  The penalty will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return in a timely manner.
• Additionally, Roth accounts in employer retirement plans will be exempt from the RMD requirements starting in 2024.
• Beginning immediately, for in-plan annuity payments that exceed the participant’s RMD amount, the excess annuity payment can be applied to the year’s RMD.

Roth Matching and Non-Elective Contributions. Effective immediately, employers can permit participants in 401(k), 403(b) and governmental 457(b) plans to elect that matching or non-elective contributions are made as Roth (after-tax) contributions. Prior to this change, employers had to make matching and non-elective contributions on a pre-tax basis. Any such contributions must be fully vested.

Small Business Owners. Sole proprietors and single-member LLC owners may make voluntary employee contributions to a new 401(k) plan as late as the employee’s tax filing due date for the plan’s initial year.

Small Incentives. Employers may offer small incentives, such as gift cards, to employees to encourage plan participation.

Defined Benefit Plan Annual Funding Notices. Effective for plan years beginning after December 31, 2023, the content of the Annual Funding Notice for defined benefit plans must comply with new content requirements aimed at making the information clearer.

Match on Student Loan Repayments. The new legislation allows qualified student loan repayments (up to the dollar limit) to be treated as elective deferrals for purposes of matching contributions. The student loan must have been for higher education expenses. The match must be available to all employees who are eligible to make elective deferral contributions, and the rate of match and vesting must be same for both elective deferral contributions and student loan payments. The IRS is directed to issue regulations to flesh out the logistics for this option. This feature will be available for plan years beginning after December 31, 2023.

No Roth RMDs Before Death. Plans are now not required to make required minimum distributions of Roth accounts before the participant’s death. This rule takes effect for distributions required in years after December 31, 2023; a required distribution for 2023 is still required even if it could be paid as late as April 1, 2024.

Emergency Withdrawals up to $1,000.  Beginning in 2024, plans may allow self-certified withdrawals for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” up to $1,000. Only one such withdrawal is allowed per year, and only if any previous withdrawal is repaid to the plan within three years.

Emergency Savings Account up to $2,500. Plans may establish a separate Emergency Savings Account for non-highly compensated participants, funded with Roth contributions, which will still be eligible for match and can be subject to auto-enrollment. The account is held in cash or a money-market type fund. It will not be subject to the usual plan restrictions on withdrawal, there is no 10% penalty tax, and can be tapped as often as once a month. Such accounts may be adopted effective for plan years beginning after December 31, 2023.

Hardship Withdrawals Expanded. The existing defined hardship events are expanded to include financial needs due to domestic abuse that occurred within the prior year (up to $10,000). Permanent rules for federally declared disasters, based on previous disaster relief such as the CARES Act, will now allow up to $22,000 to be distributed and to be repaid to the plan or taken as a loan up to $100,000. For all hardships, in plan years after enactment, SECURE 2.0 permits participants to self-certify they have experienced a safe harbor hardship event, the employee has no alternative means reasonably available to satisfy such financial need, and the distribution is not in excess of the amount needed. Similar self-certification will apply to unforeseeable emergency withdrawals from a 457(b) plan.

Exception to Penalty on Early Distributions for Individuals with a Terminal Illness. Distributions prior to age 59½ are generally subject to a 10% penalty tax. Effective immediately, the 10% early withdrawal penalty will not apply to distributions if an individual’s doctor certifies they have a terminal illness expected to result in death within 84 months.

Recovery of Overpayments. Plan sponsors currently are required to make-up non-returned overpayments to their plans. Effective immediately, plan fiduciaries have discretion over whether to seek recoupment of mistaken overpayments (with certain exceptions for forfeiture restoration or a material impact on a pension plan’s ability to pay benefits). Rollovers of the mistaken overpayments will be treated as eligible rollovers. Any recoupment of overpayments is subject to new restrictions.

Age 50 Catch-Up Contributions. Age 50 catch-up contributions made to qualified plans must be made as Roth contributions by employees with compensation exceeding $145,000 (indexed). Other employees may still make catch-up contributions on a pre-tax basis.

Involuntary Cashouts. Under current rules, terminated employees with a retirement benefit worth $5,000 or less may be involuntarily cashed out. Effective December 31, 2023, this $5,000 threshold is increased to $7,000.

Lump Sum Windows. Defined benefit pension plans that offer “lump sum window” programs will be required to provide additional information to employees who are being offered a one-time lump sum payment option. This won’t become effective until after the Department of Labor issues guidance, which may make this change effective during 2024.

Starter 401(k) Plans. Starter 401(k) or 403(b) plans may be offered by employers with no current retirement plan. Employees will be auto enrolled in the plan at a 3% to 15% deferral rate.

Plan Amendments. Plan amendments that increase plan benefits retroactively may be adopted as late as the employer’s tax filing due date.

Age 60 Catch-Up Contributions. Age 50 catch-up contributions are limited to $7,500 for 2023. This limit will be increased by 50% for individuals age 60, 61, 62 or 63. For example, if the regular limit equals $8,000 for 2025, then the higher limit will equal $12,000 ($8,000 x 150%) for 2025 for those age 60, 61, 62 or 63.

Automatic Enrollment. New 401(k) and 403(b) plans must include automatic enrollment and automatic increase features starting at least at 3% and increasing 1% per year up to a maximum between 10% and 15%, inclusive. Excluded are pre-existing plans, businesses with 10 or fewer employees, new businesses, church plans and governmental plans.

Coverage for Part-Time Employees. Current rules require 401(k) plans to permit long-term part-time employees to make voluntary contributions after completing three consecutive years with at least 500 hours. The new law reduces the three-year requirement to two years and extends this rule to 403(b) plans governed by ERISA as well as to 401(k) plans.

Mandatory Participation in “Retirement Savings Lost and Found”. Within two years of SECURE 2.0’s enactment, the Department of Labor (“DOL”) must establish an online searchable database to allow participants and beneficiaries to search for and locate plan contact information. Plan sponsors will be required to provide information to the DOL to be included in the database. Participants can use the database to update their information.

Periodic Provision of Paper Benefit Statements. Effective for plan years beginning after December 31, 2025, defined contribution plans must provide one paper benefit statement annually to participants, and defined benefit plans must provide the paper benefit statement once every three years, unless a participant chooses to receive statements electronically or if the DOL’s e-delivery rules are followed.

What Should Employers Do Now?
Although this highlights some of the pertinent changes to the law, we recommend a thorough read through of the SECURE 2.0 Act (which can be found here).  Employers should then identify any amendments that must be made to their current retirement savings plans and policies and determine what optional provisions may be beneficial. We will continue to follow developments regarding the new legislation and will keep you apprised of any updates. If you have questions regarding these changes or any other employee benefits issues, please contact Ali Law Group.

About HRtelligence
HRtelligence (www.HRtelligence.com), a dynamic labor and employment content provider, provides actionable information and real-world strategies including employment trends, insights, practical guidance and strategies, created and curated by practicing attorneys on a wide range of topics, from Discrimination/EEO to Wage & Hour.