Expanding Coverage and Increasing Retirement Savings with the SECURE 2.0 Act

Congress has passed long-awaited retirement legislation under Division T of the Consolidated Appropriations Act of 2023 known as the SECURE 2.0 Act of 2022 (the “Act”), which awaits the President’s signature.  The Act is a culmination of three closely-watched bills: the House bill known as the Securing a Strong Retirement Act, and two Senate bills – the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act, and the Enhancing American Retirement Now (EARN) Act.  The Act amends the Internal Revenue Code and the Employee Retirement Income Security Act in certain key ways and the following is a brief summary of the provisions that 401(k) and 403(b) retirement plan sponsors (as applicable) should note for plan design and administration purposes:

• RMDs. The Act provides an increase in the age for required minimum distributions (RMDs) effective for distributions made after December 31, 2022 with respect to individuals who attain age 72 after that date.  The new applicable required beginning date age is age 73 (for those who attain age 72 after December 31, 2022 and age 73 before January 1, 2033), and age 75 (for those who attain age 74 after December 31, 2032).  There are also other changes to RMD rules for tax years after the date of the Act’s enactment such as eliminating a penalty on partial annuitization and allowing participants to elect aggregate distributions from both portions of a retirement account to meet RMDs, reducing the excise tax on failures to take RMDs to 25%, and down to 10% for timely corrected failures, and beneficiaries of special needs trusts shall be treated as designated beneficiaries.  Pre-death RMDs are not required from Roth accounts after 2023 (but this does not apply to distributions that were required prior to 2024) and spousal beneficiaries can elect to be treated as the employee for purposes of RMDs after 2023.
• Employer Matching Contributions or Nonelective Contributions as Roth Contributions.  Effective for contributions made after the date of enactment of the Act, employers can make these contributions as vested Roth contributions.
• Student Loan Repayments and Matching Contributions.  Effective for plan years after December 31, 2023, employers may make matching contributions to a defined contribution plan on behalf of an employee on account of their qualified student loan payment.  The plan must provide matching contribution on account of elective deferrals at the same rate and vesting schedule as contributions on account of qualified student loan payments for employees otherwise eligible to receive matching contributions.
• Automatic Enrollment/Automatic Increase.  The Act provides for automatic enrollment requirements that apply to 401(k) (other than SIMPLE plans) and 403(b) plans established after December 31, 2024, and to employers adopting multiple employer plans.  These programs will need to satisfy the eligible automatic contribution arrangement rules such as minimum 3% deferrals in the first year of participation with automatic increases each year by 1% up to at least 10% (which can be increased further up to 15%) unless the participant elects otherwise, allowance of permissible withdrawals within 90 days, and default investments in qualified default investment alternatives.  These rules do not apply to governmental and church plans, businesses in existence for less than three years, small businesses with 10 or less employees (but will apply one year after the close of the first year that the employer employed more than 10 employees).
• Catch-up Contributions.  Effective for plan years after 2024, the Act provides an increased catch-up limit (for those who attain age 60 but not age 64 before the close of the tax year) to the greater of $10,000 (or $5,000 for SIMPLE plans) or 150% of the applicable catch-up amount for those who attained aged 50 and older.  Effective for plan years after 2023, participants whose wages exceed $145,000 (as adjusted) for a prior plan year can only make catch-up contributions as Roth contributions, and the plan must provide that any eligible participant may make catch-up contributions as Roth contributions.
• Eligibility of Part-Time Employees.  Generally effective for plan years after December 31, 2024, the look back period for eligibility of part-time employees in a 401(k) plan or 403(b) plan is two consecutive 12 month periods in which the employee has at least 500 hours of service.  The employer is not required to make nonelective or matching contribution on behalf of such employees.
• Increase in Involuntary Cash-out Limit.  The small balance cash-out limit is increased from $5,000 to $7,000 for distributions made after December 31, 2023.
• Emergency Distributions.  Effective after December 31, 2023, one distribution per calendar year can be made as an emergency personal expense distribution up to the lesser of $1,000 or an amount equal to the excess of the participant’s vested benefit over $1,000, for unforeseeable, immediate financial needs.  Individuals must wait 3 years to take another emergency distribution unless they have repaid the prior distribution to the plan or have contributions to the plan at least equal to the amount of the prior distribution.
• Linked Emergency Accounts.  Effective for plan years after December 31, 2023, a sponsor of an individual account plan can include in the plan design a pension-linked emergency savings account for non-highly compensated employees up to $2,500 (as adjusted) that they can fund with Roth contributions.
• Retirement Savings Lost and Found.  No later than 2 years after the date of enactment of the Act, an online searchable database to be known as the Retirement Savings Lost and Found will be established.  This will allow individuals to locate former plan administrators and retirement plans in which they were a participant or beneficiary, and update contact information.  For plan years beginning after the second December 31 after the date of the Act, plan administrators will need to provide information for the database, including the names and taxpayer identification numbers of each participant or former participant in the plan.  The Inspector General of the Department of Labor will conduct audits of the Retirement Savings Lost and Found.  Ideally, this program will assist with resolving missing and non-responsive participant issues.
• Qualified Distributions due to Federally Declared Disasters.  The 10% tax on early distributions from qualified retirement plans shall not apply to qualified disaster recovery distributions up to $22,000, and these distributions can be repaid to the plan within 3 years.  These provisions apply to such disaster distributions for which the incident period begins on or after the date that is 30 days after the enactment of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (i.e., January 26, 2021).
• Qualified Long Term Care Distributions.  The Act permits individuals to withdraw funds from their retirement accounts during the tax year to pay for long-term care insurance without being subject to the 10% early withdrawal penalty. The distribution cannot exceed the lesser of the insurance cost, 10% of the vested account, or $2,500 (as adjusted).  These provisions are effective 3 years after the date of enactment of the Act. 
• Pooled Employer Plans.  Effective for plan years after December 31, 2022, pooled employer plans must have a designated named fiduciary other than an employer in the plan who is responsible to collect contributions to the plan and implement written contribution collection procedures that are reasonable, diligent and systematic.  The Secretary of Labor will also conduct a study on pooled employer plans for Congress within 5 years of the Act (and every 5 years thereafter) and make it available on a public website, including recommendations on how they can be improved.
• Simplification of Certain Rules. The Act includes provisions to (i) expand the Employee Plans Compliance Resolution System to permit self -correction of inadvertent failures corrected within a reasonable period (including loan errors), (ii) clarify procedures on how to handle plan overpayments, (iii) allow for separate top heavy plan testing for excludable employees not meeting the plan’s age and service requirements (for plan years after 2023), (iv) clarify that repayments of qualified birth or adoption distributions made after enactment of the Act may be made during the 3-year period following the date the distribution was made, (v) allow plan administrators to rely on employee written certifications of immediate and heavy financial need for hardship withdrawals (for plan years beginning after the date of enactment of the Act), (vi) reform family attribution rules for plan years after 2023, (vii) permit penalty-free distributions for (A) domestic abuse victims up to the lesser of 50% of the vested account value or $10,000 (as adjusted) for plan years after 2023, and (B) terminally ill individuals after enactment of the Act, (viii) simplify disclosures required to be provided to unenrolled participants along with providing an annual reminder notice for plan years after 2022, and (ix) effective after 2025, require at least one written paper participant statement per year unless an exception is met (such as employee opt-in to electronic delivery). 
• Reporting and Disclosures. The Act also calls for several disclosure analyses such as (i) a study by the Secretary of Labor, the Secretary of Treasury and the Director of the Pension Benefit Guaranty Corporation to review the reporting and disclosure requirements under their respective purviews and report within 3 years to Congressional Committees regarding the effectiveness of the requirements and make recommendations to simplify them, (ii) a report by the Comptroller General of the U.S. to Congress within 18 months regarding the effectiveness of the Special Tax Notice (402(f) Notice) and to make recommendations regarding improvements of the explanations in the notice, and (iii) a report by the Secretary of Labor to Congress within 3 years on plan fee disclosures and related improvements.
• Auto-portability.  Automatic portability transactions can be made 12 months after the enactment of the Act from individual retirement accounts that were established due to employer plan small balance cash-outs to employer-sponsored retirement plans where the affected individual is an active participant.  These transactions will be subject to 60 days advanced notice requirements, individual opt-out rights, post-transaction notice requirements, audit requirements, and future review of the effectiveness of these transactions.
• Qualified Longevity Annuity Contracts (QLACs).  These contracts, which can be funded from accounts such as those under 401(k) and 403(b) plans, provide for deferred income annuities and the amount invested is not subject to required minimum distributions.  Effective no later than 18 months after the date of the enactment of the Act, the regulations for Longevity Annuity Contracts shall be amended to remove the 25% of the account balance cap on premiums for QLACs and increase the dollar limitation on premiums to $200,000 (as adjusted).  Further, QLACs with joint and survivor rights can still be payable following divorce provided that any qualified domestic relations order provides that the former spouse is entitled to survivor benefits and is the beneficiary under the contract.
• Starter-K.  For employers with no retirement plan, effective for plan years after December 31, 2023, employers can establish an elective salary deferral only starter plan with employees enrolled automatically at a minimum of 3% of pay, with contributions up to $6,000 (as adjusted), plus ability to make catch-up contributions for those who have attained at least age 50.  
• SIMPLE Plans.  Effective after December 31, 2023, employers may make additional non-elective contributions up to 10% of compensation (but not more than $5,000, as may be adjusted) for the year for eligible employees, and other contribution and catch-up limits are increased. For plan years beginning after 2023, a SIMPLE IRA plan can be replaced mid-year with a safe harbor 401(k) plan.
• De Minimis Incentives.  Effective for 401(k) and 403(b) plan years beginning after the date of enactment of the Act, employers may provide de minimis financial incentives not derived from plan assets (e.g., gift cards) to employees to elect to contribute salary deferrals to the plan.
• 403(b) plans.   For plan years after 2023, the Act provides that hardship withdrawals can include distributions of salary deferrals, QNECs, QMACs and applicable earnings, and the employee is not required to take an available loan first.  For plan years after 2022, certain 403(b) plans can also be multiple employer plans and pooled employer plans. 
• Small Employer Credit.  Effective after 2022, the Act provides an increased credit for small employers with up to 50 employees for 100% of start-up costs of eligible plans, and additional credits up to $1,000 per employee in certain circumstances. 

Plan amendments for the Act for non-governmental or non-collectively bargained plans can be made by the last day of the first plan year beginning on or after January 1, 2025 provided the plan or contract is operated consistently (with the corresponding due date in 2027 for governmental or collectively bargained plans rather than 2025). 

Plan sponsors and fiduciaries should set aside time to review the requirements of the Act, consider the impact to their retirement plans, and establish appropriate project timelines.   Employers of all sizes have many tools to assist workers in achieving their retirement savings goals. As always, Mintz’s Employment, Labor and Benefits team stands ready to help employers navigate these changes and future guidance that is issued.

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