The SECURE Act was initially released in December 2019 and sought to expand retirement savings coverage and increase savings overall. In late 2022, the Biden administration signed into law the Consolidated Appropriations Act, 2023 including the SECURE Act 2.0, which expands on the previous Act, with over 90 changes to the federal rules governing workplace retirement plans, many of which are beneficial to employees already enrolled or those seeking to enroll in plans in the future.
Detailed below are the provisions in the SECURE Act 2.0 with effective dates in the upcoming year that require immediate attention.
- Later Required Minimum Distributions (RMDs) – The SECURE Act 2.0 increases the age at which retirement plan participants must begin receiving RMDs from 72 to 73, effective January 1, 2023.
- Aggregation of Distributions on Tax-Preferred Retirement Accounts – Effective December 29, 2022, RMDs can be determined by aggregating distributions from both the annuity and non-annuity investments.
- Decreased Excise Tax for a Failure to Take RMDs – Effective for taxable years beginning after December 29, 2022, the excise tax rate is reduced from 50% to 25% of the missed RMD for workplace retirement plans and IRAs. Further, if an IRA makes a corrective distribution generally within two years, the excise tax is reduced to 10% for the IRA. The same is not true for workplace retirement plans.
- Repealed Limitations of Life Annuities – Effective for contracts purchased or received on or after December 29, 2022, the SECURE Act 2.0 repeals the 25% limit on the availability of life annuities in qualified plans and IRAs and allows up to $200,000 (indexed) to be used from an account balance to purchase a qualifying longevity annuity contract (QLAC). It also clarifies that “free look” periods are permitted up to 90 days for contracts purchased or received on or after July 14, 2014.
- Reduces Disclosures for Unenrolled Employees – Effective for plan years beginning after December 31, 2022, employers only must provide an annual reminder of unenrolled employees’ eligibility and deadline, if applicable, to participate in the plan. Employers must also provide such individuals with any plan documents they request.
- Allows Incentives For 401(K) and 403(B) Elections – Effective for plan years beginning after December 29, 2022, employers may provide de minimis financial benefits, such as low-value gift cards, as an incentive for employees to contribute to a 401(k) or 403(b).
- The legislation does not define what dollar amount would be considered de minimis, but based on long-standing IRS guidance in other contexts (for example, “de minimis” fringe benefits), the dollar value threshold is very low. The incentives cannot be paid from plan assets.
- Employer Contributions as Roth Contributions – Effective December 29, 2022, employers may allow plan participants to designate employer matching and nonelective contributions as after-tax Roth contributions, which would be included in the participant’s taxable wage income for the year made and must be immediately 100% vested.
- Permanent Relief for Federally Declared Disasters – Effective for federally declared disasters occurring on or after January 26, 2021, plans or IRAs may allow affected participants to take up to $22,000 of penalty-free distributions into taxable income over three years. Participants can recontribute those amounts to a tax-preferred retirement account within three years. Plans can also increase the affected participant’s loan limit to $100,000 or the participant’s vested account balance, and the repayment period on outstanding non-disaster plan loans can be extended by one year.
- This is permanent relief that eliminates the need for specific disaster relief to be issued by the IRS.
- Reliance on Employee’s Certification for Hardship Distributions – For plan years beginning after December 29, 2022, plan sponsors can rely on employees’ self-certification that the employee has experienced a hardship for purposes of taking a hardship withdrawal from a 401(k) or 403(b) plan and that the distribution does not exceed the amount required to satisfy the financial need.
- 10% Early Withdrawal Penalty Waived for Terminally Ill – Effective for distributions made after December 29, 2022, the 10% penalty on early withdrawals before age 59 1/2 is waived for distributions to terminally ill individuals whose physician certifies that their condition is expected to result in death within 84 months.
- Repayment of Qualified Birth or Adoption Distributions – Effective for distributions made after December 29, 2022 (and retroactively to the three-year period beginning on the day after the date on which such distribution was received), repayment of qualified birth or adoption distributions are limited to three years.
- Cash Balance Plan Interest Crediting Rates – Effective for plan years beginning after December 29, 2022, cash balance plans with variable interest crediting rates may use a projected “reasonable” interest crediting rate that does not exceed 6%.
- Elimination of Variable Rate Premium Indexing – Effective on December 29, 2022, SECURE 2.0 replaces the “applicable dollar amount” language for determining the premium funding target for purposes of unfunded vested benefits with a flat $52 for each $1,000 of unfunded vested benefits.
- Correction of Mortality Tables – Effective December 29, 2022, pension plans are not required to assume certain mortality improvements.
- 403(b) Investments in Collective Investment Trusts (CITs) – Effective December 29, 2022, CITs are permissible investments for 403(b) plans.
- Although this changes the tax rules, it appears that federal securities laws will need to be updated before 403(b) plans can invest in CITs.
- Multiple Employer 403(B) Plans – Effective for plan years beginning after December 31, 2022, 403(b) plans can participate in multiple employer plans (MEPs).
- Expanded Employee Plans Compliance Resolution System (EPCRS) – Effective December 29, 2022, SECURE 2.0 enhances the IRS’s self-correction program to: (1) allow more types of errors to be self-corrected without an IRS filing, (2) apply to inadvertent IRA errors, and (3) exempt certain RMD failures from the otherwise applicable excise tax.
- Auditor’s Report for “Group Of Plans” – Effective December 29, 2022, defined contribution plans filing a single Form 5500 as a “group of plans” must submit an auditor’s opinion if any plan in the group, individually, has 100 participants or more at the beginning of the plan year. The auditor’s report will relate only to each individual plan that would otherwise be subject to an independent accountant’s report.
- $500 Small Plan Tax Credit for Military Spouses – Effective for taxable years beginning after December 29, 2022, employers with 100 or fewer employees earning at least $5,000 in annual compensation can receive a general tax credit of up to $500 for three years if they make military spouses (1) eligible for defined contribution plan participation within two months of hire; (2) upon plan eligibility, they are eligible for any match or non-elective contribution that they would have been otherwise eligible for at two years of service; and (3) 100% vested in employer contributions. The credit is $200 per participating non-highly compensated military spouse, plus 100% of employer contributions made to the military spouse, up to $300. No credit is available for highly compensated employees. The credit is available for the year the military spouse is hired and the two succeeding taxable years. Employers may rely on the employee’s certification that they are an eligible military spouse.
- Small Employer Plan Start-Up Credit – Effective for taxable years beginning after December 31, 2022, the start-up credit for adopting a workplace retirement plan increases from 50% to 100% of administrative costs for small employers with up to 50 employees. Employers with a defined contribution plan may receive an additional credit based on the amount of employer contributions of up to $1,000 per employee. This additional credit phases out over five years for employers with 51-100 employees. The start-up credits are available for three years to employers that join an existing MEP, regardless of how long the plan has been in existence. The MEP rule is retroactively effective for taxable years beginning after December 31, 2019.
- SIMPLE and Simplified Employee Pension (SEP) Roth IRAs – Effective for taxable years beginning after December 31, 2022, SIMPLE IRAs can accept Roth (i.e., after-tax) contributions. In addition, employers can offer employees the ability to treat SEP contributions as Roth contributions (in whole or in part).
- SEPs for Domestic Workers – Effective for tax years beginning after December 29, 2022, employers of domestic employees (nannies, housekeepers, etc.) can provide retirement benefits for those employees under an SEP.
Almost all workplace retirement plans will need to be reviewed for possible amendments and operational changes to reflect SECURE 2.0.
While this article only details those provisions with immediate effective dates, many provisions in SECURE 2.0 are not effective until later years and require further guidance or regulation before they can be implemented by employers.
Employers should review their plan document and operations to determine what, if any, changes or updates will be needed to comply with provisions effective within the coming year as well as those with later effective dates.