Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0) – Key Retirement Plan Provisions
In late December Congress was passing a giant omnibus budget bill. Buried within it was the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0), which contains many retirement (and some other) changes to be aware of. It provides new incentives for employers to offer retirement plans to their employees and for the employees to participate and improve their retirement security. SECURE 2.0 helps employees and their beneficiaries, owner-employees, small businesses, and retirees, and eases costs, administrative burdens, and penalties for inadvertent mistakes. It will also require most plans to be amended to comply with some of its provisions. The 2023 omnibus bill containing the following key retirement plan provisions was signed into law by the President on December 29, 2022.
Automatic salary deferral enrollment. For plan years beginning after 2024, the Act provides that a plan that permits salary deferrals generally will not be treated as a qualified cash or deferred arrangement or annuity contract unless it includes an automatic contribution arrangement (EACA) that satisfies these requirements:
- it must allow permissible withdrawals within 90 days after the first elective contribution;
- automatic contributions must be 3% to 10% during a participant’s first participation year, unless the participant elects out, automatically increasing by one percentage point each year to between 10% and 15% (but no more than 10% for plan years ending before 2025 for any non-“safe harbor” plan; and
- if the participant makes no investment election, automatically contributed amounts must be invested in accordance with DOL default investment rules.
Exceptions: Automatic enrollment is not required for SIMPLE 401(k) plans, plans established before December 29, 2022, governmental or church plans, plans maintained by an employer in existence for less than three years or with fewer than 11 employees.
New “starter” 401(k) plans. The Act establishes two new kinds of retirement plan designs for plan years beginning after 2023, which smaller employers may be inclined to offer to employees due to their eased costs and administrative burdens:
- a new type of section 401(k) plan called a starter 401(k) deferral-only arrangement, which is a cash or deferred arrangement maintained by an eligible employer that automatically satisfies the actual deferral percentage (ADP) nondiscrimination test. An employer can generally offer this type of plan only if it maintains no other plan in that year. All employees who meet the plan’s age and service requirements must be eligible to participate. The contribution percentage must be from 3% to 15%, applied uniformly. Employees may elect out or choose to contribute at a different level. No matching or nonelective contributions are permitted. Employee elective contributions for a calendar year may not exceed $6,000, adjusted for inflation, but catch-up contributions of up to $1,000, inflation indexed, are permitted for employees age 50 or over.
- a new type of 403(b) plan called a safe harbor deferral-only plan, for which requirements similar to those described for starter 401(k) deferral-only arrangements apply.
Improved coverage for part-timers. The Act modifies the rules that apply to long-term part-time employees under a 401(k) or 403(b) plan subject to ERISA to reduce the service requirement for those employees from three years to two consecutive years, for employees who have worked for the employer at least 500 hours per year and have met the minimum age 21 requirement by the end of the two-year period. This change is effective for plan years beginning after 2024.
More plan self-correction permitted. The Act expands the use of self-correction under the IRS Employee Plans Compliance Resolution System (EPCRS) in a number of ways. It generally allows qualified plans under Code Sec. 401, Code Sec. 403, as well as SEPs and SIMPLE IRAs under Code Sec. 408 to self-correct certain inadvertent failures (defined expansively, but not including egregious or abusive violations), including participant-loan-related errors, without advance permission, unless the error is identified by IRS before any corrective actions is taken, or the self-correction is not completed within a reasonable time after the failure is identified.
The Act also directs IRS to allow custodians to use EPCRS to address various IRA failures, including failures to make required minimum distributions and attempted rollovers by nonspouse beneficiaries from inherited IRAs. These provisions are effective as of December 29, 2022, and EPCRS must be revised for these changes within two years.
Eased notice requirements for unenrolled participants. For plan years after 2022, the Act exempts defined contribution plans from intermittent notification requirements for participants who elect not to participate, and who have already received a summary plan description and any other notices related to initial eligibility. However, unenrolled participants must still receive: an annual reminder notice of their eligibility to participate with any applicable deadlines; and certain other documents they request.
Extended plan amendment period. The deadline for plan amendments made under the Act or any related IRS or DOL regulation is the end of the first plan year beginning on or after January 1, 2025 (2027 for governmental and collectively bargained plans). In the interim, a plan that operates as if a retroactive amendment were already in effect generally will not be treated as violating the anti-cutback rules. The Act also conforms certain plan amendment deadlines under the SECURE Act, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 to these new dates.
Catch up contributions of highly compensated. For tax years beginning after 2023, catch-up contributions under Code Sec. 401(k), Code Sec. 403(b), or Code Sec. 457(b) plans are subject to mandatory Roth tax treatment, for those made by participants whose wages for the preceding calendar year exceed $145,000, as annually indexed for inflation. This rule does not apply to simplified employee pensions under Code Sec. 408(k), or to SIMPLE IRAs under Code Sec. 408(p).
Even plans that do not provide a designated Roth contribution feature will now be forced to include and account for designated Roth contributions to the extent that they have employees with income that exceeds the annual limitation.
Matching or nonelective Roth contribution option. Before the Act, employers were not permitted to make matching or nonelective contributions on a Roth basis. For contributions made after December 29, 2022, however, a Code Sec. 401(a) qualified plan, a Code Sec. 403(b) plan, or a governmental Code Sec. 457(b) plan may permit a participant to designate some or all employer matching contributions and nonelective contributions as designated Roth contributions. This applies only to the extent that a participant is fully vested in these contributions.
Contribution changes for SIMPLE plans. Employers with SIMPLE plans currently must either make contributions for employees of 2% of compensation or match employee elective deferral contributions up to 3%. For tax years beginning after 2023, the Act permits an employer to make additional contributions to each employee of the plan in a uniform manner, of up to the lesser of up to 10% of compensation or $5,000 (indexed).
The Act also increases the SIMPLE annual deferral limit and the catch-up contribution at age 50 by 10%, compared to the limit that would otherwise apply in the first year this change is effective (tax years after 2023) for employers with no more than 25 employees. Employers with 26 to 100 employees could provide for higher deferral limits, but only if they either provide a 4% match or a 3% employer contribution. Similar changes to the contribution limits also apply for SIMPLE 401(k) plans.
We know that this amount of information is overwhelming, but there is much here that may affect you or your business and induce or require you to change your retirement plan or how you handle your account and distributions. It’s a lot to consider.
Be assured that we can help you with all of this. Please don’t hesitate to call us for more information and our assistance.