Each year, our Technical Services Committee creates a Regulatory Update covering the legislative, regulatory, and litigation developments affecting retirement plans. This year on the legislative front has been laser focused on SECURE 2.0.
While technically signed into law in 2022, the most significant legislative item on everyone's mind in 2023 has been SECURE 2.0. This retirement-focused legislation came on the heels of the original SECURE Act signed in 2019.
Combined, the two acts represent the most sweeping retirement plan changes in over a decade.
SECURE 2.0 closed some of the gaps in the original SECURE Act and introduced a variety of new provisions, many of which expand a participant's access to retirement funds. Practitioners have spent much of 2023 writing about and interpreting the new rules.
Below are some of the more notable provisions:
2023 Provisions
- Required Minimum Distributions (RMDs)
- Required beginning date moves from 72 to 73 in 2023
- Required beginning date moves to age 75 in 2033
- Penalty for failure to complete RMDs moves from 50% to 25% (10% if failure is identified and corrected within two years)
- Financial incentives for employees
- Plan sponsors may provide de minimis financial incentives to encourage plan participation
- Financial incentives may not be paid out of plan assets
- Self-certification of Hardship Distributions
- Employees may self-certify all aspects of the need for a hardship distribution
- They have an immediate financial need
- The amount requested does not exceed the financial need
- They have no other means of meeting the need
- Roth treatment of employer contributions
- Plan sponsors can allow employees to have matching and non-elective employer contributions made on an after-tax basis
- Employees must be 100% vested at the time of the contribution
- Contributions would be taxable to the employee in the year they are made
- Federal disaster relief
- Distributions up to $22,000 per disaster for federally declared disasters are not subject to the 10% early withdrawal penalty
- Distributions can be included in the participant's gross income over three years
- For loans, the loan limit increases from $50,000 to $100,000 if taken within 180 of the declared disaster, and payments can be stopped on current loans for 180 days
- Penalty-free withdrawals for terminal illness
- Must be certified by a physician that the participant has a terminal illness that is expected to result in death within the next seven years
- Employees may self-certify all aspects of the need for a hardship distribution
2024 Provisions
- Emergency savings provision – Separate ‘sidecar’ account
- Allows employer or employee to contribute up to $2,500 into a separate account to be used for emergencies
- Treated as after-tax Roth contributions and must be invested in a short-term investment vehicle with little to no investment risk
- Emergency Savings Provision – penalty free withdrawals for emergencies
- Option for a penalty-free emergency withdrawal of up to $1,000 from the retirement account
- Participant may self-certify the need
- Participant may repay the distribution within three years and cannot make another emergency withdrawal during that time if the original distribution has not been repaid
- Domestic abuse:
- Victims of domestic abuse can take penalty-free withdrawals up to $10,000 or 50% of their account balance
- Employees may self-certify, and the distribution must be made within one year of the domestic abuse
- Student loan repayments
- Plan sponsors could allow a qualified student loan payment to be eligible for an employer-matching contribution to the employee's retirement account
- The employee must certify to the employer that the student loan payment qualified for the matching contribution
- Catch-up contributions for individuals earning over $145,000
- Mandatory provision for individuals who earned more than $145,000 the previous year that catch-up contributions MUST be made on an after-tax Roth basis
- This provision remains effective 1/1/2024, but the IRS issued guidance in August that delays implementation to 2026
- Small-sum forced distributions
- Plan sponsors can currently force out inactive small balances under $5,000
- Provision increases the amount that can be forced out from $5,000 to $7,000
2025 Provisions:
- New plans are required to have auto-enroll and auto-escalate provisions
- Plans established after 2022 must auto-enroll all participants at 3% and auto-escalate 1% each year to 10%
- Participants can opt out of the enrollment or the escalation
- Increased catch-up contributions for ages 60-63
- Employees aged 60-63 may make catch-up contributions of $10,000 or 150% of the age 50 catch-up amount allowed for that year
- Long-term part-time employees
- Original SECURE Act included a provision requiring plan sponsors to provide employees with three years of service with 500 hours or greater access to make voluntary contributions to the retirement plan.
- SECURE 2.0 shortens the timeframe to two years of service with over 500 hours
- Employer does not need to make matching contributions
- Plan amendments
- Amendments to reflect any changes resulting from SECURE 2.0, SECURE 1.0, CARES Act and Relief Act must be completed by the end of the first plan year beginning on or after January 1, 2025
2026 Provisions:
- Long-term care insurance premiums
- Penalty-free withdrawal of up to $2,500 to pay for long-term care insurance
- Penalty-free withdrawal of up to $2,500 to pay for long-term care insurance
- Paper statement requirement
- Defined contribution plans must send at least one paper statement a year
- Defined benefit plans must send one paper statement at least every three years.
Many of the SECURE 2.0 provisions are not immediately effective. Still, plan sponsors should begin conversing with recordkeepers on how they plan to handle mandatory provisions and timing for the availability of optional provisions. This would be a good time for plan sponsors to review current benefit packages to understand if any optional provisions would be an appropriate fit for the plan or if changes should be made to comply with mandatory provisions.
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