Background
The Consolidated Appropriations Act was passed by Congress on Dec. 23, 2022, and then signed on Dec. 29, 2022, which gave us the Securing a Strong Retirement Act (SECURE Act 2.0). While some changes are mandatory, most are optional, with various effective dates starting in 2023. Many plans will have to be amended for any changes that are chosen under SECURE 2.0. While there are 92 provisions total in the legislation, we cover those that we believe could be the most impactful to Plan sponsors.
Impactful Provisions
Automatic Enrollment and Auto Escalation – Mandatory
New 401(k) and 403(b) plans must include an automatic enrollment feature, where input must be at least three percent, but no more than 10 percent. They must also auto escalate annually by one percent – they can do so up to at least 10 percent with a maximum at 15 percent. Plan sponsors must also offer the opportunity to withdraw contributions within 90 days of automatic enrollment. Those who are exempt from this provision are existing plans, church plans, SIMPLE plans, small employers with 10 or fewer employees, governmental plans and any new employers who have only been in existence for less than three years. The effective date is for plan years beginning after Dec. 31, 2024.
Required Minimum Distributions (RMDs) – Mandatory
SECURE 2.0 raised the required age for RMDs to 73 for those who turn age 72 after Dec. 31, 2022, and also increased the required age to 75 for those who turn 74 after Dec. 31, 2032. The penalty to take an RMD decreased from 50 percent to 25 percent. The effective date is for plan years beginning after Dec. 29, 2022, meaning this should have been implemented for 2023 plans.
Matching on Student Loan Payments – Optional
Employers can make a matching contribution for employees who have a “qualified student loan payment.” This means that employers may certify/verify the student loan payment, but also allows for self-certification by the employee. The match is generally at same rate and same extent as the match on elective deferrals. This has potential to be a great benefit for those paying off loans, although recordkeepers will need to determine how they will implement this into their systems. The effective date is for plan years beginning after Dec. 31, 2023.
Emergency Savings Account – Optional
The provision would be offered to non-highly compensated employees, making contributions to a savings account within a defined contribution plan. The amounts are capped at $2,500 and treated similarly like a Roth IRA. These contributions are also eligible for matching. These funds could encourage plan participants to save for short-term and unexpected expenses. Plan sponsors should consider any administrative burdens and complexities in offering it to employees. The effective date is for plan years beginning after Dec. 31, 2023.
Catch-Up Contributions – Increased
The catch-up contribution increase is applicable to those at least age 50 by the end of the current calendar year, with the limit in 2023 set at $7,500 for individuals ages 60 to 63. For 401(k), 403(b) and 457(b) plans, the amount should be the greater of $10,000 or 150 percent of the regular catch-up amount for 2024. For SIMPLE plans, the amount should be the greater of $5,000 or 150 percent. The amounts will be adjusted annually for inflation, and the effective date are for taxable years beginning after Dec. 31, 2024. This accelerated savings rate for older employees should help with improved retirement readiness, however there is an expected added administrative complexity for plans and recordkeepers to track transitions between the catch-up limits for age 50 and later for age 60 to 63. Targeted communications will be needed to inform and educate catch-up eligible participants, and plan sponsors should coordinate with service providers in advance of effective dates to address communication strategies, procedural changes and system updates.
Catch-Up Contributions, Roth Feature – Mandatory
This provision requires catch-up contributions made to a participant whose wages are over $145,000 to be made on a Roth basis. The provision only applies to employees at that amount or higher. This means that highly paid participants may no longer make pre-tax contributions. This creates an added administrative complexity for plan design, and guidance may be needed for catch-up contribution election changes by participants determined to be highly paid after their elections are made. Plan sponsors should establish procedures to identify such participants and coordinate with service providers in advance of the effective date (Jan. 1, 2026) to evaluate current procedures for Roth and catch-up contribution elections, implement changes and communicate these changes to participants.
Long-Term Part-Time Workers (LTPT) – Mandatory
SECURE 2.0 changes the eligibility period for LTPTs to two years, and is expanded to include ERISA covered 403(b) plans. The effective date is Dec. 29, 2024.
Missing Participants “Lost and Found” – Required for 401(k) and 403(b)
The Department of Labor (DOL) will create an online “lost and found” database of retirement plans, and the DOL must also ensure security of the personal and plan data. The provision enables plan participants to search for lost accounts and obtain contact information for the plan administrator. Plan administrators must provide the DOL with information about their plans and terminated plan participants for plan years beginning after Dec. 31, 2023. The effective date is for plan years beginning after Dec. 31, 2024.
Special Plan Distributions – Optional
This allows plans to have special provisions to provide:
- Emergency withdrawals
- Self-certified domestic abuse withdrawals
- Terminal illness withdrawals
- Federally-declared disaster withdrawals
- Qualified birth and adoption withdrawals
These provisions generally avoid a 10 percent early withdrawal penalty tax.
Mandatory Distribution Limit
Currently, plan sponsors can distribute a terminated participant’s account balance without consent if their balance doesn’t exceed $5,000. SECURE 2.0 increased this threshold to $7,000. The effective date is for distributions on or after Jan. 1, 2024.
Employee Plans Compliance Resolution System (EPCRS) and Plan Corrections
If you make mistakes in your retirement plan, you can use the EPCRS to correct your mistakes and avoid the consequences of plan disqualification and remain compliant with the Internal Revenue Code requirements. Under SECURE 2.0, the EPCRS has expanded availability of types of errors than can be self-corrected. Updated guidance for the EPCRS will be issued by the Internal Revenue Service (IRS) in December 2024. The effective date is as of Dec. 29, 2022.
Next Steps and Timeline
It is highly recommended that you review your current Plan document to consider any optional provisions to include in your Plan. Communicate with your service provider on any implementation and administrative changes that could result from new provisions. You’ll also want to make sure your Plan is amended in accordance with SECURE 2.0 rules. The last day of the plan year is beginning on or after Jan. 1, 2025 (Dec. 31, 2025 for calendar year plans). However, governmental and collective bargained plans would not consider their last day of the plan year until beginning Jan. 1, 2027 (Dec. 31, 2027 for calendar year plans).
