On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023 (CAA) into law. CAA included the much anticipated SECURE 2.0 Act of 2022 (the Act or SECURE 2.0). This sweeping retirement legislation has significant impacts on large and small plan sponsors alike, as well as important changes for retirement plan participants. Among other things, these changes are intended to increase employees’ participation in plans and their retirement savings, help plan participants preserve their retirement savings, and simplify plan administration. Some of these changes are mandatory, but many are optional. The optional changes present plan sponsors with a wide range of plan design opportunities.

In the coming months, plan sponsors should consider which optional provisions of SECURE 2.0 they may want to include in their retirement programs. Many of these optional provisions could be beneficial employee retention tools if implemented, such as including emergency savings accounts within 401(k) plans to which eligible employees may contribute, providing matching contributions on qualified student loan payments by participants, and more.

Below is a list of the key changes included in SECURE 2.0 and their effective dates, beginning with provisions effective immediately and continuing with provisions effective later.

Although plans do not have to be formally amended to reflect the Act’s mandatory provisions and any optional provisions that are adopted until the end of the 2025 plan year (or, in the case of governmental and collectively bargained plans, the end of the 2027 plan year), they must operate in compliance with such provisions as of their respective effective dates.

Changes Impacting Defined Contribution Account Plans

Eligibility, Participation, and Contributions

• Permissible to Provide Small Gifts to Employees to Participate in an Employer-Sponsored Plan—Plan sponsors may provide de minimis financial incentives (not paid for with plan assets) to eligible employees to encourage participation in their retirement plans, without running afoul of the contingent benefit rule under the Code (which generally prohibits conditioning employer-provided benefits other than matching contributions on participation in the plan). The Act does not specify what would constitute a “de minimis financial incentive,” however. We think a low-dollar gift card provided to an eligible employee to enroll in the plan should be allowed under this change. Note, the dollar amount of the gift card would be considered taxable income to the employee. This is an optional provision effective for plan years beginning after December 29, 2022.
• Participants Can Designate Employer Contributions as Roth—Plans may permit participants to designate some or all of the employer matching and/or nonelective contributions made on their behalf as Roth (after-tax) contributions, if the contributions are 100 percent vested when made. This is an optional provision effective for employer contributions made after December 29, 2022.
• Matching Contributions on Qualified Student Loan Payments—Plans can allow for qualified student loan payments to be treated as elective deferrals for the purpose of making matching contributions into a plan for plan years beginning on or after January 1, 2024. This will allow employers to assist employees with student loan debt to still save for retirement without having additional nondiscrimination testing concerns. This is an optional provision.
• Roth-Only Catch-Up Contributions for Certain Participants—Effective for taxable years beginning on or after January 1, 2024, any catch-up contributions must be made as Roth (after-tax) contributions for eligible participants whose applicable wages in the prior year exceeded $145,000 (indexed). This is a required provision if a plan allows catch-up contributions.
• Emergency Savings Account Under Defined Contribution Plan—Plan sponsors may permit non-highly compensated eligible employees to make Roth deferral contributions to qualified “emergency savings accounts” (ESAs) within their plans. Plan sponsors also may automatically enroll eligible employees at a default deferral percentage of up to three percent of applicable compensation (unless they timely opt out). The balance of any ESA attributable to participant contributions at any time may not exceed the lesser of $2,500 (indexed) or the amount set by the plan sponsor and the participant contributions must be treated as elective deferrals for purposes of making any matching contributions and annual contribution limits. ESAs also must be invested in a qualified principal preservation investment and allow for at least one withdrawal per month, with the first four withdrawals per year being free from any withdrawal fees. This is an optional provision effective for plan years beginning on or after January 1, 2024.
• Long-Term Part-Time Employees Eligible After Two Years with 500 Hours per Year—Part-time eligible employees with at least 500 hours of service in each of two consecutive years must be eligible for 401(k) or 403(b) plans. Formerly, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act 2019) required part-time eligible employees who had at least 500 hours of service in each of three consecutive years to be eligible to participate in 401(k) plans. The Act also clarifies that service prior to 2021 may be disregarded for vesting purposes and is effective as if it were included in SECURE Act 2019. This is a required provision effective for plan years beginning on or after January 1, 2025.
• Increased Catch-Up Contributions for Individuals Ages 60 to 63—Effective for taxable years beginning on or after January 1, 2025, the catch-up contribution limit for years in which eligible participants would attain the ages of 60 through 63 generally increases to the greater of $10,000 (indexed) or 150 percent of the regular 2024 catch-up limit (indexed). This is a required provision if a plan allows catch-up contributions.
• Mandatory Automatic Enrollment and Escalation for New Plans—No later than the first day of the plan year beginning on or after January 1, 2025, 401(k) and 403(b) plans that are established after December 29, 2022, must have an automatic enrollment feature that includes a default deferral percentage for the first year of participation of at least 3 percent but not more than 10 percent (unless they timely opt out), with an automatic increase in such deferral percentage of 1 percent per year up to at least 10 percent, but generally not more than 15 percent, and permits participants to withdraw those contributions within 90 days of being automatically enrolled. Generally, this is a required provision. There are certain exceptions that apply.

Withdrawals and Distributions

• Creation of Permanent Qualified Federal Disaster Distribution—Previously, the Internal Revenue Service (IRS) permitted, on an ad-hoc basis, distributions to be made to qualifying participants based on certain federally declared disasters. The Act provides permanent rules for qualified federal disaster distribution relief. Plans may permit eligible participants affected by a qualifying disaster to withdraw up to $22,000 per disaster, with the distribution being exempt from the 10 percent federal excise tax on early distributions. The qualified disaster distribution may be included in income ratably over three years and may be repaid to an eligible plan within three years after the date of the distribution. The provision also allows for the recontribution of home purchase distributions if certain criteria are met (e.g., the principal residence was within the disaster area). Maximum loan amounts for qualifying participants also may be increased, and a one-year repayment extension also may be provided under this provision. This is an optional provision effective for qualified disasters occurring after January 26, 2021.
• Self-Certification of the Amount and Event for Deemed Hardship Withdrawal—The Act generally allows 401(k) and 403(b) plans to permit participants to self-certify that a hardship withdrawal is on account of a deemed financial need as established in the U.S. Department of the Treasury regulations and is not in excess of the amount required to satisfy the financial need, and that they have no other assets reasonably available to satisfy such need. Historically, participants generally were permitted to self-certify only that they had insufficient assets available to meet their qualifying needs. This is an optional provision effective for plan years beginning after December 29, 2022.
• Penalty-Free Terminal Illness Withdrawal—Plans can allow participants who are terminally ill, as defined in the Act and certified by a physician, to take a distribution without being subject to the 10 percent federal excise tax on early distributions. The participant must provide sufficient evidence of the participant’s terminal illness to the plan administrator. The distribution may be repaid to an eligible plan within three years after the date of the distribution. This is an optional provision effective for distributions after December 29, 2022.
• Three-Year Repayment Period for Qualified Birth or Adoption Distributions—Previously, qualified birth or adoption distributions allowed by a plan could be recontributed to an eligible plan at any time and treated as rollovers. The Act restricts the recontribution period to three years of the distribution to qualify as a rollover. This is effective for distributions made after December 29, 2022. However, for distributions made prior to December 29, 2022, the repayment period ends on December 31, 2025. This is a required provision if a plan allows qualified birth or adoption distributions.
• Required Minimum Distributions Calculated on Full Balance of Partially Annuitized Plan—The Act allows required minimum distributions to be calculated based on non-annuity and annuity amounts rather than bifurcating the calculation, as is currently required today. It will decrease the amount of required minimum distributions due to a participant with a partially annuitized plan account balance. This is an optional provision effective December 29, 2022, based on good-faith interpretation until Treasury updates regulations.
• Corrective Distributions from IRAs Exempt from 10 Percent Federal Excise Tax—The Act exempts timely corrective distributions of excess contributions from IRAs and related earnings from the 10 percent federal excise tax for early distribution. This is effective December 29, 2022.
• One-Time Annual Withdrawal for Unforeseeable or Immediate Financial Need for Certain Emergency Expenses—The Act permits plans to provide for one withdrawal by a participant per calendar year of up to $1,000 or an amount equal to the excess of the participant’s vested account balance over $1,000, whichever is less, for purposes of satisfying qualifying unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses. The emergency expense withdrawal is not subject to the 10 percent federal excise tax on early distributions and may be repaid to the plan within three years. However, if the withdrawal is not repaid within three years, or the total contributions by the participant to the plan during the three-year period are less than the repayment amount, then the participant is limited to one emergency expense withdrawal per three-year period. This is an optional provision effective for withdrawals made after December 31, 2023.
• Creation of Domestic Abuse Withdrawal—Plans can allow participants who self-certify that they have experienced domestic abuse within the past year to withdraw an amount equal to the lesser of $10,000 (indexed) or 50 percent of the participant’s vested account balance. The withdrawal is exempt from the 10 percent federal excise tax on early distributions and may be recontributed within three years of the withdrawal. This is an optional provision effective for distributions after December 31, 2023.
• Increase in Small Cash-Out Limit—Plans are allowed to automatically cash out and transfer small amounts to a qualified IRA. The Act increases the small cash-out limit from $5,000 to $7,000. This is an optional provision effective for distributions after December 31, 2023.
• Increase in Age for Required Minimum Distributions—The Act provides for an increase in the age for which the required beginning date is determined for starting required minimum distributions (RMDs) under the Internal Revenue Code (Code) for plan participants and IRA owners. The Act increases the age to 73 starting in 2023 for those individuals who attain age 72 after 2022 and attain age 73 before 2033. It further increases the age to 75 starting in 2033 for those individuals who attain age 74 after 2032.
• Spouse Irrevocable Election to Be Treated as Employee for Required Minimum Distributions—Effective for calendar years beginning after December 31, 2023, a spouse who is a sole designated beneficiary may irrevocably elect to be treated as the deceased employee for required minimum distribution purposes. This is a required provision.
• Discretionary Amendments to Increase Benefits Permitted to Be Made After Close of Plan Year in Certain Circumstances—Previously, a discretionary amendment to a plan had to be adopted before the end of the plan year in which the amendment was to be effective. The Act now allows a plan to be amended to increase participants’ benefit accruals for a plan year (other than to increase the amount of any matching contributions) by the employer’s tax filing deadline, including extensions, for the taxable year that includes the effective date of the increase. This is an optional provision effective for plan years beginning on or after January 1, 2024.

Changes Impacting Defined Benefit Plans

• Update for Cash Balance Plans—The Act now permits cash balance and other “hybrid” plans to use a projected interest crediting rate that is not in excess of 6 percent or otherwise “reasonable.” This is a welcome change, as it will decrease the risk of a plan failing certain nondiscrimination requirements. This is an optional provision effective for plan years beginning after December 29, 2022.
• Update to Notice Requirements—The Act makes certain changes to the annual funding notice requirements. This is a required provision effective for plan years beginning on or after January 1, 2024.
• Increase in Small Cash-Out Limit and Increase in Age for Required Minimum Distributions—These changes, as discussed earlier for defined contribution plans, similarly apply to defined benefit plans.

Changes Impacting Operational Compliance, Including Revisions to the Employee Plans Compliance Resolution System (EPCRS)

• Recovery of Inadvertent Overpayments—A plan will not lose its tax-qualified status merely because of its failure to recover an inadvertent benefit overpayment. Plan fiduciaries have certain latitude pursuant to the Act to determine whether to pursue recovering inadvertent overpayments from participants and/or contributing employers. If plan fiduciaries choose to recoup such overpayments, specified limitations apply. The Act also provides certain fiduciary relief from failing to make the plan whole. However, plan sponsors must still meet funding requirements (if applicable), as well as prevent/restore impermissible forfeitures. This is generally effective December 29, 2022.
• Reduction of Excise Tax for Missed Required Minimum Distributions—The Act reduces the excise tax for late required minimum distributions from the current 50 percent excise tax to a 25 percent excise tax, and if the required minimum distribution is corrected with two years, the excise tax is further reduced to 10 percent. This is effective for tax years beginning after December 29, 2022.
• Reduced Notice Requirements for Unenrolled Employees—Previously, plans needed to provide eligible participants with various notices and communications, even if the employee was not enrolled. The Act significantly curtails the number of notices and communications required to be provided to unenrolled employees, if they had received the summary plan description and previous notices regarding plan eligibility. Going forward, plans will be required to provide an annual notice reminding the employee of their eligibility to participate, including enrollment deadlines. This is effective for plan years beginning on or after January 1, 2023.
• Extension of Time for Self-Correction of Eligible Inadvertent Failures Under EPCRS—EPCRS will be updated to allow for self-correction of “eligible inadvertent failures” at any time, regardless of whether an error is significant or insignificant. However, self-correction will not be available if i) the IRS identified the failure prior to the beginning of self-correction, or ii) the self-correction was not completed within a reasonable period of time after the failure was identified. An “eligible inadvertent failure” is a failure that occurs even though there are established practices and procedures that would satisfy the standards outlined in EPCRS. The Act directs the U.S. Department of Labor (DOL) to allow for loan failures to be self-corrected under EPCRS and treated as meeting the requirements of the DOL’s Voluntary Fiduciary Correction Program. Finally, Treasury has been directed to expand EPCRS to address corrections of IRAs and to update Revenue Procedure 2021-30 for these changes within two years. This is effective December 29, 2022.
• Safe Harbor Correction for Failure to Implement Automatic Enrollment, Escalation, and Elective Deferrals—The Act includes a safe harbor correction method related to the failure to implement an automatic enrollment or automatic escalation feature, or the failure to offer an affirmative election due to an employee being improperly excluded from a plan. The safe harbor will prevent a plan from failing to be qualified if the “corrected error” generally is made within nine-and-a-half months after the end of the plan year in which the error first occurred (or the date the employee notified the plan sponsor of the error, if sooner). The error must be resolved in favor of the employee and without discrimination toward similarly situated participants. A notice must be provided within 45 days after the date on which correct deferrals start. The safe harbor does not require missed deferrals to be contributed to the plan, but the plan sponsor must contribute any missed matching contributions and related earnings. The safe harbor applies to 401(a), 403(b), and 457(b) plans, as well as IRAs. This is effective for errors on or after January 1, 2024.
• Annual Paper Statement for Retirement Plans—The Act requires at least one annual paper statement to be provided to participants and beneficiaries in defined contribution plans and at least one paper statement every three years to be provided to participants and beneficiaries in defined benefit plans. Certain exceptions apply for plans that furnish these statements in compliance with specified electronic delivery rules. This is a required provision effective for plan years beginning on or after January 1, 2026.

Technical Corrections

• Technical Corrections for SECURE Act 2019—The Act clarifies that i) an automatic enrollment 401(m) safe harbor plan needs to meet the notice requirements under Code Section 401(k)(13)(E); ii) the long-term part-time employee rules were clarified that a) an employer may exclude employees from the safe harbor nondiscrimination rules under 401(m) including the alternatives under paragraphs (11) and (12), b) the vesting rules apply to the plan, not just the cash or deferred arrangement, and c) the employees cease to be long-term part-time employees when they meet the age and service requirements of a full-time employee under Code Section 401(k)(2)(D) rather than under Code Section 410(a)(1)(a)(ii); and iii) the excise tax on excess contributions to an IRA generally will not apply to difficulty of care payments contributed to an IRA. Finally, there were clerical amendments to address cross references. This is effective as if it were included in the respective sections of SECURE Act 2019.

Amendment Deadlines

• Establish Amendment Deadline—The amendment deadline for the changes made by the Act generally is set for the end of the 2025 plan year and 2027 plan year for governmental and collectively bargained plans. In addition, the Act extends the plan amendment deadlines for the SECURE Act 2019, the Coronavirus Aid, Relief, and Economic Security Act, and the Taxpayer Certainty and Disaster Relief Act of 2020 to the remedial amendment period dates reflected in IRS notices. However, as noted earlier, plans must be in operational compliance with the applicable provisions of SECURE 2.0 as of their respective effective dates.

There are several other changes included in this important legislation, but the above represent the most significant provisions affecting tax-qualified retirement plans.