President Biden signed the Consolidated Appropriations Act, 2023, on December 29, 2022, which includes the package of retirement plan legislation known as “SECURE 2.0.” SECURE 2.0 contains numerous significant changes for retirement plans, plan sponsors, and retirement plan providers. This legal alert highlights many of the important provisions of the legislation, beginning with items effective in 2023, and continuing with provisions effective at later dates.

 

 

The following provisions are effective in 2023.

 

Roth Matching and Non-Elective Contributions. Effective immediately, employers can permit participants in 401(k), 403(b) and governmental 457(b) plans to elect that matching or non-elective contributions are made as Roth (after-tax) contributions. Prior to this change, employers had to make matching and non-elective contributions on a pre-tax basis. Any such contributions must be fully vested.

 

Required Minimum Distribution Age Increase. Under the 2020 SECURE Act, the age at which individuals generally must begin taking withdrawals from their IRAs and retirement plan accounts was increased from 70½ to 72. SECURE 2.0 increases that age to 73 starting in 2023, and age 75 starting in 2033. Individuals reaching age 72 before 2023 remain subject to the prior rule requiring withdrawals to commence at age 72. Individuals reaching age 73 before 2033 remain subject to the age 73 required commencement date.

 

Small Financial Incentives for Plan Contributions. Starting in 2023, employers may offer small immediate financial incentives to employees who contribute to a 401(k) or 403(b) plan, provided that the financial incentive is de minimis and not paid for with plan assets. For example, the provision may allow an employer to provide a $10 gift card to employees who make their first 401(k) contribution. Previously, under the applicable regulations, only matching contributions could be contingent on employee contributions.

 

Hardship Self-Certification. Employees may take in-service hardship withdrawals from their 401(k) and 403(b) accounts in the event of an immediate and heavy financial need. Current regulations set forth certain safe harbor events that are deemed to constitute a hardship, and employees generally need to provide evidence of the hardship event in order to receive a withdrawal. In recent years, the IRS has indicated that plan administrators may be able to accept an employee’s self-certification of the amount of the hardship in lieu of collecting documentation, provided that certain administrative requirements are met. The new law provides that employers can rely on an employee’s self-certification of both (i) the fact that they have a hardship, and (ii) that the amount of the requested distribution is not in excess of the employee’s financial need. A similar self-certification rule applies to unforeseeable emergency distributions from governmental 457(b) plans. This provision is effective for plan years beginning after December 29, 2022.

 

Repayment of Qualified Birth or Adoption Distributions. The 2020 SECURE Act included a provision that allows individuals to receive distributions from their retirement plan in the case of birth or adoption without paying the 10% premature distribution additional tax (known as a qualified birth or adoption distribution, or QBAD). Under that provision, the distributions could be recontributed to a retirement plan at any time and are treated as rollovers. SECURE 2.0 amends the QBAD provision to restrict the recontribution period to three years, effective for distributions made after the date of the enactment and with a special transition rule for distributions made before the date of enactment.

 

Notices to Unenrolled Participants. Under current law, individual account retirement plan fiduciaries must provide eligible participants with a significant number of notices and communications, regardless of whether the individuals actually enroll in the plan. The new law significantly reduces the amount of communications that must be provided to “unenrolled participants.” An eligible individual who receives (i) the summary plan description, and (ii) any other notices regarding plan eligibility and chooses not to enroll in the plan will be treated as an unenrolled participant. Going forward, unenrolled participants only need to receive an annual reminder of their eligibility to participate. This annual notice needs to be provided within a reasonable period before each plan year begins and should highlight the key provisions of the plan (such as employer contributions and vesting).

 

Cash Balance Plan Technical Change. SECURE 2.0 also provides a fix to a technical issue in the Internal Revenue Code (Code) and ERISA with respect to cash balance and other hybrid plans that credit variable interest rates. For purposes of the backloading rules, these plans can use a reasonable projection of future interest credits, provided the projection does not exceed six percent (6%). Under current law, the appropriate projection was unclear. This change is effective for plan years beginning after December 29, 2022.

 

Reduction in Required Minimum Distribution (RMD) Penalty. Currently, individuals owe an excise tax of fifty percent (50%) on any amount that is required to be, but is not, distributed as an RMD each year. Individuals can request relief from this steep penalty by requesting a reasonable cause exception, or employers can request relief on behalf of plan participants and beneficiaries through a Voluntary Correction Program (VCP) submission. SECURE 2.0 reduces this excise tax from 50% to 25%. In addition, the excise tax may be reduced even further, to 10% if an individual corrects the failure within a two-year correction period. This provision is effective for 2023. 

 

Overpayment Recovery Limits. SECURE 2.0 revises previous guidance with respect to retirement plan overpayments. Specifically, it provides that plan fiduciaries generally are not required to collect overpayments from participants or to make a corrective contribution to the plan for overpayments that are not recovered from participants or beneficiaries. Moreover, in some instances these collection efforts are prohibited, for example, if an inadvertent error led to an overpayment that began more than three years before the participant or beneficiary receives notice of the overpayment. In addition, the legislation requires participant safeguards for plans seeking recovery of overpayments, such as giving participants and beneficiaries access to the plan claims processes for disputing overpayment recoveries and prohibiting certain methods for recovering overpayments (e.g. threatening litigation or using collection agencies). Defined benefit plan minimum funding requirements are not modified by these provisions, so plan sponsors may need to repay the trust if the overpayments materially change defined benefit plan funding levels. This change is generally effective immediately, subject to certain rules for actions taken or commenced before the date of enactment.

 

EPCRS Self-Correction Expansion. Until the enactment of SECURE 2.0, self-correction under the Employee Plans Compliance Resolution System (EPCRS) was only available for inadvertent errors that were not significant or that were identified and corrected within a limited timeframe from the date when the error began. As a result, significant errors that occurred in prior years were often not allowed to be self-corrected. The legislation expands EPCRS to permit self-correction of eligible inadvertent plan errors at any time, regardless of how much time has passed, unless (i) the error is identified on audit before the plan sponsor takes actions demonstrating an intent to self-correct or (ii) the error is not self-corrected within a reasonable time after discovery. It also provides plan loan error correction relief, which previously required a Voluntary Correction Program submission. The loan correction guidance coordinates with the Department of Labor Voluntary Fiduciary Correction Program for correcting fiduciary breaches, providing a streamlined loan correction process for plan sponsors. 

 

The legislation also expands EPCRS to permit IRA providers to correct IRA errors through the program. Previously, providers had limited correction options, such as requesting a voluntary closing agreement. 

 

RMD/Excess Contribution Statute of Limitations. Under current law, the statute of limitations for the IRS to assess excise taxes for failure to take RMDs or remove excess contributions from an IRA runs from the date that the excise tax return (Form 5329) was filed. For individuals who did not realize they owed an excise tax and therefore did not file a Form 5329, the statute of limitations never began to run. SECURE 2.0 revises the statute of limitations for RMD violations to three years from the time the taxpayer files their income tax return for the year that the violation occurs, and for excess contributions to six years from the date the taxpayer files their income tax return for the year that the violation occurs. There are certain exceptions to this rule for bargain sales to an IRA. The change is effective immediately. 

 

Removal of Certain RMD Barriers for Annuities. The RMD regulations are particularly complex as applied to payments through annuity contracts and contain certain provisions that may limit the appeal of annuity elections. Effective immediately, two of these barriers have been changed. First, if a retirement account also holds an annuity contract, the account owner is permitted to elect to aggregate distributions from both portions of the account for purposes of determining minimum distributions. Previously the account was required to be bifurcated between the portion of the account holding the annuity and the rest of the account for purposes of applying the RMD rules, generally resulting in higher minimum distributions than would have been required if the account did not hold an annuity. Second, a regulatory actuarial test for life annuity payments under a commercial annuity has been modified to permit additional forms of payment that may increase over time. 

 

Qualifying Longevity Annuity Contracts (QLACs). QLACs are deferred annuities that are generally exempted from the RMD rules until payments commence. However, due to a lack of statutory authority to provide a full exemption, the regulations authorizing QLACs imposed a number of limits on the exemption. SECURE 2.0 addresses these limitations by (1) repealing the 25 percent of account balance contribution limit and (2) allowing up to $200,000 (indexed) to be used from an account balance to purchase a QLAC. In addition, the impact of a divorce or separation upon a joint and survivor QLAC is clarified, and the legislation modifies the RMD regulations to allow free-look periods of up to 90 days. This provision is generally effective for contracts purchased or received in an exchange on or after the date of enactment. 

 

Qualified Charitable Distributions. Individuals are permitted to take nontaxable distributions of up to $100,000 each year from their IRAs for the purpose of contributing to a charitable organization (qualified charitable distributions). The new law indexes this $100,000 amount for inflation, and allows individuals to make a one-time election for qualified charitable distributions of up to $50,000 (also indexed for inflation) to be made to certain organizations that would not otherwise be considered charitable organizations under the provision: charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.

 

Pension Risk Transfer Analysis. In 1995, the Department of Labor issued Interpretive Bulletin 95-1, which provides guidance regarding the fiduciary standards that apply when selecting an annuity provider in connection with a pension risk transfer transaction in which a defined benefit plan purchases an annuity to satisfy its payment obligations. The new law requires the Department of Labor to review the current Interpretive Bulletin, determine whether any revisions are warranted, and report its findings to Congress by December 29, 2023.

 

SIMPLE and SEP Roth IRAs. Currently, SIMPLE IRAs and SEPs are not allowed to permit contributions on a Roth (after-tax) basis. SECURE 2.0 provides that sponsors of SEPs and SIMPLE IRAs may offer employees the ability to designate contributions as Roth contributions. This provision is effective for taxable years beginning after December 31, 2022.

 

Non-Trade or Business SEP Contributions. Effective immediately, employers of domestic employees (e.g., nannies) may provide retirement benefits for such employees under a SEP.

 

403(b) Plans and Collective Investment Trusts. After many years of potential legislative activity, SECURE 2.0 amends the Code to allow section 403(b) custodial accounts to invest in collective investment trusts (in addition to traditional 403(b) annuity contracts and investments in mutual funds). However, SECURE 2.0 did not contain an amendment to exempt 403(b) collective investment trusts from certain of the securities laws. Accordingly, for the time being, collective investment trusts remain unavailable to 403(b) plans.

 

 

The following provisions are effective in 2024.

 

Roth Catch-Up Contributions. Currently, catch-up contributions can be made on a pre-tax or Roth basis to qualified retirement plans for individuals who are age 50 or older in the calendar year. Effective for tax years commencing in 2024, the legislation requires employees whose compensation equals or exceeds $145,000 (indexed) to make catch-up contributions on a Roth basis only. This provision does not apply to SIMPLE IRAs or SEPs.

 

Mandatory Cash-Out Limit Increase. Currently, qualified retirement plans may automatically cash-out former employees’ retirement accounts with balances below $5,000 and roll over those account balances into an IRA. SECURE 2.0 increases the limit from $5,000 to $7,000, effective for distributions made after December 31, 2023.

 

Emergency Savings Accounts. Several provisions of SECURE 2.0 appear to be premised on a view that if plans offer more flexibility to access limited plan savings amounts at any time, participants may be more willing to commit contributions to the plan. The legislation permits plan sponsors of individual account plans (e.g., 401(k) and 403(b) plans) to offer non-highly compensated employees an opportunity to contribute on a Roth-like basis to “emergency savings accounts.” Plan sponsors may also automatically enroll participants at a rate of up to three percent of compensation and must allow withdrawals at least once per month. Contributions are not permitted to be made to an account if it holds $2,500 or more (or a lower limit set by the plan sponsor). The dollar cap is subject to indexing in future years.

 

Contributions are treated as elective deferrals for purposes of matching contributions with an annual matching cap set at the maximum account balance. The matching contributions must be made to the plan account, not the emergency savings account.

 

This provision applies to plan years beginning after December 31, 2023.

 

Matching Contributions for Student Loan Payments. Although the IRS has issued a private letter ruling permitting one 401(k) plan to treat certain qualified student loan payments as elective deferrals for purposes of determining an employee’s matching contributions, it has not been clear whether this is generally allowed under the Code. SECURE 2.0 explicitly permits this structure with respect to 401(k), 403(b), non-governmental 457(b), and SIMPLE IRA plans. Plan sponsors may rely on participant certification of the loan payment. The provision also permits a plan to apply the nondiscrimination test applicable to elective contributions (the ADP test) separately to participants receiving matching contributions on student loan repayments. This change is effective for plan years beginning after December 31, 2023.

 

Additional Early Withdrawal Exceptions. SECURE 2.0 amends Section 72(t)(2) of the Code to allow new exceptions to the 10% additional tax for early withdrawals from eligible retirement plans, including IRAs, for (1) distributions to domestic abuse victims, and (2) certain emergency personal expense distributions, as described in more detail below. These provisions apply to distributions made after December 31, 2023. There is also a new exception for terminally ill participants, effective immediately.

 

Domestic Abuse. Eligible retirement plans may permit participants to self-certify that they experienced domestic abuse and make a withdrawal equal to the lesser of $10,000 (indexed) or 50% of the participant’s vested account. Withdrawals may be repaid over a period of three years, subject to certain conditions (similar to qualified birth and adoption withdrawals). 

 

Emergency Expenses. As another aspect of the effort noted above to make retirement savings more appealing by making certain funds more accessible, eligible retirement plans can permit participants that self-certify the distribution is for “unforeseeable or immediate financial needs relating to personal or family emergency expenses” to make a distribution up to $1,000 in a calendar year. Withdrawals may be repaid over a period of three years, subject to certain conditions. No additional emergency distributions may be made in the three-year repayment period unless the original distribution is repaid or the total contributions to the plan during the three-year repayment period exceed the amount of the original emergency distribution.

 

Required Minimum Distributions for Roth Accounts. Currently, required minimum distributions are required during the account owner’s lifetime for Roth accounts in employer retirement plans but not Roth IRAs. SECURE 2.0 eliminates the pre-death distribution requirement for Roth accounts in employer plans. This provision is effective for taxable years beginning after December 31, 2023, but does not apply to distributions that are required with respect to years beginning before January 1, 2024.

 

Surviving Spouse Treated as Participant. Effective in 2024, the legislation allows a spousal beneficiary to elect to be treated as the deceased participant for purposes of RMDs, similar to the current rule afforded to spousal beneficiaries of IRA accounts. 

 

Contributions to SIMPLE Plans. Current law requires employers with SIMPLE plans to make employer contributions to employees of either 2% of compensation or 3% of employee elective deferral contributions. SECURE 2.0 permits an employer to make additional contributions to each employee of the plan in a uniform manner, provided that the contribution may not exceed the lesser of up to 10% of compensation or $5,000 (indexed). In addition, under current law, the annual contribution limit for employee elective deferral contributions to a SIMPLE IRA plan is $14,000 (2022) and the catch-up contribution limit beginning at age 50 is $3,000. SECURE 2.0 increases the annual deferral limit and the catch-up contribution at age 50 by 10%, as compared to the limit that would otherwise apply in 2024, in the case of an employer with no more than 25 employees. An employer with 26 to 100 employees would be permitted to provide higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution. A similar change applies to the contribution limits for SIMPLE 401(k) plans. This provision applies beginning in 2024.

 

Distributions from 529 Qualified Tuition Accounts to Roth IRAs. SECURE 2.0 allows for tax-free rollovers from section 529 qualified tuition accounts to Roth IRAs, under certain conditions. The rollovers from 529 accounts would be subject to Roth IRA annual contribution limits and a lifetime limit of $35,000. In addition, the 529 account must have been open for at least 15 years, and the rollover cannot exceed the aggregate amount contributed (plus earnings) before the five-year period ending on the date of distribution. This provision is effective for distributions made after December 31, 2023.

 

IRA Catch-Up Contributions Indexed. Currently, catch-up contributions for IRAs are limited to $1,000 and are not indexed for inflation. Beginning in 2024, the legislation indexes IRA catch-up contributions for inflation in $100 increments in the same manner as the indexing for regular IRA contributions.

 

 

The following provisions are effective in 2025.

 

Auto-Enrollment. Effective for plan years beginning after December 31, 2024, 401(k) and 403(b) plans established after December 29, 2022 are required to include an automatic enrollment feature. The initial automatic enrollment amount must be at least 3% and not more than 10%. Each plan year the contribution amount automatically escalates by 1% until it reaches the maximum permissible percentage, which is 10% or 15% depending on the year and type of plan. There are exceptions for small businesses with ten or fewer employees, employers that have been in business for less than three years, church plans, and governmental plans. 

 

Additional Catch-Up Contributions. Currently, eligible employees who are age 50 or over at the end of the calendar year can make annual catch-up contributions to certain retirement plans, limited to $7,500 in 2023 for most plans. For plan years beginning in 2025, SECURE 2.0 increases the limit for most plans to the greater of $10,000 (as indexed) or 150% of the regular catch-up amount in 2024 for individuals who are 60, 61, 62, or 63 as of the end of 2025. 

 

Retirement Savings Lost and Found. The Department of Labor, in consultation with the Treasury Department, is required to establish a national online lost and found database for Americans' retirement plans, known as the “Retirement Savings Lost and Found.” The database is meant to enable individuals who may have lost track of their pension or 401(k) plan to search for the contact information of their plan administrator. Employers will be required to report some additional information on former employees to the Department of Labor in connection with the database. The database must be established no later than December 29, 2024.

 

Long-Term Part-Time Employees. The SECURE Act generally required 401(k) plans to allow employees to make elective deferrals if they completed at least 500 hours of service in three consecutive years. Before the SECURE Act, plans could require employees to complete 1,000 hours of service in a single year before allowing them to participate. SECURE 2.0 reduces the three-year rule to two years, and expands the rule to apply to ERISA-covered 403(b) plans. The change is generally effective for plan years after December 31, 2024.

 

Blended Performance Benchmarks. Under current ERISA regulations, individual account plans with investments directed by participants are required to disclose the performance of the plan investment options, including performance against a broad-based securities market index as a benchmark. Certain investments that use a mix of asset classes, such as target date funds, often do not have a benchmark that is directly applicable, and plan fiduciaries have used the closest available benchmark in those cases. This has led to disclosure that can sometimes be confusing or unhelpful for participants. The legislation requires the Department of Labor to update its regulations by December 29, 2024 to allow funds that have a mix of asset classes to be benchmarked against a blend of broad-based securities market indices, provided (a) the index blend reasonably matches the fund’s asset allocation over time, (b) the index blend is reset at least once a year, and (c) the underlying indices are appropriate for the investment’s component asset classes and otherwise meet the rule’s conditions for index benchmarks. 

 

 

Paper Statements. Section 105 of ERISA requires retirement plans to provide periodic benefit statements to plan participants, with such statements outlining the individual’s total benefits accrued and nonforfeitable pension benefits that have accrued (and the earliest date that the benefits vest, if subject to vesting). The SECURE Act made changes that required administrators of defined contribution plans to include a lifetime income disclosure in the annual benefits statement. SECURE 2.0 made changes to Section 105 as well, adding a new requirement starting in 2026 that generally requires defined contribution plans to provide at least one quarterly statement in paper form each year, and that generally requires defined benefit plans to provide one annual statement every three years in paper form. This section is effective for plan years beginning after December 31, 2025. 

 

 

Saver’s Match. Low to moderate income taxpayers who contribute to IRAs or employer-sponsored retirement plans (as well as ABLE accounts) are currently able to receive a nonrefundable tax credit as part of their tax refund. SECURE 2.0 changes this payment for IRAs and retirement plans from a tax refund to a matching contribution of up to $2,000 from the federal government that will generally be deposited into their retirement plan account and treated as a pre-tax contribution. This provision is effective for tax years beginning after December 31, 2026.

 

 

Enhanced Lump Sum Window Disclosure. SECURE 2.0 directs the Department of Labor to issue regulations that add new notice requirements for defined benefit plans that offer participants a lump sum distribution window. The notice will be required to be provided at least 90 days before the first day the window opens, and it must include information such as the available benefit options, an explanation of how the lump sum was calculated, a comparison against other benefits, and the tax rules relating to accepting the lump sum. The Department of Labor is directed to issue a model notice. Plan administrators will also be required to provide a notice to the Department of Labor and the PBGC informing them of the lump sum window, and the information will be made available on a public website, though in a manner that “protects the confidentiality” of the information provided. The legislation does not provide an outside deadline for the guidance to be issued, but it directs that the regulations may not be effective sooner than December 29, 2023. 

 

 

Plan administrators have until the last day of the first plan year beginning on or after January 1, 2025 (2027 for governmental plans and certain collectively bargained plans) to amend plans pursuant to SECURE 2.0 as long as the plan operates in accordance with such amendments as of the effect date of the legislation’s requirements or the amendment. SECURE 2.0 further provides the plan amendment deadlines under the SECURE Act, the CARES Act and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 are the same as the SECURE 2.0 dates. These amendment deadlines also apply to IRA governing documents.