The omnibus package signed by President Biden on December 29, 2022 contains legislation making numerous changes to retirement plan law (SECURE 2.0 or the Act).

Employers sponsoring qualified retirement plans like a 401(k) will be required to amend their plan documents in coming years to incorporate changes made by SECURE 2.0 and must operate their plans in accordance with the Act as of its effective date.

The provisions of the Act are designed to encourage retirement savings for millions of Americans while making it easier for employers to offer qualified retirement plans. The Act contains certain new requirements such as auto enrollment of new employees and also contains revenue producing changes resulting in immediate taxation of amounts previously deferred on a pre-tax basis.

Certain of the Act’s provisions take effect beginning in 2023. Other provisions are effective in future years. While the Act contains numerous specific changes, some of the notable changes include:

• Modification of Eligibility Rules for Part Time Employees – The SECURE Act of 2019 required that part time employees be allowed to participate in an employer’s retirement plan after being employed for three consecutive years and meeting a 500 hour of service threshold in each year. SECURE 2.0 shortens the three-year requirement to two years. The Act provides that a 500-hour year will be considered a year of service for vesting purposes but clarifies that pre-2021 years of service will not be considered for vesting purposes. The change is effective for plan years beginning after December 31, 2024.
• Increase in Age for Required Minimum Distributions – for individuals reaching age 72 after December 31, 2022, the age at which “minimum required distributions” from a retirement account must begin is increased to 73. For individuals reaching age 74 after December 31, 2032, the age at which distributions from a retirement account must begin is increased to 75. The change is effective for distributions required to be made after December 31, 2022.
• Increased Catch-Up contributions for participants ages 60, 61, 62, 63 – catch up contributions (an additional elective deferral amount generally available to participants age-50 or older) are increased for participants age 60-63 to the greater of $10,000 or 150% of the regular catch up amount applicable in 2024. The change is effective for taxable years beginning after December 31, 2024.
• Catch-Up Contributions Required to be Roth for Higher Income Participants – Catch-up contributions for those earning more than $145,000 in the preceding calendar year are subject to mandatory Roth treatment. The change is effective for tax years beginning after December 31, 2023.
• Student Loan Payment Matching – Employers can treat qualified student loan payments made by employees as if they were plan contributions and provide a “match” accordingly. The amount of a student loan payment that can be matched cannot exceed the regular employee limit on 401(k) deferrals ($22,500 in 2023). The student loan must meet the definition of a “qualified education loan under Section 221 of the Internal Revenue Code. A plan must provide for matching generally and student loan matching must be on terms similar to matching contributions for other employees. An employer may rely on a participant’s annual certification regarding payment of student loans. The changes made are effective for plan years beginning after December 31, 2023.
• Auto-Enrollment for New Employees – With certain exceptions, employers are required to provide automatic plan enrollment for new employees resulting in a first-year deferral of not less than 3% or more than 10% of employee compensation. An employee must be permitted to opt out of participation or elect a different percentage. The deferral percentage must increase by 1% each year (to at least 10% but not more than 15%) unless the participant opts out or elects a different percentage. Small employers, new businesses and plans enacted before December 31, 2024 are exempt from the auto-enrollment requirement. The change is effective for taxable years beginning after December 31, 2024.
• Increased Plan Startup Cost Credit for Small Employers – A tax credit for plan startup costs is increased from 50% to 100% for employers having no more than 50 employees. An additional tax credit is allowed for employer plan contributions, subject to a cap and credit phase-in. The change is effective for taxable years beginning after December 31, 2022.
• “De minimis” Financial Incentives for Using 401(k) Plan – The Act amends the Internal Revenue Code and ERISA to allow an employer to offer an employee a “de minimis” financial incentive (not from plan assets) to defer from the employee’s salary into the employer’s 401(k) plan). A specific exemption from the prohibited transaction rules is created to allow the incentive. Additional guidance will be needed as to what qualifies for a de minimis incentive. The change is effective with respect to plan years beginning after the date of enactment of the Act.
• Updating Dollar Limit for Mandatory Distributions – A plan sponsor cannot distribute account retirement account funds of former employees without the consent of the former employee unless the account balance is below a certain threshold. The Act increases the threshold from $5,000 to $7,000. The change is effective for distributions made after December 31, 2023.
• Application of Top-Heavy Rules to Excludable Employees – The Act provides that for purposes of determining a plan’s compliance with the “top-heavy” non-discrimination rules, employees being allowed to enter the plan early (“otherwise excludable employees”) are disregarded. The change is effective for plan years beginning after December 31, 2023.
• Expansion of Employee Plans Correction Rules – The two-year self-correction period stated in Revenue Procedure 2021-30, the employee plans correction procedure, has been expanded. The deadline for self-correction is indefinite so long as the failure is not identified by the IRS prior to the plan sponsor taking action and the correction is completed within a reasonable time. The Act allows self-correction for plan loan failures and expands correction procedures to IRAs. The Act requires the Secretary of the Treasury to revise Revenue Procedure 2021-30 within two years of the enactment of the Act.
• Establishment of Retirement Account Lost and Found – The Act requires the establishment of a searchable database within two years of the enactment of the Act to assist former plan participants in locating lost accounts. The database is intended to maintain and update plan contact information that may have changed due to merger, consolidation, termination, plan sponsor bankruptcy, or change of name or address of the administrator. Plan administrators will be required to submit specific information relating to employee plan to the database within approximately three years of the enactment of the Act.

The above is intended as a high-level summary of some of the Act’s key provisions and should not be construed as legal advice. We will provide further information as guidance is released.