The Senate ushered in the New Year with a bang by passing SECURE 2.0 on December 22, 2022. SECURE 2.0 includes many updates to the sweeping changes brought about under 2019’s original SECURE Act legislation. The following are some notable changes that employers should be aware of:

1.  Enrollment Expansions

• Expanded Automatic Enrollment: Section 101 of SECURE 2.0 requires certain new 401(k) and 403(b) plans to automatically enroll participants. Initial automatic enrollment amount is at least 3% but not more than 10% with an auto-increase each year to not more than 15%. Current 401(k) and 403(b) plans are grandfathered (exempt) and there is also an exception for small businesses (10 or fewer employees), new businesses (i.e., in business for less than 3 years), church plans, and governmental plans. Section 101 is effective for plan years beginning after December 31, 2024.
• Accelerated Part-Time Worker Coverage: The SECURE Act requires employers to allow long-term, part-time workers to participate in employers’ 401(k) plans. Specifically, a part-time employee must complete either 1 year of service (with the 1,000-hour rule) or 3 consecutive years of service (with the 500 hour rule). Section 125 reduces the 3 year rule to 2 years and also extends the long-term part-time coverage rules to 403(b) plans that are subject to ERISA. This provision is generally effective for plan years beginning after December 31, 2024.

2.  Contribution & Distribution Changes

• Required Minimum Distribution Age Increases: Under current law, participants are generally required to begin taking distributions at age 72. Section 107 of SECURE 2.0 increases the required minimum distribution to (a) age 73 starting on January 1, 2023 (for a person who attains age 72 after December 31, 2022 and age 73 before January 1, 2033) and (b) age to 75 starting on January 1, 2033 (for an individual who attains age 74 after December 31, 2032).
• Higher Catch-Up Limit at Age 60, 61, 62, and 63: SECURE 2.0 increases the age-50 catch-up limit to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63. These amounts are indexed for inflation thereafter. Section 109 is effective for taxable years beginning after December 31, 2024.
• Student Loan Payments Treated as Elective Deferrals for Match Purposes: Section 110 allows employees to receive matching contributions in connection with student loan repayments. For purposes of nondiscrimination testing applicable to elective contributions, a plan may test separately employees who receive matching contributions on student loan repayments. Section 110 is effective for contributions made for plan years beginning after December 31, 2023.
• Withdrawals for Certain Emergency Expenses. Section 115 provides an exception to the 10% early distribution penalty for certain emergency distributions. Only one distribution (up to $1,000) per year is permitted and the distribution may be repaid within 3 years. No further emergency distributions are permissible during the 3 year repayment period prior to repayment. Section 115 is effective for distributions made after December 31, 2023.
• Increased Dollar Limit for Mandatory Distributions: Currently, employers may transfer former employees’ retirement accounts into an IRA if their balances are between $1,000 and $5,000. Section 307 increases the $5,000 limit to $7,000, effective for distributions made after December 31, 2023.
• QBAD 3-Year Repayment Period: Under the SECURE Act, QBADs can be recontributed at any time and are treated as rollovers. However, IRC Section 6511 prevents a refund from being provided after the limitations period, which is generally 3 years. Thus, there is not a mechanism that allows someone who took a QBAD to recontribute the distribution more than 3 years later and amend their return to receive a refund for taxes paid in the year of the withdrawal. Section 311 amends the QBAD provision to restrict the recontribution period to 3 years and is effective to distributions made after the date of the enactment of this Act and retroactively to the 3-year period beginning on the day after the date on which such distribution was received.
• Penalty-free Withdrawal Provisions: Section 314 allows retirement plans to permit participants that self-certify that they experienced domestic abuse to withdraw the lesser of $10,000, indexed for inflation, or 50% of the participant’s account. The distribution is not subject to the 10% early distribution penalty and the participant may repay the money over 3 years. Section 318 is effective for distributions made after December 31, 2023. In addition, Section 326 provides an exception to 10% penalty in the case of a distribution to a terminally ill individual. The provision is effective for distributions made after the date of enactment.
• Pre-Death Roth Plan Distribution Rule: Under current law, RMDs are not required to begin prior to the death of a Roth IRA owner while pre-death distributions are required in the case of the owner of a Roth designated account in an employer retirement plan (e.g., 401(k) plan). Section 325 eliminates the pre-death distribution requirement for Roth accounts in employer plans, effective for taxable years beginning after December 31, 2023.
• Using Retirement Funds in Connection with Qualified Federally Declared Disasters: Section 331 provides permanent rules addressing the use of retirement funds in the case of a federally declared disaster. Notably, up to $22,000 may be distributed for affected individuals, such distributions are not subject to the 10% distribution tax, are treated as gross income over 3 years, and can be repaid to a tax preferred retirement account. Section 331 is effective for disasters occurring on or after January 26, 2021.
• Elective Deferrals Limited to Regular Contribution Limit: Under current law, catch-up contributions can be made on a pre-tax or Roth basis. Section 603 provides that, except with respect to employees with compensation of $145,000 or less (indexed), all catch-up contributions are subject to Roth tax treatment, effective for taxable years beginning after December 31, 2023.

3.  Plan Correction & Administration Facilitation

• Recovery of Plan Overpayments: Plan fiduciaries often seek to recover mistaken overpayments from retirees which, depending on the amount of overpayment and amount of time lapsed, can be substantial. Section 301 of the SECURE Act allows plan fiduciaries the flexibility to decide not to recoup mistaken overpayments. If plan fiduciaries choose to recoup overpayments, limitations and protections apply to safeguard retiree recipients. Section 301 is effective on the date of enactment.
• Safe Harbor for Employee Elective Deferral Corrections: IRS guidance on the correction of failures relating to default enrollment includes a safe harbor that expires December 31, 2023. The safe harbor permits correction if notice is given to the affected employee, correct deferrals commence within certain time periods, and the employer provides the employee with missed matching contributions. Section 350 offers a grace period so that such errors must be corrected prior to 9 ½ months after the end of the plan year in which the mistakes were made and is effective to errors after December 31, 2023.
• Employer Reliance on Employee Hardship Certification: SECURE 2.0 Section 312 provides that, under certain circumstances, employees are permitted to self-certify that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal. Section 312 is effective for plan years beginning after the date of enactment of this Act.
• Amendments to Increase Benefit Accruals Allowed Until Employer Tax Return Due Date: Currently, discretionary plan amendments to an existing plan must generally be adopted by the last day of the plan year in which the amendment is effective. Section 316 allows discretionary amendments that increase participants’ benefits to be adopted by the due date of the employer’s tax return. Section 316 is effective for plan years beginning after December 31, 2023.
• EPCRS Expansion: Section 305 expands the Employee Plans Compliance Resolution System (“EPCRS”) to (1) allow more types of errors to be corrected through self-correction, e.g., plan loan errors, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make RMDs from otherwise applicable excise taxes. Section 305 is effective on the date of enactment.
• Retirement Lost & Found: Section 303 creates a national online searchable lost and found database for retirement plans at the DOL. The database is intended to enable those who might have lost track of their retirement plan to search for plan administrator contact information. Section 303 directs the creation of the database no later than 2 years after the date of enactment.

4.  Specialized Plans: Retiree Health/Life, ESOPs, Small & PEP Plans

• Use of Assets from Overfunded Pension Plan for Retiree Health and Life Benefits: An employer may use assets from an overfunded pension plan to pay retiree health and life insurance benefits, however, these rules sunset at the end of 2025. Section 606 extends the sunset date to the end of 2032 and permits transfers to pay retiree health and life insurance benefits provided the transfer is no more than 1.75% of plan assets and the plan is at least 110% funded. Section 606 is effective for transfers made on or after the date of enactment.
• Tax Deferral for Certain Sales of Employer Stock to ESOP: Under IRC Section 1042, an individual owner of stock in a non-publicly traded C corporation that sponsors an ESOP may elect to defer recognition of gain from the sale of such stock to the ESOP if the seller reinvests the sales proceeds into qualified replacement property. After the sale, the ESOP must own at least 30% of the employer corporation’s stock. Section 114 of SECURE 2.0 expands the gain deferral provisions of Section 1042 with a 10% limit on the deferral to sales of employer stock to S corporation ESOPs. Section 114 is effective for sales made after December 31, 2027.
• Small Employer Pension Plan Startup Credit Modification: Section 102 increases the startup credit from 50% to 100% for employers with up to 50 employees. And, except in the case of defined benefit plans, an additional credit is provided. The amount of the additional credit is generally a percentage of the amount contributed by the employer on behalf of employees, up to a $1,000 per-employee cap for employers with 50 or fewer employees. There is also an exception for high-wage earners. Section 102 is effective for taxable years beginning after December 31, 2022.
• PEP Modification: Section 105 clarifies that a pooled employer plan (“PEP”) may designate a named fiduciary (other than an employer in the plan) to collect plan contributions. Said fiduciary is required to implement reasonable, diligent, and systematic contribution collection procedures. Section 105 is effective for plan years beginning after December 31, 2022.

KMK Comment: While the above is not an exhaustive discussion of SECURE 2.0, it does provide a birds-eye view of many key plan changes brought about by SECURE 2.0. These changes are significant and require close attention. At this point, the plan amendment deadline is generally December 31, 2025. However, employers should begin working with service providers and counsel to ensure timely implementation and amendment.