As part of a large year-end piece of legislation, the provisions known as SECURE 2.0 Act of 2022 (“SECURE 2.0”) were enacted into law.  SECURE 2.0 represents a broadly bipartisan piece of legislation that continues efforts over the last few years to modify and improve (generally) the retirement provisions of the Internal Revenue Code and ERISA.  While the new law includes close to 100 different provisions, in contrast to the original SECURE Act, many of the provisions in SECURE 2.0 have delayed effective dates, thus permitting a more gradual rollout of changes, which will no doubt be helpful to employers, advisors and recordkeepers scrambling to keep up.  Moreover, we would say that there are relatively fewer truly significant provisions in SECURE 2.0; much of what is in the law falls into the “fine-tuning” adjustments category.  We summarize below the more significant and/or immediate changes that are part of SECURE 2.0.

Immediate (Mostly) Changes

The following changes are generally effective this year.

MRD changes.  In order to impose some outer limit on the benefits of tax deferral, the Internal Revenue Code has historically mandated the payment of so-called minimum required distributions (“MRDs”).  A failure to make (or take) MRDs can result in the loss of tax qualified status for plans and a 50% excise tax on the individual, in addition to any income tax otherwise payable.

For many years, MRDs were required to begin shortly after an individual attained age 70½.  The SECURE Act increased the starting point from age 70½ to age 72, applying with respect to individuals born on or after July 1, 1949.  As a result of SECURE 2.0 and beginning this year (2023), MRDs are not required until the individual attains age 73.  This means that anyone who attains age 72 in 2023 need not receive an MRD for 2023.  Beginning in 2033ish (there is a glitch in the law), the age will be further increased to age 75.  As a reminder, a critical exception for retirement plans (but not IRAs) allows older workers to defer MRDs until retirement, provided the worker does not own more than 5% of the business and assuming the retirement plan permits continued deferral.

The age 73 requirement will generally apply to all forms of tax-favored retirement plans including 401(k), 403(b), profit sharing, money purchase pension, stock bonus, defined benefit and 457(b) plans) as well as IRAs.

In addition, the 50% excise tax penalty for failing to satisfy the MRD rules, which is payable by a participant or IRA owner and is in addition to applicable income taxes, has been reduced to a 25% excise tax penalty, with the opportunity for a 10% rate if certain corrective actions are timely taken to report and cure an MRD failure.  Because this excise tax was self-reported on Form 5329, a failure to file Form 5329 meant that the statute of limitations never ran on the penalty, leaving the individual significantly exposed.  As a result of a SECURE 2.0 change, the individual’s Form 1040 is now the tax filing that begins the statute of limitations for purposes of this excise tax.

Finally, while not effective until 2024, MRDs with respect to the Roth portion of a retirement plan account are not required while the participant remains alive.  This makes the in-plan Roth rule similar to the existing Roth IRA rule.

A lot of Roth.  No doubt because Roth contributions are immediately taxable – which raises revenue – SECURE 2.0 has added a host of Roth (after-tax) related changes.  Beginning for contributions made in 2023, plans may be amended to allow participants to elect to treat vested matching and/or profit sharing contributions as Roth contributions (akin to an immediate in-plan Roth conversion).  Note that a plan is not required to offer this election, and we generally advise clients to wait until guidance is issued and recordkeeping systems are able to administer this provision before adopting.  On the guidance front, there are a number of open questions including, for example:  whether the election is available with respect to partially vested contributions; who, as between the payroll provider and plan recordkeeper, is reporting the income; and confirmation (hopefully) that any resulting income inclusion is not treated as part of a plan’s compensation for benefit accrual and other purposes.

Also beginning in 2023, SEPs and SIMPLE IRAs may now include a Roth feature, including for employer contributions.  Whether this is required is unclear.

More changes to long-term part-time employee participation requirements. The original SECURE Act mandated 401(k) deferral contribution eligibility for long-term employees who perform at least 500 hours of service with an employer for at least three consecutive years, beginning on or after January 1, 2021.  (The individual must also be at least age 21 at the end of the period.)  This is an override to the historic age 21/one year of service (generally 1,000 hours) for 401(k) deferral contribution eligibility.  Assuming a plan is operating on a calendar year basis, the first time such an employee would be eligible would be in 2024.

These so-called long-term part-time employees are not required to receive matching or profit sharing contributions and can be excluded from top heavy and nondiscrimination testing, but if they receive matching or profit sharing contributions, the plan must credit vesting for each year in which they completed at least 500 hours of vesting service.  As noted in an earlier advisory, Keeping Up With All the Changes, for vesting purposes the Internal Revenue Service took the position that a year of vesting service must be credited to long-term, part-time employees even for years prior to 2021, unless some other exemption applied (the plan provided that years prior to attaining age 18 were not counted for vesting purposes, for example).  This presented employers with very difficult recordkeeping issues.

SECURE 2.0 has made three important changes to these rules.  First, the provision is extended to 403(b) arrangements that are otherwise subject to ERISA, effective for plan years beginning in 2025.  Second, the three consecutive year requirement has been dropped to a two consecutive year requirement also effective for plan years beginning in 2025 (although counting only 12-month periods beginning on or after January 1, 2023 for this purpose).  And finally, Congress overrode the Internal Revenue Service’s vesting interpretation, effective retroactively.  The latter means that any long-term part-time employee who first becomes eligible under the original provision in 2024 will not have any vesting service counted before 2021.  And going forward, only service on or after 2021 (for qualified plans) or 2023 (for 403(b) arrangements) will need to be counted for vesting purposes with respect to long-term part-time employees.

Tax credits.  SECURE 2.0 continues the trend of offering tax credits to encourage smaller employers to offer retirement plans to employees, with a new twist.  In general, smaller employers (not more than 50 employees) are eligible for credits of up to 100% (increased from 50%) of the “startup” costs of a qualified plan, SEP, SIMPLE IRA or SIMPLE 401(k), up to $5,000, for up to three years.  (Employers with up to 100 employees remain eligible for the 50% credit.)  SECURE 2.0 also expanded the availability of these credits to small employers that join an existing multiple employer plan (or “MEP”) or pooled employer plan (or “PEP”).

In addition, SECURE 2.0 includes a handful of provisions pursuant to which an employer is able to obtain a federal tax credit with respect to contributions made to participant accounts in various types of retirement plans.  One example is a new small employer credit of up to $1,000 per employee (available for up to five years and phased out beginning with the second year following the year the plan is established) with respect to contributions to defined contribution plans on behalf of lower paid employees.  (The amount phases out for employers with 50 to 100 employees.)

QDRO tweaks.  Effective after 2022, tribal governments are now able to issue domestic relations orders (“DROs”).  Plan administrators will need to evaluate whether such an order is a qualified domestic relations order (a “QDRO”).  Plan documents and QDRO procedures will need to be revised to reflect this change.

Expanded availability of MEPs and PEPs.  SECURE 2.0 expanded changes made by the original SECURE Act that allows employers to utilize MEPs and PEPs.  These are plans that are offered to unrelated employers that are not part of a single employer affiliated (or controlled) group.  MEPs and PEPs are generally intended to allow smaller employers to share the administrative costs associated with running a retirement plan, including, for example, by enjoying the benefits of lower investment-level fees typically associated with higher account balances.  SECURE 2.0 allows most employers offering 403(b) arrangements to participate in MEPs or PEPs, effective immediately.

Significant Changes On The Horizon

While not immediately effective, the following SECURE 2.0 provisions are likely to be of importance to retirement plans and plan sponsors.

Catch-up contribution changes.  Any catch-up contributions to most forms of retirement plans (other than SARSEPs and SIMPLE IRAs) will need to be made on a Roth (after-tax) basis beginning after 2023.  This was a significant revenue raising provision, although in its final form, only those making more than $145,000 in the prior year from the employer are subject to this rule.  Interestingly, the $145,000 limit is based on the definition of wages used for FICA (Social Security, Medicare and Additional Medicare) tax purposes, which may make this even more difficult to administer if an employer also has deferred compensation plans subject to the quirky (and all-to-often misapplied) timing rules of Internal Revenue Code Section 3121(v).  Moreover, since self-employed individuals (partners, for example) are subject to the SECA tax system, it appears that the rule might not apply to those persons, although this may not have been what Congress had in mind.

Employers and recordkeepers will need to modify systems to ensure that this new rule is administered correctly and guidance is needed to address a host of questions, including who, as between the payroll provider and plan recordkeeper, is responsible for reporting the taxable amount, particularly with respect to amounts recharacterized as catch-up contributions after year end.  And presumably if a plan does not currently offer a Roth feature and has higher-paid participants, it either must be amended to add Roth or all catch-up contributions will need to be eliminated (both with respect to the sponsor’s plan and the plans of any of the sponsor’s affiliates).

That said, due to a drafting glitch, SECURE 2.0 actually eliminated the availability of all catch-up contributions beginning in 2024.  It will be interesting to see whether Congress is able to enact a legislative fix before year-end, or whether the Treasury Department and Internal Revenue Service decide that they can plug this hole in the absence of a law change.

Looking further ahead, SECURE 2.0 also provides for increased retirement plan catch-up contributions.  Beginning in 2025, individuals aged 60, 61, 62 and 63 will have an opportunity to make larger catch-up contributions (albeit as Roth catch-up contributions for those who are higher paid).  The new limits will be indexed for inflation but would be $10,000 ($5,000 for SIMPLE IRAs and SIMPLE 401(k) plans), versus $7,500 ($3,500 for SIMPLE IRAs and SIMPLE 401(k) plans) in 2023.  (In each case the dollar amount would be 150% of the regular indexed amount, if larger.)

Finally, the $1,000 catch-up contribution amount for IRAs, which has not been indexed for inflation, will now begin to be indexed beginning in 2024.

Small balance cash-outs.  Beginning in 2024, the small balance cash-out limit is being raised from $5,000 to $7,000, although the amount is still not indexed for inflation.  As a reminder, the Internal Revenue Service position is that if a qualified plan includes this provision, it must operationally make these distributions to terminated participants.  A failure to do so can result in plan disqualification.

SECURE 2.0 also adds a new prohibited transaction exemption designed to facilitate “auto-portability” of small balance cash-outs.

Required automatic enrollment.  Generally effective for plan years beginning in 2025, 401(k) plans and 403(b) arrangements will be required to automatically enroll participants at a minimum 3% (maximum 10%) of compensation contribution rate, with an annual automatic increase of 1% of compensation per year (to between 10% and 15% of compensation).  The requirement does not apply to SIMPLE 401(k) plans, certain small employer plans (generally with 10 or fewer employees), plans adopted by new businesses (less than three years) or, importantly for existing plans, plans established before December 29, 2022.  In contrast to the long-term part-time employee provisions discussed earlier, there is no explicit exception from employer contributions for this feature.

Additional 403(b) arrangement changes.  SECURE 2.0 also teased sponsors of 403(b)(7) arrangements into believing that collective investment trusts (or “CITs”) might soon be available.  In general, the operating expenses of CITs tends to be lower than the operating expenses of mutual funds.  And while SECURE 2.0 did remove an impediment to offering CITs to 403(b)(7) arrangements on the tax side, a required change to federal securities law was not included, and so additional Congressional action is needed before CITs are available to 403(b)(7) arrangements.

ESOPs.  Sellers of “S” corporation stock to an ESOP may, beginning in 2028, take advantage of the tax deferral provisions of Internal Revenue Code Section 1042 with respect to 10% of the gain on the sale of shares to the ESOP.

A Few More Things To Come

As noted at the beginning, SECURE 2.0 includes a lot of changes, many of which have delayed effective dates and/or cannot as a practical matter be implemented until guidance is published.  This final section discusses some of these provisions that are broadly applicable to employers.

Changes affecting contributions.

• SECURE 2.0 permits plans to offer a new pension-linked emergency savings account (a “PLESA”).  The basic idea is that non-highly compensated employees can elect into or be automatically enrolled into a Roth (after-tax) savings arrangement of up to 3% of compensation for a total account balance of up to $2,500.  The amount contributed to the PLESA, which must be matched if the plan otherwise includes a match feature, is then available for the employee’s emergencies.  While PLESAs can begin to be offered as early as 2024 and may be particularly attractive to employers looking to boost participation rates, like many provisions of SECURE 2.0, it is unlikely employers will make this feature available until guidance has been issued and the recordkeeping industry has had a chance to catch up.
• Beginning with contributions made for plan years beginning in 2024, employers may treat “qualified student loan repayments” as elective deferrals for matching contribution purposes under a 401(k) or governmental 457(b) plan or a 403(b) arrangement or SIMPLE IRA.
• SECURE 2.0 provides some loosening, beginning with the 2024 plan year, of the date by which a qualified plan may be amended in order to increase benefit accruals (other than any match) for the prior year.

Changes affecting distributions.

• Beginning in 2024, eligible distributions of generally up to $10,000 may be made from a variety of retirement plan vehicles (other than money purchase pension and defined benefit plans) to a domestic abuse victim.  This distribution is not subject to the 10% early withdrawal excise tax and can be repaid within three years.
• Also beginning in 2024, various plans can be amended to permit employees access to a once-per-year distribution of up to $1,000 as an “emergency personal expense distribution.”  Such a distribution can be recontributed within three years but additional distributions are not available during that period (unless the amount is recontributed).

Changes affecting plan administration.

• Congress appears to continue to view favorably the steps the Internal Revenue Service has taken to encourage plan sponsors to identify and resolve issues under its Employee Plans Compliance Resolution System (“EPCRS”).  It has done this by encouraging self-correction of “eligible inadvertent failures,” including an expanded ability to self-correct plan loan failures, incorporation into the law of certain correction provisions relating to automatic enrollment and automatic increase failures that are due to expire at the end of this year and expanding the availability of EPCRS to IRA custodians.
• Several provisions are aimed at reevaluating the tsunami of notices that are required under the Internal Revenue Code and ERISA.  SECURE 2.0 directs both the Internal Revenue Service and the Department of Labor to undertake studies of the efficacy of various notices and to considering whether consolidation is possible.  That said, in a potential step back from the all-electronic approach to participant communication, SECURE 2.0 will generally require a paper statement once a year for defined contributions plans and once every three years for defined benefit plans, beginning after 2025.
• The Department of Labor is tasked with establishing a new Retirement Savings Lost and Found searchable database, the goal of which is to connect individuals with their “lost” retirement plan savings.

Amendment Timing

SECURE 2.0 generally provides that plan documents need not be amended until the last day of the plan year beginning on or after January 1, 2025 (December 31, 2025 for calendar year plans) unless a later date is established by Treasury.  This amendment timing rule applies to changes under the original SECURE Act, the CARES Act and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and expands the Internal Revenue Service’s prior extension of the amendment timing rule for these provisions to generally include all types of plans, including 403(b) arrangements.  (A 2027 amendment date applies to governmental plans.)

Given the sheer number of changes, plan sponsors and plan administrators are urged to keep careful track of the implementation date of each change.  The Internal Revenue Service requires that accurate effective dates for plan changes be part of required plan amendments.  We are already seeing the inability to identify a specific implementation date as a problem with respect to CARES Act and original SECURE Act amendments, particularly with respect to terminating plans that must be amended in connection with their termination.

Employment and Labor Law Updates

Changes To Confidentiality And Non-Disparagement Provisions

The National Labor Relations Board has issued a decision finding that certain (and fairly standard) confidentiality and non-disparagement provisions in severance agreements required employees to waive rights under the National Labor Relations Act (“NLRA”) and were impermissible.  This recent change in the law is most important for dealing with employees who are not in a managerial or supervisory role because managers and supervisors do not have the same rights under the NLRA.

In light of this decision, employers should have their severance agreements reviewed for any necessary revisions; this is also a good opportunity to review employee handbooks, confidentiality agreements and other employment forms that may have confidentiality and/or non-disparagement provisions.

Possible Changes To Non-Competition Agreements

The Federal Trade Commission (“FTC”) has proposed a rule that would ban post-employment non-competition restrictions.  This rule would be retroactive and employers with non-competes in place would be required to rescind those agreements.  Under the proposed rule, there would be a limited exception available when a business is sold – an owner, member or partner owning at least a quarter of the business could be required to agree to a noncompete.

This proposed rule has already generated heated debate, and if the FTC does enact the rule, we can expect litigation.  If the rule is enacted, employers will need to not only revise their restrictive covenants agreements to exclude post-employment noncompete provisions but also to ensure that they are receiving maximum protection from confidentiality and non-solicitation provisions.

Increased Protections For Pregnant And Post-Partum Workers

Two new federal laws increase the accommodations that many employers must provide to pregnant and post-partum workers.  (Small employers may be exempt from one or both of the new laws.)  These two laws add to protections established by the Pregnancy Discrimination Act of 1978 and the Americans with Disabilities Act.

The Providing Urgent Maternal Protections for Nursing Mothers Act (“PUMP for Nursing Mothers Act”) requires employers to provide break time and a private location (which cannot be a bathroom) for nursing employees for up to two years.

The Pregnant Workers Fairness Act requires employers to make reasonable accommodations related to pregnancy, childbirth and related medical conditions, and it prohibits discrimination against employees who have requested or used reasonable accommodations.

Key 2023 Benefits Related Limits 

Training Reminders

A variety of training requirements apply in the employment and benefits realm.  For example, so-called “covered entities,” which potentially picks up employer sponsored self-insured health arrangements (such as HRAs and health care flexible spending accounts), are required to provide training with respect to protected health information (“PHI”) under HIPAA.  In addition, other employment and/or benefits training is often encouraged by regulators, or viewed as a best practice, even where not required.  In Massachusetts, for example, employers are encouraged to conduct anti-discrimination and sexual harassment training annually.  And employees responsible for plans subject to ERISA, such as 401(k) plans, often benefit from periodic fiduciary training and operational compliance reviews.