401(K): What Do I Need To Know About SECURE 2.0? Overview Of Significant Provisions, Part III

As we have previously reported, Congress passed the SECURE 2.0 Act of 2022 (“SECURE 2.0”), a vast collection of retirement-related provisions having a profound effect on 401(k) plans, as part of the larger Consolidated Appropriations Act, 2023 (“CAA”) in late December of 2022. President Biden signed the legislation on December 29, 2022.

SECURE 2.0 supplements and expands upon many of the reforms included as part of the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) enacted in late 2019 (see our blog entitled “Congress Finally Passed SECURE Act – The Most Sweeping Pension Legislation in Over a Decade is Now Law” for a general overview). But SECURE 2.0 contains even  more retirement-related provisions than did its predecessor, and arguably represents a more significant package of reforms, which are generally intended to help make retirement savings available to a wider range of employees and to streamline plan administration.

GEEK OUT! For those who wish to dig a bit deeper, the Senate Finance Committee has issued a nineteen-page summary of SECURE 2.0, available here.

NOTE: This article, along with past related articles, is intended only as a very broad overview of the most significant provisions contained in SECURE 2.0 applicable to most 401(k) plans. It is not intended to cover all 401(k)-related provisions, provide a detailed analysis of the provisions discussed, or address provisions applicable to other types of retirement plans, such as defined benefit retirement plans, Internal Revenue Code Section 403(b) plans, SIMPLE plans, SEPs, multiemployer plans, pooled employer plans, governmental plans, or individual retirement accounts (“IRAs”).


As stated in our previous blog, due to the sheer number of SECURE 2.0 provisions affecting 401(k) plans, we are addressing the more significant of those provisions in a series of blog articles.

The first article in the series (“Part I”) focused on some of the more significant provisions affecting most 401(k) plans that are immediately effective, along with a brief discussion of how SECURE 2.0 changes the coverage rules regarding long-term, part-time employees that were originally implemented by the first (i.e., 2019) SECURE Act.

The second article in the series (“Part II”) focused on some of the more significant provisions affecting most 401(k) plans that will become effective next year (years after 2023) or in later years.

This Part III – the final installment in the series — addresses several additional noteworthy SECURE 2.0 provisions affecting most 401(k) plans, that were not addressed in Parts I or II, and are either currently effective or will become effective in future years.


  1. Small, Immediate Financial Incentives for Contributing to a 401(k) Plan.

Previously, employers have been prohibited from providing any type of financial incentives, particularly cash, to employees as a means of encouraging them from joining, or contributing to, a retirement plan, such as a 401(k) plan – even though it is believed that such incentives may be effective motivators in this regard.

Effective for plan years beginning after December 29, 2022, SECURE 2.0 permits employers to offer employees “de minimis” financial incentives, such as low-dollar gift cards, as an encouragement to help boost participation in 401(k) plans. The statute explicitly prohibits payment of such incentives from plan assets, meaning employers must either fund the incentives from their general assets or find other non-plan source.

COMMENT: Though potentially helpful, the statutory language does not shed any light — nor is there any official guidance at the present time — as to critical questions such as, what constitutes “de minimum?” or, what are the limits on “low-dollar” gift cards? These questions will need clear answers before employers will be eager to set up programs offering these types of incentives to boost participation in their 401(k) plans.

  1. Reduction in Excise Tax on Certain Accumulations in 401(k) Plans (RMD Failures).

Qualified retirement plans, including 401(k) plans, are required to distribute a portion of a participant’s account (“required minimum distribution” or “RMD”) by no later than his or her “required beginning date.” (See our compliance task entitled “Required Minimum Distribution” for more information.) Failure to take RMDs by the “required beginning date” can result in a penalty in the form of an excise tax which, prior to SECURE 2.0, was generally 50 percent of the amount which should have been distributed.

Effective for taxable years begging after December 29, 2022, the excise tax is reduced from 50 percent to 25 percent of the amount by which the minimum required distribution exceeds the actual amount distributed. Additionally, if a failure to take an RMD is corrected within a two-year correction period, the excise tax is further reduced from 25 percent to ten percent of the amount which should have been distributed.

  1. Employers May Rely on Employee Certification of Deemed Hardship.

Many 401(k) plans permit participants to withdraw amounts from their plan accounts while the participants are still working in cases of financial hardship. (See our compliance task entitled “401(k) Plan Distributions and Vesting” for details on these “hardship distributions.”)

Prior to SECURE 2.0., the plan sponsor (not the participant) was solely responsible for determining (i) whether the hardship is due to an “immediate and heavy financial need,” as set forth in the Internal Revenue Code and related regulations; and (ii) that the amount of the withdrawal was necessary to alleviate the hardship. In general, the only thing the participant could self-certify is that he or she did not have other financial resources sufficient to satisfy the financial need.

Effective for plan years beginning after December 29, 2022, plan administrators generally may now rely on an participant’s written self-certification that a “deemed” hardship distribution is due to an “immediate and heavy financial need,” and that the amount of the distribution is limited to the amount required to satisfy such need. This change, in effect, shifts the burden of having to document the rationale behind the hardship distribution from the plan administrator to the participant.

COMMENT: The IRS previously permitted plan administrators to rely on participant self-certifications in the case of special “Coronavirus-Related Distributions” (see here for details). Although these special, time-limited distributions are no longer available, this practice provided a precedent for permitting participants to self-certify why they qualify for in-service plan distributions made on account of circumstances such as financial hardship.


  1. Plan Withdrawals Permitted for Certain Emergency Expenses.

Currently, aside from hardship distributions (see above) and under other specifically permitted circumstances (for example, the new SECURE 2.0 “qualified disaster distributions” – see “401(k): What Do I Need to Know About SECURE 2.0? Overview of Significant Provisions, Part I” for details), plan distributions made prior to retirement or termination of employment are generally subject to an additional ten percent penalty tax.

Effective for distributions made after December 31, 2023, SECURE 2.0 adds yet another exception to the general rule. Under this new rule, one distribution per year, of up to $1,000, may now be made for emergencies that are unforeseeable, or that constitute an immediate financial need relating to personal or family emergency expenses. Here again, a plan may rely on a participant’s written certification that he or she has had such an unforeseeable or immediate financial need (see Item 3, above). Recipients may repay the distribution amount into the plan within three years, and may not take another such distribution within the three-year period — unless the prior distribution has been fully repaid.

COMMENT: These “emergency expense withdrawals” are completely separate from, and exist in addition to, ordinary hardship withdrawals (see Item 3, above), which have been in effect for decades. Plan administrators who choose to include the new provisions will need to exercise caution in keeping the various types of in-service withdrawals separately accounted for, particularly in light of the differing repayment and other rules that apply to each withdrawal type.

  1. “Starter” 401(k) Plans for Employers Currently Offering No Retirement Plan.

Currently, 401(k) plans are often seen as unduly complicated, costly and subject to copious legal requirements — a perception which serves as a deterrent to many employers who might otherwise wish to offer retirement plans to their employees. Although Congress has created so-called SEPS and SIMPLE plans in the past to help address these concerns, neither of these plans has proved to be extremely popular, due in part to their limited features.

Effective for plan years beginning after December 31, 2023, SECURE 2.0 tries again by providing employers that do not currently sponsor a retirement plan the opportunity to offer a “starter” 401(k) plan. The major incentive appears to be that the “starter” 401(k) would be statutorily exempt from the costly, complex nondiscrimination (including top-heavy testing) requirements, provided that certain requirements are met:

  • The plan must automatically enroll participants at the deferral rate at least three percent, and no more than fifteen percent, of participant compensation (see “401(k): What Do I Need to Know About SECURE 2.0? Overview of Significant Provisions, Part II” for more about automatic enrollment);
  • Elective deferrals are limited to the annual limit applicable to individual retirement accounts (IRAs), which is $6,500 for 2023, with an additional $1,000 (for a total of $7,500) in “catch-up” contributions for participants who are age 50 or older; and
  • Employer matching or non-discretionary contributions are not required or permitted.
  1. Emergency Savings Accounts Linked to 401(k) Plans.

There is growing concern in Congress and among professional financial advisors that too few Americans are saving enough money to cover unexpected expenses. Specifically, the Federal Reserve has reported that nearly half of Americans would struggle to cover an unexpected expense of $400 or more.

To help rectify this situation, effective for plan years beginning after December 31, 2023, SECURE 2.0 permits plan sponsors to offer “pension-linked emergency savings accounts” (PLESAs) connected to their 401(k) plans. Participants, who are not “highly compensated employees” (see reference article entitled “401(k) Nondiscrimination Testing” for details), may contribute, on a post-tax (“Roth”) basis, an amount not to exceed $2,500 (as indexed for inflation), or a lesser amount, subject to plan provisions. Once the maximum is reached, any additional contributions may be deposited into the employee’s 401(k) plan’s Roth account (if any).

Employers may automatically enroll participants at up to three percent of their compensation, but they must be permitted to opt out of the arrangement at any time. The emergency account must allow for at least one withdrawal by the participant per calendar month, and the first four distributions in any one year must be exempt from fees or charges. Distributions from an emergency savings account are exempt from the ten percent excise tax on early distributions.

Contributions to emergency savings accounts must be eligible for the same matching contributions applicable to regular 401(k) elective deferrals, but the matching contributions must be made to the 401(k) plan itself instead of to the emergency savings account.

At separation from service, employees may withdraw their emergency savings accounts in the form of cash, or roll it into their Roth 401(k) account (or Roth individual retirement account), if any.

  1. Application of “Top-Heavy” Rules to 401(k) Plans Covering Excludable Employees.

Many qualified retirement plans, including 401(k) plans, are subject to annual “top heavy” testing, a form of nondiscrimination testing (see compliance task entitled “Top-Heavy Testing” for more information). Plans that are deemed to be “top-heavy” must make certain minimum contributions to rank-and-file employees (non-“key employees”), and must meet special vesting requirements for such employees, in order to remain tax-qualified.

Effective for plan years beginning after December 31, 2023, SECURE 2.0 allows 401(k) plans to exclude from the top-heavy testing population any employees covered under the plan who do not meet the Internal Revenue Code’s minimum age or service requirements (generally, age 21 and one year of service). In other words, plans are encouraged to be more generous in their coverage than otherwise legally required because – even if they would be “top-heavy” if all covered, excludable employees were included in the testing – the plans are not mandated to make the additional contributions, and meet the top-heavy vesting rules, for any non-key employees participating in the plan.

  1. Required Minimum Distribution (RMD) Rules for Roth Accounts.

As previously stated, 401(k) and other retirement plans must distribute a portion of a participant’s account (“required minimum distribution” or “RMD”) by no later than his or her “required beginning date” (see our compliance task entitled “Required Minimum Distribution” for more information on RMDs). Under current law, certain pre-death RMDs are mandatory in the case of a participant having a Roth 401(k) account. (For more information, see our “Geek-Out” reference article entitled “401(k) Plan Distributions and Vesting”.)

Effective for taxable years beginning after December 31, 2023, SECURE 2.0 generally eliminates the pre-death RMD requirement for Roth 401(k) plan accounts. Accordingly, on and after the effective date, RMDs will generally not be required to begin prior to the death of a participant having a Roth 401(k) plan account.

  1. Surviving Spouse Election to be Treated as Employee for RMD Rules.

Currently, for purposes of the RMD rules (see above), surviving spouses generally must begin receiving RMDs by no later than the date that the participant would have attained his or her “required beginning date” (currently age 73, but scheduled to increase to age 75 in 2033 – see “401(k): What Do I Need to Know About SECURE 2.0? Overview of Significant Provisions, Part I” for details on the age increase).

Effective for calendar years beginning after December 31, 2023, surviving spouses may elect to be treated as deceased employees for purposes of the RMD rules. Accordingly, such electing spouses generally would have to receive the entire balance to the credit of the participant’s 401(k) plan account before the end of the tenth year of the participant’s death, or certain other specified events (see our “Geek-Out” reference article entitled “401(k) Distributions and Vesting – Special Rules” for more details).

  1. Safe Harbor for Corrections for Employee Elective Deferral Failures.

Under current law, 401(k) plans having an automatic enrollment and/or automatic escalation feature could be subject to significant penalties in the event that specific legal requirements (particularly notice requirements) are not met – even in the case of minor or innocent errors.

The IRS has previously provided a “safe-harbor” correction method intended to help ease this burden on employers, but the safe-harbor was originally set to expire on December 23, 2023 (see our blog entitled “401(k): Updates to EPCRS Correction Programs Encourage Employers to Self-Identify, Correct Mistakes” for details). Very generally stated, the safe-harbor method permits correction to be made if (i) notice is given to the affected employee(s); (ii) corrected deferrals commence within certain specified time periods; and (iii) the employer makes any matching contributions that would have been made if the failure had not occurred.

Effective for tax years beginning after 2023, SECURE 2.0 permits a “grace period” for plan sponsors to correct, without penalty, reasonable errors in administering automatic enrollment and automatic escalation features. Generally stated, under the SECURE 2.0 provision, such errors must be corrected prior to nine-and one-half months after the end of the plan year in which the mistakes were made.

Plan Amendments to Comply with SECURE 2.0.
SECURE 2.0 provides that written plan amendments made to comply with the applicable provisions of SECURE 2.0 (including each of the provisions covered in Part I and Part II of this blog series) generally must be made on or before the last day of the first plan year beginning on or after January 1, 2025.

In addition, SECURE 2.0 conforms the plan amendment deadline to encompass retirement plan amendments made under the original SECURE Act (see our blog entitled: “Congress Finally Passes SECURE Act – The Most Sweeping Pension Legislation in Over a Decade is Now Law”), the CARES Act (see our blog entitled “Congress Passes CARES Act in response to COVID-19 Crisis, Contains 401(k) Ease-of-Access and Other Provisions”), and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 – thus providing a welcome, single amendment deadline applicable to all of these important, recent pieces of legislation affecting 401(k) plans.

EDITORIAL COMMENT: As previously noted, the items discussed above are some of the more prominent 401(k)-related provisions contained in SECURE 2.0, that are currently effective or will become effective next year or in later years, that were not previously covered in Part I or Part II of this series. The omission of any SECURE 2.0 Act provision from discussion in Part I, Part II or this Part III of this series is not intended to indicate or imply that such provision may not affect any particular 401(k) plan, as this would depend upon, among other factors, the particular provisions of such plan.


The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.

Leave a Reply

Your email address will not be published. Required fields are marked *