ENCORE! SECURE 2.0 PASSES, REPRESENTING AN EVEN LARGER COLLECTION OF 401(K) PLAN REFORMS
In a whirlwind of year-end activity, Congress has at long last succeeded in passing the SECURE 2.0 Act of 2022 (“SECURE 2.0”), a huge package of retirement provisions that will have a major impact on 401(k) plans. Included as part of the larger Consolidated Appropriations Act, 2023 (“CAA”), SECURE 2.0 augments and expands upon many of the reforms enacted as part of the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”), which was passed in late 2019 (see out blog entitled “Congress Finally Passed SECURE Act – The Most Sweeping Pension Legislation in Over a Decade is Now Law” for a general overview). If anything, SECURE 2.0 represents even a larger group of statutory revisions than did the predecessor legislation.
OBSERVATION: Enjoying widespread bipartisan support, many of the provisions included in SECURE 2.0 have been around for a while, some having been proposed as part of previous, failed legislation. Overall, the goal behind most of the changes is to help make retirement savings available to a wider range of employees through a wide variety of distinct approaches favored by experts and retirement plan professionals.
In the days and weeks ahead, we will be writing about SECURE 2.0 in greater detail. For now, the following is a very general outline of a few of the more significant provisions that will affect most 401(k) plans (this list is not meant to be exhaustive):
Mandatory Auto Enrollment Provisions.
Most 401(k) plans established after the passage of SECURE 2.0 must contain an automatic enrollment feature, for plan years beginning after December 31, 2024. This plan feature generally must automatically escalate participants’ 401(k) deferral percentages from between 3 percent to 10 percent per year. Participants generally may opt out of the automatic enrollment and/or the automatic escalation features.
- Government “Savers Match.” Effective for years beginning after December 31, 2026, the Federal government will contribute matching contributions to certain low-income 401(k) plan participants of up to 50 percent of their elective deferral contributions, up to a maximum of $2,000, reduced by certain distributions.
- Matching Contributions for Student Loan Payments. Effective for plan years beginning after 2023, 401(k) plan sponsors will be able to make matching contributions to participants for certain “qualified student loan payments” that such participants make for qualifying higher education expenses.
- “Catch-Up” Contribution Increase. 401(k) plan participants who are age 50 or older currently are eligible to make additional “catch-up” contributions up to certain inflation-adjusted limits ($7,500 for 2023). Effective for tax years beginning after December 31, 2024, the catch-up contribution limit will be increased to the greater of (i) $10,000; or (ii) 150 percent of the current, pre-SECURE 2.0 age 50 catch up contribution amount, for employees who are reach ages 60, 61, 62, or 63 during the year.
- Mandatory Roth Catch-Up Contributions for Certain Participants. Effective for tax years beginning after 2023, catch-up contributions made under 401(k) plans by participants whose wages exceed $145,000 (as indexed for inflation) per year must be made on a “Roth” (i.e., after tax) basis.
- Election of Roth Matching and/or Nonelective 401(k) Contributions. Effective for employer matching and/or nonelective contributions made after the passage of SECURE 2.0, 401(k) plans may allow participants to elect some or all of these contributions to be characterized as “Roth” after-tax contributions, provided that the contributions are fully vested at the time they are made.
- Delayed Required Beginning Date. Effective January 1, 2023, the participant age linked to the “required beginning date” at which mandatory retirement plan distributions must commence will increase from age 72 to age 73. Beginning on January 2, 2033, this age will increase from age 73 to age 75.
- Increase in Small Benefit Cash-Out Limit. Currently, 401(k) plans are prohibited from distributing participant accounts in excess of $5,000 without the participant’s consent. Amounts under this threshold generally may be “cashed out,” even without the participant’s permission. Effective for distributions made after December 31, 2023, this automatic cash-out limit will increase from $5,000 to $7,000. In addition, SECURE 2.0 contains automatic portability rules applicable to amounts transferred to a default individual retirement account (IRA) chosen by the plan sponsor.
- Penalty-Free Withdrawals for Domestic Abuse, Terminal Illness. SECURE 2.0 expands the list of permissible in-service withdrawals from 401(k) plans to include self-certified cases of domestic abuse and physician-certified terminal illnesses, with somewhat different rules applicable in each such case. The withdrawals are not subject to a ten-percent early withdrawal penalty tax and may be repaid pursuant to specified rules.
- Permanent Rules for Qualified Federal Disaster Distributions. Effective for disasters occurring on or after January 26, 2021, SECURE 2.0 establishes permanent rules for in-service distributions made in response to certain Federally declared disasters, in amounts up to $22,000. These distributions are not subject to a ten-percent penalty tax on early withdrawals and may be repaid pursuant to specified rules.In addition, under the same circumstances, the maximum permissible 401(k) loan limits are expanded up to the lesser of $100,000 or 100% of the participant’s account balance, and there is a one-year extension of any associated loan repayment period.
- Expansion of IRS EPCRS Program. Effective immediately, SECURE 2.0 expands the ability of plans to self-correct additional failures through the IRS’s EPCRS program, including certain plan loan failures and “eligible inadvertent failures” (generally stated, failures that occur despite the plan’s having practices and procedures in place designed to ensure compliance with applicable legal requirements). (See our reference page entitled “401(k) EPCRS Overview” for details about EPCRS.)
- Creation of Retirement “Lost and Found.” Within two years of enactment, SECURE 2.0 will create an online searchable database that will permit participants and beneficiaries to search for any available contact information for those plan administrators of 401(k) plans under which they may be due a benefit. To help create and maintain the database, 401(k) plans will be required to share their updated contact information with the DOL.
COMMENT: As previously noted, the above are just a few of the more prominent 401(k)-related provisions contained in SECURE 2.0. Other provisions not mentioned above are not necessarily of lesser importance but, for time and space considerations, many of them will be covered later in greater detail and in multiple blogs.
The individual provisions contained in SECURE 2.0 are effective as of various effective dates, as noted above and elsewhere in the statute. Although there are no immediate changes required before the end of 2022, plan sponsors and administrators should seek to familiarize themselves with the new provisions as quickly as possible, as many of the changes will require a certain amount of lead time to implement prior to their applicable effective dates.
DISCLAIMER: This article 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 mentioned, or address provisions applicable to other retirement plans, such as defined benefit retirement plans, Internal Revenue Code Section 403(b) plans, governmental plans or individual retirement accounts (“IRAs”). We will be writing about the above-mentioned 401(k) provisions, along with more of the most prominent SECURE 2.0 provisions applicable to most 401(k) plans, in somewhat greater detail in the near future.
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.