Secure 2.0 Act of 2022 Introduces Key Changes for Workplace Retirement Plans
The Consolidated Appropriations Act, 2023 (Public Law No. 117-328) that was signed into law on December 29, 2022 by President Joe Biden includes the SECURE 2.0 Act of 2022, which introduces over 90 changes to the federal rules governing workplace retirement plans.
This landmark legislation builds on the original SECURE Act that was enacted on December 19, 2019, and aims to expand coverage and increase retirement savings while simplifying and clarifying retirement plan rules.
Every employer, whether for-profit or tax-exempt, that currently maintains a qualified retirement plan or is evaluating a future plan should consider implementing these new rules, since the changes are generally beneficial for employees.
Unless the Internal Revenue Service (IRS) announces otherwise, employers that operate in accordance with the mandatory or optional changes in the law as of the provisions’ applicable effective date have until the end of the plan year beginning in 2025 to adopt the written amendment. Government employers have until the end of their 2027 plan year to amend the plan document.
To help prioritize the evaluation of the changes, the following summary of the SECURE 2.0 provisions is organized by the year in which the change is required or may be incorporated into plan operations, without regard to the plan type. Future articles will discuss various aspects of SECURE 2.0, including strategic opportunities and implementation challenges for employers.
Changes with immediate effective dates
Insight: Employers need to consider immediately updating employee notices and plan procedures for these important changes in the law.
Later required minimum distributions (RMDs). SECURE 2.0 increases the age at which retirement plan participants must begin receiving RMDs from 72 to 73, starting January 1, 2023. The original SECURE Act increased the starting age for RMDs from 70½ to 72.
Aggregation of distributions on tax-preferred retirement accounts that hold annuities. Effective December 29, 2022, RMDs can be determined by aggregating distributions from both the annuity and non-annuity investments.
Reduced excise tax for a failure to take RMDs. Effective for taxable years beginning after December 29, 2022, the excise tax rate is reduced from 50% to 25% of the missed RMD for workplace retirement plans and IRAs. Further, if an IRA makes a corrective distribution generally within two years, the excise tax is reduced to 10% for the IRA (but not for workplace retirement plans).
Encourages life annuities. SECURE 2.0 eliminates certain actuarial tests in the RMD regulations that operated as barriers to the availability of life annuities in qualified plans and IRAs. Effective for contracts purchased or received in an exchange on or after December 29, 2022, SECURE 2.0 repeals the 25% limit and allows up to $200,000 (indexed) to be used from an account balance to purchase a qualifying longevity annuity contract (QLAC). It also clarifies that “free look” periods are permitted up to 90 days for contracts purchased or received in an exchange on or after July 14, 2014.
Reduces disclosures for unenrolled employees. Effective for plan years beginning after December 31, 2022, employers are no longer required to provide most notices under ERISA or IRS rules to employees who do not participate in the employer’s retirement plan. However, employers must provide an annual reminder of the employee’s eligibility and deadline, if applicable, to participate in the plan. Employers must also provide such individuals with any plan documents they request.
Allows incentives for 401(k) and 403(b) elections. Effective for plan years beginning after December 29, 2022, employers may provide de minimis financial benefits, such as low-value gift cards, as an incentive for employees to elect to contribute to a 401(k) or 403(b) plan without violating IRS’s “contingent benefit rule.”
Insight:The legislation does not define what dollar amount would be considered de minimis, so IRS guidance is needed. Based on long-standing IRS guidance in other contexts (for example, “de minimis” fringe benefits) the dollar value threshold is very low, which may not be sufficient to motivate anyone to enroll in the plan. The incentives cannot be paid from plan assets.
Employer contributions may be designated as Roth contributions. Effective December 29, 2022, employers may allow plan participants to designate employer matching and nonelective contributions as after-tax Roth contributions. Such contributions would be included in the participant’s taxable wage income for the year made. Employer contributions designated as Roth contributions must be immediately 100% vested.
Permanent relief for federally declared disasters. Effective for federally declared disasters occurring on or after January 26, 2021 (i.e., this provision is effective retroactively), plans or IRAs may allow affected participants additional access to retirement funds. Penalty-free distributions up to $22,000 per participant, per disaster may be taken into taxable income over three years and participants can recontribute those amounts to a tax-preferred retirement account within three years. Plans can also increase the affected participant’s loan limit to $100,000 (instead of the regular $50,000 loan limit) or the participant’s vested account balance. Also, if the affected participant has a non-disaster plan loan outstanding the repayment period can be extended by one year.
Insight: This is permanent relief that eliminates the need for specific disaster relief to be issued by the IRS.
Reliance on employee’s certification for hardship distributions. For plan years beginning after December 29, 2022, plan sponsors can rely on employees’ self-certification that the employee has experienced a deemed hardship for purposes of taking a hardship withdrawal from a 401(k) or 403(b) plan and that the distribution is not in excess of the amount required to satisfy the financial need. Future regulations might restrict reliance if the sponsor has information that contradicts the employee’s certification.
10% early withdrawal penalty waived for terminally ill. Effective for distributions made after December 29, 2022, the 10% penalty on early withdrawals before age 59 1/2 is waived for distributions to terminally ill individuals whose physician certifies that they have a condition that is expected to result in death within 84 months.
Repayment of qualified birth or adoption distributions. Effective for distributions made after December 29, 2022 (and retroactively to the three-year period beginning on the day after the date on which such distribution was received), repayment of qualified birth or adoption distributions are limited to three years. Previously, such distributions could be recontributed at any time, but due to the IRS’s three-year statute of limitations to amend an income tax return, taxpayers might not receive a refund of the taxes that were paid in the year of withdrawal. This change aligns the repayment period with the eligibly for refund.
Cash balance plan interest crediting rates. Effective for plan years beginning after December 29, 2022, cash balance plans with variable interest crediting rates may use a projected “reasonable” interest crediting rate that does not exceed 6%. This means that those plans can use graded pay credits that increase for older, longer service workers without risking failing the anti-backloading rules that otherwise may create problems for cash balance plans that use market-based interest crediting rates.
Elimination of variable rate premium indexing. Effective on December 29, 2022, SECURE 2.0 replaces the “applicable dollar amount” language for determining the premium funding target for purposes of unfunded vested benefits and replaces it with a flat $52 for each $1,000 of unfunded vested benefits.
Correction of mortality tables. Effective December 29, 2022, pension plans are not required to assume certain mortality improvements. The IRS must amend the applicable regulations within 18 months.
403(b) investments in collective investment trusts (CITs). Effective December 29, 2022, CITs are permissible investments for 403(b) plans. Previously, under IRS rules, 403(b) plans could invest only in mutual funds or annuity contracts, which generally have higher fees than CITs.
Insight: Although this changes the tax rules, it appears that federal securities laws will need to be updated before 403(b) plans can invest in CITs.
Multiple employer 403(b) plans. Effective for plan years beginning after December 31, 2022, 403(b) plans can participate in multiple employer plans (MEPs).
Expanded Employee Plans Compliance Resolution System (EPCRS). Effective December 29, 2022, SECURE 2.0 enhances the IRS’s self-correction program to: (1) allow more types of errors to be self-corrected without an IRS filing, (2) apply to inadvertent IRA errors, and (3) exempt certain RMD failures from the otherwise applicable excise tax. For example, operational errors that can be self-corrected without an IRS filing now include significant errors and plan loan errors, provided the error is corrected within a reasonable time after it is discovered (and the IRS has not identified the error). Employers are no longer required to attempt to recoup certain overpayments made to participants. The IRS was directed to update the EPCRS revenue procedure accordingly within two years and the U.S. Department of Labor (DOL) is required to coordinate its Voluntary Fiduciary Compliance Program (VFCP) accordingly.
Auditor’s report for “group of plans".Effective December 29, 2022, defined contribution plans filing a single Form 5500 as a “group of plans” must submit an auditor’s opinion if any plan in the group, individually, has 100 participants or more at the beginning of the plan year. The auditor’s report will relate only to each individual plan that would otherwise be subject to an independent accountant’s report. Thus, the DOL and the IRS will continue to receive the same number of audit reports (and content) about plans with 100 or more participants that would be filed if the “group of plans” was not filed as a single Form 5500.
$500 small plan tax credit for military spouses. Effective for taxable years beginning after December 29, 2022, employers with 100 or fewer employees earning at least $5,000 in annual compensation can receive a general tax credit of up to $500 for three years, if they make military spouses (1) eligible for defined contribution plan participation within two months of hire; (2) upon plan eligibility, they are eligible for any match or non-elective contribution that they would have been otherwise eligible for at two years of service; and (3) 100% vested in employer contributions. The credit is $200 per participating non-highly compensated military spouse, plus 100% of employer contributions made to the military spouse, up to $300. No credit is available for highly compensated employees. The credit is available for the year the military spouse is hired and the two succeeding taxable years. Employers may rely on the employee’s certification that they are an eligible military spouse.
Small employer plan start-up credit. Effective for taxable years beginning after December 31, 2022, the start-up credit for adopting a workplace retirement plan increases from 50% to 100% of administrative costs for small employers with up to 50 employees. The credit remains 50% for employers with 51-100 employees. Employers with a defined contribution plan may also receive an additional credit based on the amount of employer contributions of up to $1,000 per employee. This additional credit phases out over five years for employers with 51-100 employees. The start-up credits are available for three years to employers that join an existing MEP, regardless of how long the plan has been in existence. The MEP rule is retroactively effective for taxable years beginning after December 31, 2019.
SIMPLE and Simplified Employee Pension (SEP) Roth IRAs. Effective for taxable years beginning after December 31, 2022, SIMPLE IRAs can accept Roth (i.e., after-tax) contributions. In addition, employers can offer employees the ability to treat employee and employer SEP contributions as Roth contributions (in whole or in part).
SEPs for Domestic Workers. Effective for tax years beginning after December 29, 2022, employers of domestic employees (nannies, housekeepers, etc.) can provide retirement benefits for those employees under a SEP. Previously, employers were not permitted to offer domestic employees a workplace retirement plan because the employer was not engaged in a trade or business.
While many of the retirement plan provisions in SECURE 2.0 are not effective until later years (including some, like the new federal “Saver’s Match” and mandatory paper benefit statements, that will not take effect until 2026), a number of important provisions require immediate attention. Some of the changes are especially helpful to small employers.
Almost all workplace retirement plans will need to be reviewed for possible amendments and operational changes to reflect SECURE 2.0.
While further guidance on many of the new provisions is needed, employers should review their plan document and operations in the meantime to determine what, if any, amendments will be needed, what operations need to be changed and what systems or processes should be updated.
To learn more about the Secure 2.0 Act of 2022, visit the BDO website, or contact our EB team.