TAX ALERT | January 06, 2023
Authored by RSM US LLP
Executive summary: SECURE 2.0 Provisions
SECURE 2.0 Act of 2022, enacted Dec. 29, 2022, significantly changes the complex tax rules applicable to employer-provided retirement plans, including opportunities and burdens for plan sponsors.
Key takeaways for employers under the SECURE 2.0 Act of 2022
The SECURE 2.0 Act of 2022 (the Act), enacted on Dec. 29, 2022, as part of the Consolidated Appropriations Act, 2023,1 is one of the most comprehensive pieces of retirement legislation in decades.
The Act generally focuses on increasing retirement savings for employees and individual retirement account (IRA) owners.2 For example, the Act attempts to encourage participants to save more on a tax-favored basis by raising the otherwise applicable annual contribution limits for qualified retirement plans and allowing participants greater access to their retirement savings in the event of an emergency without application of the 10% early distribution penalty.3 The Act also provides tax credits and streamlines administration as an incentive for small businesses without a retirement plan to adopt one.
In addition, the Act may be read to expand coverage to more employees, provide incentives for more employer contributions, and ease administrative burdens associated with nondiscrimination testing, plan enrollment, mandatory participant disclosures, correction of plan qualification failures and deadlines for adopting plan amendments under prior legislation.
Some of the Act’s provisions have been under discussion for years, while others seem to be trial balloons requiring the various regulatory agencies to monitor and report on their usefulness to Congress.4
Some of the key provisions affecting employers are described below.
Automatic enrollment mandatory for new 401(k) and 403(b) plans
Plan sponsors are required to include an “eligible automatic contribution arrangement” (EACA) in new 401(k) or 403(b) plans established after the date of enactment,5 including a contribution rate during the first year of participation of not less than 3% or greater than 10% unless the participant opts out, with an automatic 1% annual deferral increase up to a maximum of 15% (10% for 401(k) safe harbor plans). After deferral, participants must have the right to withdraw such automatic contributions from the plan within 90 days of the first contribution.
Automatic contribution arrangements are no longer voluntary, except for 401(k) and 403(b) plans established prior to Dec. 29, 2022 (date of enactment); savings incentive match plan (SIMPLE), governmental and church plans; plans of employers with fewer than 10 employees; and plans of employers in existence for less than three years. Employers that adopt an existing multiple employer plan after the enactment date are not entitled to rely on that plan’s grandfathered status and will need to comply with applicable automatic enrollment rules. In order to allow employers and plan providers a transition period to develop automatic enrollment procedures, the provision is generally effective for plan years beginning after Dec. 31, 2024.
Expanded qualified plan start-up credit for small employers
The existing tax credit for qualified plan start-up costs for employers with no more than 50 employees is increased from 50% to 100% of such costs, starting with the 2023 tax year.6 The Act also provides for an additional credit of up to $1,000 per employee. This additional credit applies to employers with up to 50 employees and is phased out for employers with between 51 and 100 employees. The additional credit does not apply to defined benefit plans and in determining the credit, the employer cannot take into account contributions made for employees who earn more than $100,000 (indexed).
Student loan repayments may be treated as elective deferrals for matching purposes
Starting in 2024, employers may make a matching contribution to a 401(k), 403(b), 457(b) or SIMPLE IRA plans, based on the amount of a qualified student loan repayment made by a participant to a lender during the applicable period.7 The loan repayment amount is treated as if the participant had deferred the amount under the plan, even though no deferral amount is actually withheld from the participant’s eligible compensation or contributed to the plan by the participant.
The Act treats student loan repayment amounts as elective deferrals or elective contributions for purposes of the annual limits under section 402(g) ($22,500 for 2023, as indexed), section 408(p)(2)(E) ($15,500 for 2023, as indexed) and section 457(b)(2) ($22,500 for 2023, as indexed). Self-certification is permitted with respect to whether and to what extent the participant actually makes student loan repayments.
Election to treat fully vested employer contributions as Roth contributions
Effective as of the date of enactment, a plan may permit employees to elect to treat fully vested employer matching and other employer contributions as after-tax Roth contributions (including student loan “matching contributions”) and include such amounts in income in the year received.8 This provision does not apply to SIMPLE-IRA plans.
Expansion of coverage to part-timers
For plan years beginning after 2024, a part-time employee credited with more than 500 hours of service in two consecutive years with an employer maintaining a 401(k) or 403(b) plan must be eligible to make elective deferrals under the plan but is not required to receive employer contributions unless the plan so provides. For this purpose, the two consecutive year period means two consecutive 12-month periods, excluding any 12-month period beginning before Jan. 1, 2023.9
The original provisions in the SECURE Act of 2019 required participation by such long-term part-time employees starting Jan. 1, 2024, and required three, rather than two, consecutive years with more than 500 hours of service.
Pre-2021 years with at least 500 hours of service credit must be counted for vesting purposes to the extent the plan provides that such employees are eligible for employer contributions. The pre-2021 service exclusion for vesting and the top-heavy clarification are effective for plan years after Dec. 31, 2020.
Small immediate incentives for participating in a qualified plan
Employers are permitted, starting after the date of enactment, to encourage employees to save by providing a de minimis financial incentive to employees contingent on an election to make 401(k) or 403(b) plan deferrals,10 e.g., giving away a gift card or promotional item if they enroll. Providing such de minimis incentives to non-highly compensated employees may encourage them to enroll, possibly resulting in a positive effect on nondiscrimination tests relating to elective deferrals.
Increase in the small account balance mandatory cash-out limit
After 2023, the maximum small account balance mandatory cash-out limit of $5,000 is increased to $7,000,11 with respect to a plan provision requiring a mandatory rollover to an IRA without participant consent of account balances of more than $1,000 and not more than the maximum limit.
Changes to the Internal Revenue Service (IRS) Employee Plans Compliance Resolution System (EPCRS)
The Act changes the EPCRS rules by eliminating the requirement that “significant” failures eligible for self-correction must be corrected by the end of the third year following the year in which the failure occurred. The Act further provides that EPCRS corrections are sufficient for relief under the Department of Labor (DOL)’s Voluntary Fiduciary Correction Program and that self-correction for participant loan failures will be permitted without regard to current EPCRS restrictions.12
In addition, while it did not previously apply to IRAs, EPCRS will apply to certain IRA failures and corrections, including a waiver of the excise tax for required minimum distribution failures and a non-spouse beneficiary’s ability to return distributed amounts to an inherited IRA after an ineligible rollover.13
403(b) plan enhancements
- Starting after 2022, multiple employer 403(b) plans are permitted, subject to special annual reporting requirements.14
- Starting after 2023, 403(b) plan hardship withdrawal sources are expanded beyond elective deferrals to also include qualified nonelective employer contributions, matching contributions and earnings.15
- As of the date of enactment, 403(b) plan custodial account investments are expanded to allow participation in any group trust intended to satisfy applicable requirements (under Rev. Rul. 81–100 or any successor guidance), regardless of whether other trust participants are 403(b) custodial accounts. Previously, 403(b) plan custodial account investments were limited to mutual fund investments (i.e., regulated investment company stock) and group trusts comprised solely of section 403(b) custodial accounts.16 A note of caution here, the Act did not address section 3(c)(11) of the Investment Company Act of 1940 which precludes most 403(b) plans from making such investments.
Changes in the required minimum distribution rules
- The age for required minimum distributions from IRAs or qualified plans is increased to age 73 for persons who reach age 72 after 2022 and age 73 before 2033; and further increases to age 75 for persons who reach age 74 after 2032.17
- Required minimum distributions from a designated Roth account in a qualified plan are not required prior to the participant’s death, for distributions related to years after 2023.18
Catch-up contribution changes
- Starting in 2024, participants with annual wages up to $145,000 may make catch-up contributions with respect to both pre-tax and Roth contributions, while participants with wages over $145,000 may make catch-up contributions only with respect to Roth contributions.19
- Starting in 2025, the annual catch-up limit for participants ages 60, 61, 62, or 63 at the close of any tax year in a qualified plan is increased from $7,500 (2023 limit, as indexed) at age 50 to $10,000 (or, if greater, 150% of the 2024 annual limit). For SIMPLE plans only, the annual catch-up limit increases from $3,500 (as indexed) at age 50 to $5,000 (or, if greater, 150% of the 2025 annual catch-up limit). Special indexing rules apply.20
- Starting in 2024, the annual $1,000 catch-up limit for IRAs will be indexed for the cost of living.21
Permissible emergency distributions added
In lieu of the disaster-by-disaster approach in current law, Congress has added permanent rules for plan loan and distributions related to federally declared disasters.22 Key features of the new provisions are:
- Up to $22,000 may be distributed to a participant per disaster,
- The amount of income included can be spread over three years,
- Amounts distributed may be repaid within three years,
- Increased the maximum dollar amounts on a disaster related loan to $100,000 and
- Waives the normally applicable 10% penalty on amounts included in income.
These rules are effective for disasters occurring on or after Jan. 26, 2021.
Domestic abuse provisions
Starting in 2024, special provisions have been added to benefit victims of domestic abuse,23 including the following:
- This will be a permitted in-service distribution event for 401(k), 403(b), and governmental 457(b) plans.
- The victim may take a penalty-free early withdrawal of up to the lesser of $10,000 (indexed) or 50% of the value of the employee’s vested account under the plan.
- Amounts withdrawn may be recontributed to the plan within three years.
Self-certified emergency personal expenses
Effective Jan. 1, 2024, defined contribution plans including IRAs may permit penalty-free withdrawals of up to $1,000 per year for unforeseeable or immediate financial needs relating to personal or family emergency expenses.24 Similar to other provisions in the Act, the taxpayer may repay the withdrawal within three years. However, only one withdrawal per three-year repayment period is permitted if the first withdrawal in the period has not either been repaid or the recipient has not contributed as a current contribution at least the amount of the withdrawal to the plan.
Emergency savings accounts
The Act also sends up a trial balloon allowing participants to open “pension-linked emergency savings accounts”25 in qualified plans by making separately accounted for contributions capped annually at $2,500, subject together with other participant deferrals to the section 402(g) limit ($22,500 for 2023, as indexed), section 408(p)(2)(E) ($15,500 for 2023, as indexed) and section 457(b)(2) ($22,500 for 2023, as indexed)).
SIMPLE and SEP plan enhancements
- Starting in 2023, Roth contributions are permitted in SIMPLE IRA and SEP-IRA plans;26
- Starting in 2024, the prohibition on additional employer contributions to SIMPLE IRA plans is eliminated and additional employer contributions of up to 10% are permitted, capped at $5,000 per participant, in addition to the required matching or 2 percent of pay elective noncontribution.27
- The annual SIMPLE IRA contribution limits are increased for employers who have not maintained another qualified plan for the prior three years to 110% of the 2024 limit with respect to any annual contribution and catch-ups contributions (1) for employers of not more than 25 employees; and (2) for larger employers (26 to 100 employees) who make a matching contribution of at least 4% or a nonelective employer contribution of at least 3%;28 and
- Employers may terminate and replace a SIMPLE IRA plan with a safe-harbor 401(k) or 403(b) plan pursuant to specified transition rules, with relief from the two-year withdrawal limitation otherwise applicable to SIMPLEs. 29
Additional tax-return due date deadlines
Starting with plan years beginning after the date of enactment,
- The deadline for adopting retroactive discretionary plan amendments to increase participant plan benefits is extended to the employer’s tax return due date, rather than the last day of the plan year in which the amendment is effective. This does not apply to an amendment to increase matching contributions.30
- An individual who owns the entire interest in an unincorporated trade or business (i.e., a sole practitioner or single-member LLC) with no other employees has until the tax return due date (without regard to extensions) of the plan’s initial plan year to contribute elective deferrals for such year.31
The Act will require significant adjustments for employers, participants, and third-party administrators in providing retirement benefits. Such adjustments will require extensive IRS and DOL guidance and a revamping of third-party administrator and pre-approved sponsor plan documents, policies and administrative systems. Employers may have heavier administrative burdens and increased costs, as well as greater responsibility for keeping employee census data current and for promptly communicating any updates to payroll providers and third-party plan administrators. Finally, participants will require increased plan education and technology training to take advantage of tax-favored benefits available as a result of the Act and to avoid any pitfalls it may have created. Participants and beneficiaries may also wish to update their estate plans to account for differences in the amount and timing of retirement plan distributions.
1 HR 2617.
2 The Act generally amends the Internal Revenue Code of 1986, as amended (IRC); and the Employee Retirement Income Security Act of 1974, as amended (ERISA).
3 See generally, IRC section 72(t).
4 See, e.g., Act section 120. Exemption for Certain Automatic Portability Transactions; adds new IRC section 4975(d)(24); effective for transactions occurring on or after 12 months from enactment; Treasury to issue regulations within 12 months of enactment, report to Congress within 2 yrs. of enactment; and Act. section 127. Pension-Linked Emergency Savings Accounts; adds a new ERISA section (3)(45) and Part 8; effective for plan yrs. beg. after Dec. 31, 2023, effective for plan yrs. beg. after Dec. 31, 2023; Treasury must report to Congress within 7 yrs. of enactment on efficacy and use of these accounts.
5 Act section 101. Expanding automatic enrollment in retirement plans; adds a new IRC section 414A; effective for plan years beginning after Dec. 31, 2024.
6 Act section 102. Modification of credit for small employer pension plan startup costs; amends IRC section 45E(e)(3)(A); effective for taxable years beginning after Dec. 31, 2022.
7 Act section 110. Treatment of Student Loan Payments as Elective Deferrals for Purposes of Matching Contributions; amends IRC sections 401(m), 408(p)(2), 457(b), 403(b)(12)(A); effective for contributions made for plan years beginning after Dec. 31, 2023.
8 Act section 604. Optional Treatment of Employer Matching or Nonelective Contributions as Roth Contributions; amends IRC section 402A; effective for contributions made after date of enactment.
9 Act section 125. Improving Coverage for Part-Time Workers; amends ERISA sections 202, 203(b); IRC sections 401(k)(2)(D)(ii), 403(b)(12), 401(k)(15)(B)(i); effective for plan years beginning after Dec. 31, 2024, except that the provisions relating to pre-2021 service for vesting and top-heavy clarification are effective for plan yrs. beg. after Dec. 31, 2020.
10 Act section 113. Small Immediate Financial Incentives for Contributing to a Plan; amends IRC sections 401(k)(4)(A); 403(b)(12)(A); 4975(d)(23); ERISA section 3(21); effective for plan years beginning after date of enactment.
11 Act section 304. Updating Dollar Limit for Mandatory Distributions; amends ERISA section 203(e)(1), IRC sections 401(a)(31)(B)(iii), 411(a)(11)(A); effective for distributions made after Dec. 31, 2023.
12 Act section 305. Expansion of Employee Plans Compliance Resolution System (EPCRS); amends IRC sections 401(a), 403(a), 403(b), 408(p) and 408(k)) and expands the EPCRS (Rev. Proc. 2021-30); effective upon date of enactment. The IRS is directed to revise Rev. Proc. 2021-30 not later than 2 years after enactment.
14 Act section 106. Multiple Employer 403(b) Plans; adds a new section403(b)(15); effective for plan yrs. beg. after Dec. 31, 2022.
15 Act section 312. Employer may rely on employee certifying that deemed hardship distribution conditions are met; adds a new IRC sections 401(k)(14)(C), 403(b)(7) and (b)(11), 457(d); effective for plan years beginning after the date of enactment.
16 Act section 128. Enhancement of 403(b) Plans; amends IRC section 403(b)(7)(A); effective for amounts invested after date of enactment.
17 Act section 107. Increase in Age for Required Beginning Date for Mandatory Distributions; amends IRC sections 401(a)(9), 408(b); effective for required minimum distributions made after Dec. 31, 2022, for individuals who attain age 72 after that date.
18 Act section 325. Roth Plan Distribution Rules; adds a new IRC section 402A(d)(5); effective for tax years beginning. after Dec. 31, 2023.
19 Act section 603. Elective Deferrals Generally Limited to Regular Contribution Limit; adds a new IRC section 414(v)(7), amends IRC sections 402(g)(1), 457(e)(18)(A)(ii); effective for tax years beginning after Dec. 31, 2023.
20 Act section 109. Higher Catch-up Limit to Apply at Age 60, 61, 62, and 63; amends IRC section 414(v)(2); effective for tax years beginning after Dec. 31, 2024.
21 Act section 108. Indexing IRA Catch-up Limit; amends IRC section 219(b)(5)(C); effective for tax years beginning after Dec. 31, 2023.
22 Act section 331. Special Rules for Use of Retirement Funds in Connection with Qualified Federally Declared Disasters; adds a new IRC section 72(t)(M); effective for disasters occurring on or after Jan. 26, 2021.
23 Act section 314. Penalty-Free Withdrawal from Retirement Plans for Individual in Case of Domestic Abuse; adds a new IRC section 72(t)(2)(K); effective for distributions made after Dec. 31, 2023.
24 Act section 115. Withdrawals for Certain Emergency Expense; adds a new IRC section 72(t)(I); effective for distributions made after Dec. 31, 2023.
25 Act. section 127. Pension-Linked Emergency Savings Accounts; adds a new ERISA section (3)(45) and Part 8; effective for plan years beginning after Dec. 31, 2023.
26 Act section 601. SIMPLE and SEP Roth IRAs; amends IRC section 408A; effective for tax years beginning after Dec. 31, 2022.
27 Act section 116. Allow Additional Nonelective Contributions to SIMPLE Plans; amends IRC section 408(p)(2)(A); effective for tax years beginning after Dec. 31, 2023.
28 Act section 117. Contribution Limit for SIMPLE Plans; amends IRC section 408(p)(2)(E); effective for tax years beginning after Dec. 31, 2023.
29 Act section 332. Employers Allowed to Replace SIMPLE Retirement Accounts with Safe Harbor 401(k) Plans During a Year; adds a new IRC section 408(p)(11); effective for plan years beginning after Dec. 31, 2023.
30 Act section 316. Amendments to Increase Benefit Accruals Under Plan for Previous Plan year Allowed Until Employer Tax Return Due Date; adds new section 401(b)(3); effective for amendments applicable to plan years beginning after Dec. 31, 2023.
31 Act section 317. Retroactive First-Year Elective Deferrals for Sole Proprietors; amends IRC section 401(b)(2); effective for amendments applicable to plan yrs. beg. after date of enactment.
This article was written by Bill O’Malley, Joni Andrioff, Catherine Davis, Lauren Sanchez, Chloe Webb and originally appeared on 2023-01-06.
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