SECURE 2.0 Changes Rules for Retirement Plans
Friday, December 30, 2022

SECURE 2.0 Act of 2022 (the “Act”) was signed into law by President Biden on December 29, 2022 (the date of enactment), as part of the larger government funding bill. The Act makes numerous changes affecting retirement plans. This article provides an overview of the changes that we believe are of most interest to larger plan sponsors. Any plan amendments needed as a result of these changes must be adopted by the last day of the 2025 plan year (2027 for collectively bargained and governmental plans), unless extended by the Department of Labor (DOL) or the Internal Revenue Service (IRS).

Changes Affecting All Retirement Plans

  • Increase to Cashout Limit: Starting January 1, 2024, a plan may increase its mandatory cashout limit from $5,000 to $7,000.

  • Delayed Amendment Deadline for Benefit Increases: Under current rules, if a plan sponsor wishes to amend its retirement plan to increase benefit accruals or contributions, the amendment must be adopted before the end of the year in which the increase is effective. For plan years beginning after December 31, 2023, the Act delays the amendment deadline for such increases, other than increases in matching contributions, until the employer’s tax filing deadline with respect to the year in which the increase is effective.

Changes to Required Minimum Distribution Rules

  • RMD Age Increases, Again: The original SECURE Act in 2019 increased the required minimum distribution (RMD) age from 70.5 to 72. The Act again increases the RMD age as follows: for individuals turning age 72 after December 31, 2022 and age 73 before January 1, 2033, the RMD age is 73. For those turning age 74 on and after January 1, 2033, the RMD age is 75. Note that, at the end of this period, when the RMD age increases from 73 to 75, there appears to be overlapping RMD ages for participants born in 1959. We expect that this will be corrected at some point in a technical amendment.

  • RMD Excise Tax Decreases: Currently, an individual who fails to take their RMD from a retirement plan is subject to an excise tax of 50% of the RMD amount that should have been distributed. Effective beginning in 2023, the excise tax is reduced to 25%, and is further reduced to 10% if the individual receives all of their past-due RMDs and files a tax return paying such tax before receiving notice of assessment of the RMD excise tax and in all events within two years after the year of the missed RMD.

  • No Mandatory RMDs from Roth Accounts: Starting with RMDs required in 2024 (except RMDs due by April 1 for those reaching their RMD age in the prior year), RMDs are no longer required to be made from a designated Roth account maintained under a 401(k), 403(b) or governmental 457(b) plan to a participant during the participant’s lifetime. The RMD rules applicable upon a participant’s death still apply.

Changes Affecting Defined Contribution Plans (Including 401(k) Plans)

  • Auto-Enrollment Required for Most New Plans: For most 401(k) and 403(b) plans that are newly established after the Act’s effective date, the plan must provide for automatic enrollment of newly eligible employees at a rate of at least three percent of pay, and provide an annual automatic increase of at least one percent until the participant reaches a contribution level of at least a 10% (but not more than 15%) of pay, starting with the 2025 plan year. Certain exceptions apply to governmental plans, plans of small businesses (those with 10 or fewer employees) and plans of new employers (those in business less than three years).

  • Catch-Up Contributions Modified: The Act made two changes affecting catch-up contributions. First, starting in 2025, a participant who is age 60, 61, 62 or 63 can make catch-up contributions equal to the greater of $10,000 or 150% of the regular catch-up limit. The $10,000 amount will be indexed for inflation. In addition, starting in 2024, catch-up contributions made by participants who were paid compensation by the plan sponsor of $145,000 (indexed for inflation) or more in the prior year must be made on a Roth basis.

  • Employers May Match Student Loan Payments: Currently, an employer may choose to make an employer contribution (often referred to as match, but technically not a matching contribution) with respect to student loan payments through a somewhat convoluted approach described in an IRS private letter ruling. The Act amends the Internal Revenue Code to specifically permit an employer to make matching contributions under its defined contribution plan (including a 401(k), 403(b) or governmental 457(b) plan) on certain qualified higher education loan repayments made by its employees, as if such loan repayments had instead been contributed to the plan. The new rules are effective for 2024 and later plan years.

  • Employer Roth Contributions Allowed: Effective immediately, an employee may elect to have employer matching or non-elective contributions made on a Roth basis, to the extent permitted by a plan. This avoids an employee have to elect an in-plan Roth conversion after such contributions have been made to the plan, and potentially have to pay a small amount of tax on any earnings that have accumulated on such amounts prior to their in-plan conversion.

  • Mandatory Participation of Part-Time Employees: Under the SECURE Act of 2019, defined contribution plans (other than collectively bargained plans) that permit employee elective deferrals were required to allow part-time employees who completed 500 hours in each of three consecutive years to begin participating in the plan, starting in 2024. The Act changes that requirement to only two consecutive years of 500 hours, effective for plan years beginning in 2025. ERISA-governed 403(b) plans are subject to these same requirements.

  • De Minimis Financial Incentives Permitted: Under current law, the only incentive that an employer may provide to an employee to encourage the employee to enroll in the employer’s 401(k) or 403(b) plan is a matching contribution under such plan. Starting with the 2023 plan year, an employer may provide a de minimis financial incentive, not paid for with plan assets, to encourage employees to enroll in the plan. The Act does not define what de minimis means, and the Senate summary of the Act only uses the phrase “such as low-dollar gift cards” without further explanation.

  • Changes Related to Withdrawals: The Act made several changes with respect to the withdrawal provisions applicable to retirement plans, including:

    • Starting in 2024, a participant who withdraws up to $1,000 (or such smaller amount that leaves at least $1,000 of vested benefits remaining in the account after the withdrawal) and certifies that it is for a personal or family emergency, may avoid the 10% early withdrawal tax on such amount and may repay such amount to the plan within three years. Only one such withdrawal is permitted per year, and no additional emergency withdrawals may be made within three years unless the participant has either repaid the prior withdrawal or has contributed at least an amount equal to the prior withdrawal. The distribution is not eligible for rollover. In addition, a plan sponsor may amend their plan to permit an in-service withdrawal for this circumstance. The limits apply across all plans maintained within a single controlled group.

    • Starting in 2024, a participant who withdraws up to the lesser of $10,000 (indexed for inflation) or 50% of their vested balance and certifies that they have been the victim of domestic abuse by a spouse or domestic partner within the prior one year, may avoid the 10% early withdrawal tax on such amount and may repay such amount to the plan within three years. The distribution is not eligible for rollover. In addition, a plan sponsor may amend their plan to permit an in-service withdrawal for this circumstance. The distribution limit applies across all plans maintained within a single controlled group.

    • Under current law, a participant who takes a withdrawal for qualified birth or adoption expenses may repay such withdrawals to the plan at any time. For withdrawals taken starting following the date of enactment of the Act, the repayment period is limited to three years. For withdrawals that have already been taken, the repayment period ends December 31, 2025.

    • Effective for plan years beginning after the date of enactment, an administrator of a Code Section 401(k), 403(b) or 457 plan that offers hardship withdrawals may rely on an employee’s certification as to the hardship event and the amount needed for the withdrawal. Under current regulations, the employer could rely on the employee’s certification that the employee had insufficient cash or other liquid assets reasonably necessary to meet the end, but a certification as to the existence of the event itself or the amount needed was not clearly permitted, although the IRS has informally indicated its comfort with such certifications.

    • Effective immediately, withdrawals taken from a plan by a participant who has been determined by their physician as being terminally ill will be exempt from the 10% tax on early withdrawals, and may be repaid to the plan within three years. Unlike some of the other new withdrawal provisions, the Act does not specifically permit a plan to provide for withdrawals in this circumstance from a participant’s elective deferral or Roth accounts, although profit-sharing accounts could be available for an in-service withdrawal in this instance if the plan so provides.

    • Effective for federal disasters occurring on or after January 26, 2021, if a participant lives in a federal disaster area and suffers an economic loss in connection with the disaster, may make a withdrawal of up to $22,000 within 180 days after the disaster, without being subjected to the 10% early withdrawal tax. The participant may repay such withdrawal to the plan within three years. A plan sponsor may also amend their plan to permit an in-service withdrawal for this circumstance. The distribution limit applies across all plans maintained within a single controlled group.

    • Effective for federal disasters occurring on or after January 26, 2021, if a participant took a plan withdrawal within 180 days prior to a federal disaster in order to buy or construct a home as a first-time homebuyer, but was unable to do so because the home was in a qualified disaster area, the participant may repay that distribution to the plan within 180 days after the federal disaster.

    • Effective with the 2024 plan year, the hardship withdrawal rules for 403(b) plans are aligned with those of 401(k) plans.

  • Loans Related to Federal Disasters: The Act increases the limits on loans taken from a defined contribution plan to the lesser of $100,000 or 100% of the vested account balance if the loan is taken by a participant who lives in a federal disaster area, suffers an economic loss as a result of such disaster and takes the loan within 180 days after the disaster. In addition, for participants living in a federal disaster area and suffering an economic loss, plan loan payments that are due (whether under existing or newly-obtained loans) during the 180 days after the disaster may be delayed for one year and the five-year payment deadline can be extended accordingly. This provision is effective for federal disasters occurring on or after January 26, 2021.

  • Plans May Offer Savings Account: The Act permits a plan sponsor to amend its defined contribution plans to add “pension-linked emergency savings accounts” starting with the 2024 plan year. An employer may either allow employees to choose to make contributions to the account, or automatically enroll employees (at not more than a three percent of pay rate) in the account, provided that highly compensated employees are not permitted to have an emergency savings account. All employee contributions must be made on a Roth basis and are capped such that the balance in the employee’s emergency savings account attributable to the employee’s contributions may not exceed $2,500 (indexed for inflation); any contributions above that limit may be deposited into the participant’s regular Roth account within the plan. Participants cannot choose how to invest the money held in these accounts; rather, the contributions must be held in cash, in an interest bearing account, or invested in a fund designed to preserve principal, as selected by the plan sponsor. Employees may make monthly withdrawals from the account. If the employer makes matching contributions under the plan, the employer must also match the amount contributed to the emergency savings account at the same rate as the match is made on typical employee deferrals. That match is contributed to the regular match account under the plan, not the emergency savings account. Upon an employee’s termination, the balance of the emergency savings account may either be transferred to a regular Roth account within the plan or be distributed to the former employee.

  • Reduced Notice Obligation for Unenrolled Participants: Effective with the 2023 plan year, a defined contribution plan does not violate ERISA if it fail to provide certain notices to individuals who are eligible, but not enrolled, in the plan, provided that individual was provided a summary plan description and any other required notice relating to initial eligibility and is given an annual reminder notice about their eligibility for the plan.

Changes Affecting Defined Benefit Pension Plans

  • Lump Sum Notice: If a defined benefit pension plan intends to offer a lump sum window to participants or beneficiaries, then 90 days before the first day that a lump sum can be elected, the plan sponsor must provide a written notice to each individual about the lump sum window, including how the lump sum will be calculated, what the monthly amount would be at normal retirement age or as a currently payable annuity, that a commercial annuity may cost more than the annuity available from the plan, and the ramifications of electing the lump sum, among other items. In addition, 30 days before the first day that a lump sum can be elected, the plan sponsor must notify the DOL and the Pension Benefit Guaranty Corporation (PBGC) of the total number of participants and beneficiaries eligible for the lump sum window, the length of the window, and a description of how the lump sum is to be calculated, and provide a sample of the notice that was given to participants and beneficiaries. The plan sponsor is also required to send a second notice to the DOL and PBGC within 90 days after the close of the lump sum window reporting how many individuals took the lump sum option. This provision is not effective until final regulations are issued.

  • Changes to Annual Funding Notice: Under current rules, a defined benefit pension plan is required to provide participants with an annual funding notice, which discloses, among other items, the plan’s “funding target attainment percentage.” Starting with the 2024 plan year, rather than disclosing that funding metric, the notice instead will disclose the “percentage of plan liabilities funded.” In addition, the notice will also need to include the average return on assets for the plan year, whether the assets are sufficient to fund liabilities that are not guaranteed by the PBGC as well as other information.

  • Projected Credited Interest Rate for Cash Balance Plans: Effective for 2023 and later plan years, for purposes of testing whether a cash balance plan that provides variable interest crediting rates satisfies the anti-backloading rules of ERISA and the Code, the plan may use a reasonable projection of such variable rate, not to exceed six percent. This new provision will help cash balance plans provide larger benefits to older, longer service workers.

  • Termination of PBGC Variable Rate Premium Indexing: Starting with the 2024 plan year, the PBGC variable rate premium, which underfunded pension plans must pay, will change from an indexed amount to a flat $52 per $1,000 of unfunded vested benefits, which is the indexed amount for the 2023 plan year. Put differently, there will no longer be automatic increases in the PBGC variable rate premiums; rather, for such premiums to increase, Congress will need to act.

Changes Affecting Plan Corrections

  • Recovery of Overpayments: Effective immediately, several rules apply to the recovery of overpayments made from retirement plans. First, a fiduciary is not considered to have violated their fiduciary duty under ERISA, and a plan shall not fail to meet the qualification requirements of the Internal Revenue Code, if the fiduciary decides to not recover from the recipient any inadvertent overpayments made from a retirement plan, and in most cases, decides to not require the plan sponsor to restore those overpayments to the plan. Second, if a fiduciary decides to seek a return of the overpayment from the recipient, then it is prohibited from charging interest, and if the recoupment is to be accomplished from reducing non-increasing future periodic payments, then the recoupment must cease once the amount is recovered, no more than 10% of the amount owed may be recouped in a single calendar year, and the periodic payment may not be decreased to less than 90% of the amount otherwise payable by the plan. The Secretary of Labor is directed to establish rules for recouping overpayments from other forms of payment. Third, a fiduciary may not threaten litigation as a means to recoup the overpayment, unless the fiduciary determines that there is a reasonable likelihood of success in such litigation, and except in limited circumstances, a fiduciary may not engage a collection agency to recover the overpayment. Fourth, overpayments made to a participant may not be recouped after their death from a spouse or other beneficiary, although presumably the fiduciary could still make a claim against the participant’s estate. Finally, any overpayments that are more than three years old may not be recouped, unless caused by the individual’s fraud or misrepresentation.

    If overpayments will be recouped, then the recipient must have the right to dispute the recoupment pursuant to the plan’s ERISA claims and appeals procedures. If the overpayment was rolled over and the recipient files a claim disputing the overpayment, the plan seeking to recoup the overpayment must notify the plan or IRA that received the rollover of such dispute, and the receiving plan or IRA vendor must place a hold on that money pending resolution of the dispute.

    The Act also provides that inadvertent overpayments that are rolled over will no longer be considered to be ineligible rollovers.

  • Expansion of Correction of Plan Errors: Within two years, the IRS is directed to revamp the Employee Plans Compliance Resolution System (EPCRS), which is a program permitting the correction of certain retirement plan operational and document errors. The mandatory revamp includes permitting self-correction of most errors, which will result in fewer errors needing to be filed with the IRS for correction, and expansion of the self-correction of certain loan errors. These changes will become effective once published in updated EPCRS rules.

  • Extension of Favorable Corrections for Auto-Enroll Plans: Currently, under EPCRS, if a plan has an auto-enrollment or auto-escalation feature and there is an operational error relating to such auto-enrollment or auto-increase (including implementing participant affirmative elections), the plan sponsor does not have to make a corrective contribution for the employee’s missed deferrals if the error is corrected by 9½ months after the plan year in which the error occurs, or if earlier, shortly following the date the employee notifies the plan administrator of the error. This extended time period to make a correction without having to fund the missed deferrals expires under EPCRS on December 31, 2023. The Act makes this extended correction period permanent. Consistent with the current EPCRS rules, the plan sponsor will still have to fund the missing matching contributions (and related earnings) and provide a notice to the affected employee about the error.

Other Changes

  • Paper Statements Required: Under current law, defined contribution plans are generally required to provide quarterly account balance statements and defined benefit plans are generally required to provide a pension benefit statement once every three years (unless the defined benefit plan provides an annual notice about the availability of a pension benefit statement). Under the Act, starting with the 2026 plan year, a defined contribution plan must provide at least one of those statements each year in a paper format, and a defined benefit plan must provide at least one of those pension benefit statements every three years in a paper format. Exceptions apply for plans that deliver these statements in accordance with certain electronic delivery requirements or if the recipient requests electronic delivery.

  • Lost Participant Database: Within two years following the date of enactment, the Secretaries of the DOL and the IRS are required to establish an online searchable database so that individuals can see if they have money owed under a retirement plan. Plan sponsors will be required to provide information needed to populate the database.


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