Securing a Strong Retirement
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Secure Act 2.0 Insight + Timeline of Regulatory Impact
Note: Secure Act 2.0 regulations are subject to change. We will continue to update as increased guidance is released, especially as relates to IRS changes to tax regulations and reporting requirements.
Required Amendments and Regulatory Guidance
Section 119: 415 Limits for Rural Electric Cooperative Plans
Effective: December 30, 2022
The highest three-year average compensation limit no longer applies to participants in certain rural electric cooperative plans, except for participants who were HCEs in the earlier of:
The plan year the participant terminated
The plan year distributions commenced
Any of the five plan years preceding the plan year above
Section 202: More Qualifying Longevity Annuity Contract (QLAC) Flexibility
Effective: December 30, 2022
Treasury has 18 months to amend its QLAC regulations as follows:
Eliminate requirement that premiums not exceed 25% of a participant’s account balance
Increase the dollar limitation on premiums to $200,000 (from $125,000) and provide for indexing starting in 2024
Allow ex-spouses to receive spousal benefits pursuant to a qualified domestic relations order (QDRO) or similar divorce or separation instrument
An employee may rescind the purchase of the contract within a period not exceeding 90 days from the date of purchase
Section 204: Partial Annuitization in DC Plans; Effect on RMDs
Effective: December 30, 2022
Participants receiving a portion of their individual account as an annuity can count annuity payments received during a year toward RMD due for that year.
Section 301: Recovery of Overpayments
Effective: December 30, 2022
Plan fiduciaries can decide not to recoup certain inadvertent benefit overpayments; such overpayments must be treated as eligible rollover distributions. Fiduciaries can also choose to forgo recovery of overpayments from sponsors if doing so poses no risk to other participants’ benefits.
Section 308: Firefighter Distributions
Effective: December 30, 2022
Age 55 exception for public sector firefighters is expanded to include private sector firefighters.
Section 313: Statute of Limitations for Excise Tax
Effective: December 30, 2022
Changes made to ensure there is a reasonable period of limitations for violations of which taxpayers were not aware and therefore did not file an excise tax return.
Section 329: Public Safety Officer Distribution Age Requirement
Effective: December 30, 2022
Distributions made from governmental plans to public safety officers with at least 25 years of service are exempt from the 10% additional tax.
Section 330: Corrections Officer Exception
Effective: December 30, 2022
The public safety officer exception to the 10% early distribution tax is extended to corrections officers who are employees of state and local governments.
Section 345: Defined Contribution Group (DCG) Audit Exception
Effective: December 30, 2022
This provision eliminates the trust-level audit requirement for groups of plans permitted to file a single Form 5500 under the SECURE Act. DOL and Treasury refer to these plans as “defined contribution groups” (DCGs) in proposed revisions to Form 5500 and related regulations released in September 2021. Only large plans (with 100 or more participants) in the DCG must undergo an audit.
Section 102: Small Employer Startup Credit
Effective: January 1, 2023
The small employer retirement plan startup credit is modified as follows:
Employers with 50 or fewer employees now get a credit for 100% of the costs to start and administer a pension plan (up from 50%), but the credit is still capped at $5,000 and available for the employer’s first 3 taxable years administering the plan.
Employers that start a DC plan get an additional credit that’s a percentage of their contributions on behalf of employees, capped at $1,000 per employee and phased out for employers with 51–100 employees.
Section 118: SEP Contributions for Domestic Workers
Effective: January 1, 2023
Employers of domestic employees (e.g., nannies) may provide benefits under a SEP.
Section 201: Life Annuities from Defined Contribution (DC) Plans
Effective: January 1, 2023
Plans can offer annuities with the following features without violating IRC Section 401(a)(9):
Annual increases of less than 5%
Lump sum payments that shorten the payment period or result in a full or partial commutation or acceleration of future payments
Dividends and similar distributions
Return of premium payments upon death
Section 302: Reduction in Excise Tax for RMD Failures
Effective: January 1, 2023
The excise tax for failure to take RMDs is reduced to 25% (from 50%). The tax is further reduced to 10% if the failure is fixed during a specified correction window.
Section 306: 457(b) “First Day of the Month” Change
Effective: January 1, 2023
Participants in governmental 457(b) plans may make deferral changes at any time prior to the date that the compensation being deferred is available.
Section 320: Simplified Disclosures for Unenrolled DC Plan Participants
Effective: January 1, 2023
Eliminates the requirement to provide notices to unenrolled participants that would otherwise be required by the tax code or ERISA. This provision would not apply to a participant who is eligible to accrue employer-funded benefits under the plan, even if the participant has not elected to contribute.
Section 348: Cash Balance Cap on Interest Crediting Rate for Accrual Rules Testing
Effective: January 1, 2023
To demonstrate compliance with the anti-backloading rules in IRC Section 411(b), cash balance and other hybrid plans with variable interest-crediting rates can use a reasonable projection of the rate, not greater than 6%. Provision only affects the projected rate for compliance testing, not the plan’s actual interest-crediting rate.
Section 116: SIMPLE Nonelective Contributions
Effective: January 1, 2024
Employers may make additional discretionary contributions to SIMPLEs of up to 10% (max $5,000, indexed).
Section 315: Reform of Family Attribution Rule for Controlled Groups
Effective: January 1, 2024
Contains an exception to the spousal attribution rule for spouses who own separate businesses if:
Neither spouse has an ownership interest in the other’s business,
Neither spouse is a director or employee, or involved in the management of, the other’s business,
There are no restrictions on disposition of a spouse’s ownership interest that run in favor of the other spouse or their minor children, and
No more than 50% of the gross income of each business is derived from passive income (royalties, rents, dividends, interest, and annuities).
The exception though has not been available under two situations:
Where the spouses live in community property states (because each is treated as having direct ownership in the other’s business due to the community property interest), and
Where the spouses have minor children (because the minor children are still attributed what their parents own, triggering a controlled group if each spouse has a controlling interest in their respective business).
SECURE 2.0 fixes these problems. New IRC §414(b)(2) provides that, when applying the attribution rules under IRC§1563: (1) community property laws are disregarded, and (2) if IRC §1563(e)(5) is satisfied, the stock of each spouse is not attributed to their minor children.
Section 323: Substantially Equal Periodic Payments Rule
Effective: January 1, 2024
Substantially equal life expectancy periodic payments will continue to be exempt from the 10% additional tax, including in the case of a rollover of the account, an exchange of the annuity, or an annuity that satisfies the required minimum distribution rules. Begins 2024 (but immediately in the case of annuity distributions).
Section 325: No Pre-death RMDs for Roth Accounts
Effective: January 1, 2024
Roth accounts in DC plans are no longer subject to the pre-death RMD rules. However, plans must still pay pre-death RMDs from Roth accounts that relate to tax years before the effective date (e.g., 2023 RMD must be paid to a participant with April 1, 2024, required beginning date).
Section 327: Surviving Spouse Election to be Treated as an Employee
Effective: January 1, 2024
Allows the surviving spouse who inherits an employee’s account in an employer-sponsored plan to elect to be treated as the employee going forward. The amended provision still doesn’t require RMDs until the employee would have had to start distributions, but goes further by treating the surviving spouse as the employee, rather than a designated beneficiary.
Section 343: Annual Funding Notice (AFN) Enhancements
Effective: January 1, 2024
The disclosure of a plan’s funded level for the notice year and the prior two years will be based on year-end market value of assets and liabilities, rather than the funding target attainment percentage (FTAP).
Section 350: EPCRS Correction of Automatic Contribution Failures
Effective: January 1, 2024
Codifies the correction method for elective deferral failures under plans that have automatic contribution arrangements.
Section 125: Long-term, Part- time Workers (LTPT)
Effective: Plan Years Beginning After December 31, 2024
SECURE 1.0: This act made changes that took effect on January 1, 2024, allowing some LTPT employees to participate in employer-sponsored 401(k) plans. To qualify, employees must have:
Worked at least 500 hours in three consecutive 12-month periods
Been at least 21 years old
SECURE 2.0: This act made changes that take effect for plan years beginning after December 31, 2024. These changes include:
Reducing the consecutive year requirement from three to two years
Expanding the provision to include ERISA 403(b) plans
Other Changes:
Employers are not required to make employer contributions for LTPT employees
LTPT employees can be excluded from nondiscrimination and coverage testing
Plan sponsors must amend retirement plans by December 31, 2025
Section 328: Distributions to Retired Public Safety Officers for Health and Long-term Care Premiums
Effective: January 1, 2025
These distributions no longer have to be paid directly to the insurer.
Section 603: Roth-only Catch-up Contributions for High Earners
Effective: January 1, 2026
Requires employees who earn more than $145,000 (indexed starting in 2025) in the prior calendar year to make catch-up contributions for the current year in the form of designated Roth contributions. Statutory language does not subject self-employed individuals to this rule.
Section 309: First Responder Disability Payments
Effective: January 1, 2027
First responders are permitted to exclude service- connected disability pension payments from gross income after reaching retirement age.
Section 117: SIMPLE Contribution Limit and Data Collection
Effective: January 1, 2028
Annual deferral and catch-up limits to SIMPLE plans are increased by 10% starting 2024. Details are a bit complex. Also, Treasury will provide a report on SIMPLE data by the end of 2024.
Recommended Amendments and Regulatory Guidance
Section 311: Modified Qualifed Birth or Adoption Distribution Rules (QBAD)
Effective: January 1, 2020
A participant who wishes to repay a QBOAD has 3 years to do so starting on the day after the distribution is received. However, for QBOADs made on or before Dec. 29, 2022, the repayment period ends on Dec. 31, 2025.
Section 331: Qualified Federally Declared Disaster Relief
Effective: Disasters On or After January 26, 2021
Standardized rules now provide relief to participants who are affected by a Federally declared disaster so that Congress no longer needs to pass special relief for each disaster. Relief includes:
Qualified disaster distributions (and the opportunity to repay them) up to $22,000 without being subject to the 10% premature distribution penalty;
401(k) and 403(b) principal residence hardship withdrawal repayments; and
Plan loan repayment delay up to one additional year and increased limit up to $100,000.
Section 113: Small Financial Incentives for Participation
Effective: January 1, 2023
Employers can offer employees de minimis financial incentives ( e.g. gift cards) to encourage participation in a 401(k) or 403(b) plan. IRS guidelines limit the amount up to $250 and must not be paid from plan assets.
Section 312: Employee-certified Hardship Distributions
Effective: January 1, 2023
Plan Sponsors of 401(k) and 403(b) plans may now allow participants to self-certify their need for a hardship withdrawal instead of submitting documentation for approval. Plan Sponsors can rely on participant certification unless they have knowledge to believe the information provided is not accurate.
Section 326: Penalty-free Withdrawals for Terminal Illness
Effective: January 1, 2023
Plans can offer distributions with no early withdrawal penalty to participants certified by a physician as having a condition reasonably expected to result in death within 84 months after the date of certification. This provision only allows a distribution under this new rule if the participant is otherwise eligible for a distribution.
Section 601: SIMPLE and SEP Roth IRAs
Effective: January 1, 2023
SIMPLE IRAs are now allowed to accept Roth contributions and SEPs may now accept employee/employer Roth contributions.
Section 310: Top-heavy Exception for Otherwise Excludable Employees in Defined Contribution (DC) Plans
Effective: Plan Years Beginning December 31, 2023 or Later
Exempts a plan from providing top heavy minimum contributions to otherewise excludable employees (i.e. employees who have not satisfied the statutory age 21 and 1-year eligibility requirements). The plan will apply the new rules and no longer provide top heavy minimum contributions to otherwise excludable employees.
Section 304: Increase Involuntary Cash-Out Limit
Effective: January 1, 2024
When a participant separates from service or retires with a vested accont balance below the cash-out threshold, the Plan Sponsor may choose to distribute without the participant's affirmative consent. The cash-out limit has increased from $5,000 to $7,000.
Section 314: Domestic Abuse Distribution Penalty Exception
Effective: January 1, 2024
Plans that are not subject to qualified joint and survivor requiments, generally most Defined Contribution Plans other than Money Purchase Plans, can allow distributions to victims of domestic abuse with no early withdrawal penalty.
Section 109: Higher Catch-up Contribution Limits
Effective: January 1, 2025
Plans can allow participants ages 60 to 63 within a 4-year window to make catch-up contributions up to the greater of the following amounts: $10,000, or 150% of the standard catch-up limit.
Section 125: Long-term, Part- time Workers (LTPT)
Effective: January 1, 2025
New LTPT rules require that employees who meet these requirements must be offered the option to particiate in a 401(k) or ERISA 403(b) plan after completing 2 consecutive years of 500 hours or more. Previously 401(k)'s had a 3-year requirement and this rule did not apply to 403(b) plans. Our default provisions will include the following as they relate to LTPT employees:
LTPT employees will not be eligible for Employer Matching or Non-elective contributions
LTPT employees will be covered by the Plan's Automatic Enrollment and auto escalation provisions, if Plan was adopted after December 29, 2022
LTPT Entry Dates for participation will be limited to semi-annual entry dates - the 1st day of the Plan Year and the 1st day of the 7th month of the Plan Year
LTPT employees will not be eligible for Participant Loans
Section 128: 403(b) CITs
Estimated: January 1, 2025
Collective Investment Trusts (CITs) are a type of pooled investments similar to mutual funds, but typically with lower expenses. They are currently only permitted in a 401(k) Plan. Congress added this option for 403(b) plans but there are still security law issues to be addressed before 403(b) plans can offer them. Our recommendation is to accept this option so that your Plan can offer them once they do become available.
Optional Amendments and Regulatory Guidance
Section 112: Tax Credit for Military Spouses
Effective: January 1, 2023
Small employers who provide for faster eligibility and vesting for employees whose spouses are in the uniformed services (since such spouses may move frequently and often miss out on contributions) can get a small tax credit (up to $500).
Section 604: Employer Contributions Directly Made as Roth Contributions
Effective: January 1, 2023
Defined Contribution Plans may now permit employees to voluntarily designate company matching and/or non-elective contributions directly as Roth contributions. Since this will require additional administrative burden on payroll and plan operations, our default is to NOT recommend this provision. Most plans already have options for in-Plan Roth conversionos which can be accomplished directly between participants and the plan's recordkeeper without any administrative burden for the Employer.
Section 120: Force-out IRA Auto-portability
Effective: December 30, 2023
Auto portability for small-balance force outs may be beneficial to both plan participants and plan sponsors, but the processes and costs at this time are not known. Therefore, we are not recommending this option at the current time.
Section 110: Matching Contributions for Student Loan Repayments
Effective: Plan years Beginning January 1, 2024
Secure 2.0 allows for an Employer to make matching contributions for participants who submit a certification that they have made qualified student loan payments during the plan year. This provision is intended to provide for a Match for those participants who aren't contributing to the 401(k) because of the expense of their student loan debt. The plan must already have matching provisions, or matching contribution must be added to the plan for all participants in order to add this feature. The Match must be at the same rate that is being provided for participants who are making 401(k) contributions and if participants are already receiving the maximum employer Match, then no additional Match would be available.
Section 115: Penalty-free Withdrawals for Emergency Expenses
Effective: January 1, 2024
Plans can offer distributions with no early withdrawal penalty for “unforeseeable or immediate financial needs relating to necessary or personal family emergency expenses”. Since there is concern that this provision may encourage withdrawals from accounts intended to be used for retirement, and because once a plan adopts this provision, it will be considered a "protected benefit" and cannot be removed, we are not recommending this as a default provision.
Section 127: Pension-linked Emergency Savings Accounts (PLESA)
Effective: January 1, 2024
Employers may establish a separate participant emergency savings account for Non-Highly compensated employees who may make Roth contributions up to $2,500. This emergency account will be available for withdrawal at any time and for any reason at least once per month. No fees can be assessed for the first 4 distributions. Limited Recordkeepers currently have the ability to allow for this feature.
Section 334: Qualified Long-Term Care Distributions
Effective: December 30, 2025
This provision allows employees to take in-service distributions from the plan to pay for qualified long-term care insurance. We are currently not recommending this provision at this time.
Secure 2.0 limits the current open-ended repayment period for QBADs to 3 years from the date of distribution. This change was made to align with the tax limitations for 3-year repayment to avoid income taxes on the distribution. Distributions taken prior to December 29, 2022 have until December 31, 2025 for repayment.
Section 103: Expanded Saver’s Credit Match
Effective: January 1, 2027
The Saver's Match program will replace the current Saver's tax credit for low-income workers. It will be funded by the Department of Treasury at at rate of 50% or annual contributions up to $2,000, with a maximum match of $1,000. If a Plan does not allow this provision, employees can still receive the same benefit in ther IRA. Our recommendation is for plan sponsors to not accept these contributions for plan deposit.