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Five SECURE 2.0 Changes Impacting Non-Profit Employers

On December 29, 2022 President Biden signed into law H.R. 2617, the Consolidated Appropriations Act, 2023, a $1.7 trillion omnibus spending bill that will keep the federal government funded for the 2023 fiscal year.  Of the many provisions in the massive bill, Division T, the SECURE Act of 2022, contains close to 400 pages of far-reaching changes affecting retirement plans and IRAs.  Commonly referred to as SECURE 2.0, it builds upon and adds to retirement plan provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) which was passed in 2019, but is more extensive than the earlier law.  This post focuses on five provisions of SECURE 2.0 that specifically impact retirement plans maintained by non-profit employers. In addition to the changes listed below, which affect plans currently in existence, beginning in 2025 newly adopted Section 403(b) plans will be required to auto-enroll participants, with some exceptions.

One: Expansion of Multiple Employer Plan and Pooled Employer Plan Arrangements to Section 403(b) Plans

Effective for plan years beginning after December 31, 2022,  Section 403(b) plan sponsors can participate in multiple employer plan arrangements (MEPs) and pooled employer plan arrangements (PEPs), potentially achieving economies of scale under such arrangements (in terms of recordkeeping and investment expenses) that have previously only been available to for-profit employers.  MEPs and PEPs organized for Section 403(b) plan sponsors will be able to take advantage of relief, extended under SECURE 1.0,  from the “one bad apple” rule so that violation of one employer member of a multiple employer or pooled arrangement does not affect the tax treatment of other, compliant employer members. 

Two: Section 403(b) Plans May Invest in Collective Investment Trusts (CITs)

Since 1974, the only two permitted investment vehicles for 403(b) plans were annuity contracts and mutual funds.  Effective as of its date of enactment, SECURE 2.0 adds a third option, collective investment trusts (CITs), to that short list.  CITs are pooled investment arrangements that are made available only to qualified retirement plans, and that share some features with mutual funds but have different regulatory oversight and may offer some cost efficiencies.  Despite the immediate effective date, there will be some lead time before CITs are available to Section 403(b) plan sponsors due to the need to modify applicable securities laws.

Three: Expanded Investment Sources for Section 403(b) Hardship Withdrawals

Prior to SECURE 2.0, hardship withdrawals from Section 403(b) plans could be drawn only from employee contributions, less earnings.  Effective for plan years after December 31, 2023, SECURE 2.0 will bring Section 403(b) plans into conformity with Section 401(k) plans in this regard, so that QNECs, QMACs , in addition to elective deferrals, and earnings on these amounts, are permitted sources for hardship withdrawals.   SECURE 2.0 also permits hardship withdrawals to be made on the basis of a written certification by the participant as to the need for the withdrawal rather than on the basis of more formal documentation.

Four: Extension to Amend Section 457(b) Plans for SECURE 1.0 Required Minimum Distribution Rules

As we posted recently, December 31, 2022 was the deadline for sponsors of non-governmental Section 457(b) deferred compensation plans to amend their plan documents to incorporate changes to required minimum distribution rules under SECURE 1.0.  For tax-exempt sponsors of these plans who did not act timely, SECURE 2.0 has extended the amendment deadline under SECURE 1.0 to conform to the amendment deadline under applicable provisions of SECURE 2.0.  The new deadline is the last day of the first plan year beginning on or after January 1, 2025 (2027 in the case of governmental plans).  Note in this regard that SECURE 2.0 further modifies RMD rules, including increasing the RMD starting age in stages, first from 72 to 73, then eventually to 75, so additional amendments to RMD provisions will eventually be needed under SECURE 2.0.  Plans must operate in accordance with required provisions, in the interim.

Five: Eligibility for Long-Term, Part-Time Employees

This is a provision of SECURE 2.0 that is not unique to 403(b) plans but applies equally to 401(k) plans.  The original SECURE 1.0 rule required long-term, part-time employees, defined as employees who have worked 500 or more hours of service in three consecutive twelve-month periods, to be able to participate in the deferral-only portion of a 401(k) plan beginning in 2024.  Effective for plan years beginning after December 31, 2024, SECURE 2.0 expands this rule to 403(b) plans that are subject to ERISA and reduces the three consecutive twelve-month requirement to two consecutive periods.  This will be a significant adjustment to 403(b) plan sponsors who are accustomed to the universal availability rule, one exception to which permitted employees who normally work less than 20 hours per week, and who fail to accumulate 1,000 hours of service in an eligibility measurement period, to be excluded from making elective deferrals.  Although universal availability does not apply under 401(k) plans, the 1,000 hour rule operated in a similar way and will now yield to the 500 hour in two consecutive year standard.

SECURE 2.0 will be a topic of discussion at EforERISA in many posts to come.  If you have not subscribed to this blog yet, please take a moment to do so by typing your email address under the prompt at “Continue Reading More Articles.”  And if you are a plan sponsor, or advise plan sponsors, and have questions about provisions of the law or steps to take to get ready for their implementation, don’t hesitate to reach out using the Contact form (under “Posts Worth Revisiting”).

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2023 Christine P. Roberts, all rights reserved.

Photo credit: Ståle Grut, Unsplash

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Year End SECURE Act Deadline Looms for Tax-Exempt 457(b) Plans

Despite an extension granted to qualified plans, Section 403(b) plans, and governmental Section 457(b) plans to make necessary amendments under the SECURE Act, no extension past December 31, 2022 currently applies for Section 457(b) plans maintained by private tax-exempt organizations.  That means that, absent future guidance from IRS, these plans must be amended by the end of this year to incorporate the SECURE Act’s changes to required minimum distribution provisions.  Prompt action by those responsible for Section 457(b) benefits is required in order to meet the fast-approaching deadline. 

By way of background, Section 457(b) permits private, tax-exempt organizations to offer deferred compensation plans to a “top-hat” group, consisting of a “select group of management or highly compensated employees.”  Such plans are exempt from most provisions of Title I of ERISA and permit covered participants to defer up to the 457(e)(15) annual dollar limit annually ($22,500 in 2023) in addition to whatever they defer under the tax-exempt employer’s Section 403(b) or other retirement plan.  Governmental employers may also sponsor plans under Section 457(b) without limiting participation to a top-hat group.  Section 457(b) plans, whether sponsored by private tax-exempt employers or governmental entities, are subject to the required minimum distribution rules under Internal Revenue Code Section 401(a)(9).  Those rules require that accounts begin to be distributed to participants by their “required beginning date” or RBD, as defined under Section 401(a)(9)(C), and also govern subsequent distributions to account holders and their beneficiaries.

Enter the SECURE Act in 2019.  The SECURE Act moved the RBD for non-owners out to the later of retirement or April following the year in which a participant reaches age 72, rather than 70 ½, which has been the prior rule, and also required annual required minimum distributions following the death of an account holder to be made over a period not exceeding 10 years for most designated beneficiaries, rather than over a period covering their life expectancy, which had been the case previously.  This is a mandatory change under the SECURE Act; the Act also contains discretionary provisions such as qualified birth and adoption withdrawals. 

The original deadline to amend non-governmental plans under the SECURE Act was the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for a calendar plan year).   Governmental employers and multiemployer plans had until the end of 2024, however, as did 403(b) plans maintained by public schools.   In recent months, the IRS extended the SECURE Act amendment deadlines for all types of plans other than Section 457(b) plans maintained by tax-exempt employers.  This was announced in Notice 2022-33, issued in September 2022, whic was followed up by guidance in October of 2022 (Notice 2022-45) that extended the deadline to adopt amendments under applicable provisions of other laws (the Coronavirus Aid, Relief and Economic Security Act (CARES Act) and Bipartisan American Miners Act of 2019 (Miners Act) and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act)).  (More precisely, the deadline extended under Notice 2022-33 included amendments under the CARES Act related to the 2020 waiver of RMDs and Notice 2022-45 covered amendments under other applicable provisions of the CARES Act.)

December 31, 2025 is the new amendment deadline under applicable provisions of SECURE and these other laws for qualified retirement plans, including 401(k) plans, and 403(b) plans.  For governmental pension plans and governmental Section 457(b) plans it is generally 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023. 

In the absence of further guidance from IRS, December 31, 2022 remains the deadline to amend Section 457(b) plans maintained by private tax-exempt employers to conform to the RMD provisions of the SECURE Act.  It is not unheard of for IRS to issue late-in-the-year deadline extensions, but in this instance, it has been silent on this category of plan twice in close succession.  Employers who maintain such plans should connect with their third-party administrators or benefit attorneys to arrange for timely adoption of the necessary amendment to their plan document, and an update of plan summary information provided to participants.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

Photo credit: Markus Winkler, Unsplash

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IRS Plays Musical Chairs With Voluntary Correction Programs

Section 401(k) and other retirement plans are notoriously complicated to operate and no plan sponsor gets it 100% correct, 100% of the time. When problems arise, plan sponsors may correct certain errors – technically “failures” — under an IRS program called the Employee Plans Compliance Resolution System, or EPCRS. Failures corrected this way cannot later be the basis for revoking the tax-qualified status of the plan, or imposing other tax penalties or interest. EPCRS is set forth in a Revenue Procedure that the IRS updates every few years. On July 16, 2021 the IRS published the latest EPCRS upgrade in Revenue Procedure 2021-30, in which, like musical chairs, some ground is gained while some is taken away. Below is a summary of some of the key changes.

Expansion of Self-Correction Period

Under the Self Correction Program, a plan sponsor may at any time, without IRS review or approval, correct “insignificant” failures in the way a plan has been operated (operational failures), and failures relating to plan documentation such as missed amendment deadlines (plan document failures). Further, a plan sponsor may self-correct “significant” failures of these types, provided that the significant failure is identified and fixed within a set “correction period.”

In the past, the correction period ended on the last day of the second plan year following the plan year for which the failure occurred. The EPCRS upgrade adds a whole additional year to the correction period. Now, self-correction of significant failures may be made by the end of the third plan year following the plan year in which the failure occurred. Thus, a plan sponsor with a calendar plan year and a significant operational error occurring in 2018 will have until the end of 2021 to correct the error.

There are two follow-on effects of this extension:

  • The three-year self-correction period for significant operational failures does not begin to run until after the statutory correction period for ADP and ACP testing failures, which is the 12-month period following the close of the plan year for which the test was failed. In effect there is four years to correct these errors – the original statutory period of 12 months, followed by the three plan year self-correction period.
  • For errors involving a failure to offer or implement elective deferrals, corrective contributions equal to 50% of what would have been deferred generally must be made to the plan. That percentage is reduced to 25% of what would have been contributed if certain requirements are met, including that the period during which the error occurred lasted more than three months, but not longer than the self-correction period for significant failures. That period has now been extended a year, from two to three plan years.

Plan sponsors wishing to use the Self-Correction Program should be mindful not just of the correction period deadline, but of several other pre-requisites. First, the plan sponsor must have established compliance practices and procedures in place, and the error must have arisen due to a lapse in their normal application. Plan document failures may only be self-corrected if a “favorable letter” for the plan exists. The plan sponsor must also assess a number of facts and circumstances in order to determine whether the failure is “insignificant” or “significant.” For those seeking more information, the IRS provides helpful online guidance on Self-Correction (but the two-year correction period had yet to be updated as of the date of this post), as well as Self-Correction FAQs.

Anonymous VCP Repealed after 2021

In addition to Self-Correction, EPCRS includes the Voluntary Compliance Program (VCP), which involves an online submission, IRS approval of the proposed correction method, and payment of a VCP fee. Normally the name of the plan sponsor and the plan involved are revealed in the VCP submission process. However the IRS has for some years maintained an Anonymous VCP process, particularly for plan sponsors whose proposed corrections do not fit within the preapproved or “safe harbor” methods outlined in EPCRS. In Anonymous VCP, a representative of the plan sponsor, such as a law firm, files the submission without identifying the plan sponsor or plan. If the IRS approves the proposed correction, the plan sponsor reveals is identity and the process converts to a conventional VCP submission. If the IRS rejects the proposed correction method, the plan sponsor remains anonymous and has the option of later participating in regular VCP with an alternative proposed correction.

For reasons that it does not explain, the IRS is retiring Anonymous VCP and will not accept any more Anonymous VCP submissions after December 31, 2021. In its place the IRS is introducing a new program effective January 1, 2022, which it refers to as an “anonymous, no-fee VCP pre-submission conference.” This new program is intended for proposed corrections that fall outside the safe-harbor correction methods set forth in Appendices A and B to the EPCRS Revenue Procedure. The VCP pre-submission conference is available only if the plan sponsor is eligible for and intends to submit a conventional VCP submission. Following a VCP pre-submission conference, the IRS will provide oral feedback on the failures and proposed correction method that is “advisory only, is not binding on the IRS.” The IRS will only confirm in writing that a VCP pre-submission conference took place but will not appear to provide anything substantive in writing about what was discussed.

VCP pre-submission conferences are held only at the discretion of the IRS and “as time permits.” Given limited IRS funding and significant understaffing in recent years, one wonders how widely and promptly available this program will be. It is also unclear whether or not the introduction of the VCP pre-submission conference means that VCP coordinators at IRS will no longer informally discuss proposed corrections with attorneys and other practitioners, as has been the practice in the past.

Other Changes

  • EPCRS generally requires full correction of operational errors, but makes an exception for certain de minimis amounts. Effective July 16, 2021, the de minimis threshold increases from $100 to $250, and erroneous contributions (plus earnings) of $250 or less will not need to be pulled from a participant’s account or recouped after distribution to a participant.
  • In the past, when a participant received a lump sum distribution of a more than de minimis amount (“Overpayment”), the plan was required to seek recoupment in a lump sum repayment. Now, repayment in installments is also an option. For defined benefit plans, the Revenue Procedure describes certain conditions under which recoupment of Overpayments may be avoided altogether.
  • The Revenue Procedure restores a safe harbor correction method for failures arising from automatic contribution arrangements, which had expired on December 31, 2020. The new expiration date is December 31, 2023; until then no corrective contributions are required for certain automatic contribution failures that do not extend beyond 9 ½ months following the end of the plan year of the failure. Other correction criteria apply including provision of written notice to affected employees.
  • The Revenue Procedure substantially liberalizes self-correction of certain operational failures through a plan amendment that retroactively reflects how a plan has been operated. Such retroactive amendments must increase benefits, rights or features under the plan, rather than reduce them. In the past it has been required that the benefit increase or enhancement apply to all eligible participants under the plan, which made many proposed corrections unaffordable. The new Revenue Procedure lifts the universality requirement, so that a retroactive amendment may increase benefits only for those participants affected by the operational error. This will make this form of correction much more flexible and attainable for plan sponsors.

Photo credit: Federica Campanaro, Unsplash

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.