Ten Mandatory SECURE 2.0 Changes for 401(k) Plans
The SECURE 2.0 Act of 2022, as enacted on December 29, 2022, contains over 90 provisions affecting retirement plans and IRAs, but of the many provisions only a handful are required changes for 401(k) plans. This post lists those changes and indicates when the provisions go into effect. Unless otherwise noted, 401(k) plans (and 403(b) plans, to which these changes also apply) will need to be amended to reflect mandatory SECURE 2.0 changes by the end of their 2025 plan year, unless that deadline is later extended. Note that some of the changes listed below, such as the paper disclosure requirement, may not require a plan amendment. Also as noted, two are required changes only if discretionary provisions are first adopted.
One. Increases In Required Minimum Distribution Age
Effective for required minimum distributions (RMDs) after December 31, 2022 for individuals who attain age 72 after that date, the RMD increases from 72 to 73 for those born between 1951 and 1959, and age 75 for those born in 1960 and subsequent. A technical glitch needs to be corrected, as the law currently puts those born in 1959 into the age 73 and age 75 distribution categories.
Two. Removal of RMD Requirement for In-Plan Roth Accounts
RMDs during your lifetime are not required for Roth IRAs, but were required under prior law, to be taken from from in-plan Roth accounts. SECURE 2.0 eliminates the requirement to take lifetime RMDs from in-plan Roth accounts effective for tax years beginning after December 31, 2023.
Three. Roth Catch-Up Contributions for High Earners
Effective for tax years beginning after December 31, 2023, age 50 catch-up contributions under 401(k) plans made by participants whose wages in the prior year exceeded $145,000 must be made in the form of designated Roth contributions. The $145,000 amount is indexed after 2024. Catch-up contributions for lower wage earners can continue to be made on a pre-tax basis but must be permitted to be made in the form of designated Roth contributions. Another technical glitch in the law needs to be corrected, in order to make catch-up contributions permissible at all, beginning in 2024. Plans that don’t include designated Roth contributions must be amended to do so by the applicable deadline, in order to accommodate the Roth catch-up feature.
Four: Increased Catch-Up Limit Between Ages 60-63
Effective for tax years beginning after December 31, 2024, the age 50 catch-up limit is increased for participants between the ages of 60 and 63 to the greater of (a) $10,000 or (b) 150% of the 2024 “normal” catch-contribution limit. 150% of the 2023 catch-up contribution limit already exceeds $10,000 ($11,250). The $10,000 limit will be adjusted for cost-of-living after 2025.
Five. Coverage of Long-Term, Part-Time Workers
This one is a double whammy because SECURE 1.0, enacted in 2019, requires coverage of long-term, part-time employees for 401(k) plans in 2024, and SECURE 2.0 expanded this rule to ERISA 403(b) plans, in addition to reducing the number of years required to qualify as a long-term part-time employee. Specifically, beginning in 2025 401(k) and ERISA 403(b) plans must allow employees who complete 500 or more hours of service in two consecutive years to make elective deferrals (but need not make employer contributions on their behalf), taking into account service worked in 2023 and subsequent. Under SECURE 1.0, 401(k) plans must allow employees who worked 500 or more hours in three consecutive years, beginning in 2021, to make elective deferrals commencing in 2024. These employees need not be taken into account for nondiscrimination and coverage purposes or for top-heavy purposes.
An example illustrates how this works. An employee who works at least 500 hours of service in 2021, 2022, and 2023 would be eligible to make elective deferrals in their employer’s 401(k) plan on January 1, 2024, per SECURE 1.0. But if that same employee were employed by an employer with an ERISA 403(b) plan, the employee would have to work 500 or more hours in both 2023 and 2024, in order to be eligible to make elective deferrals in 2025 under SECURE 2.0 Note that this would be the case even if the employee were a student employee or were hired into a position requiring less than 20 hours per week (categories that were exceptions to the universal availability rule applicable to 403(b) plans). Service for plan years before January 1, 2023 is disregarded for purposes of SECURE 2.0 eligibility, but service worked since 2021 is counted for vesting purposes under both SECURE Acts.
Six. Auto-Enrollment and Auto-Escalation for Newly Adopted Plans
Effective for single-employer 401(k) or 403(b) plans adopted on or after December 29, 2022 SECURE 2.0 requires that, starting in 2025, the plan auto-enroll participants, and auto-escalate deferrals. This rule also applies to employers that adopt multiple employer plans on or after December 29, 2022. Certain exemptions apply, including employers with 10 or fewer employees, businesses in the first three years of existence, governmental and church pans, and SIMPLE 401(k) plans. For plans subject to the rule, the automatic enrollment percentage must start at 3% and increase at least 1% on the first day of each successive plan year until the deferral rate reaches at least 10%, but not more than 15%. For plan years beginning before 2025, non-safe harbor plans may not exceed 10%. Participants must be permitted to withdraw deferrals, and earnings, within 90 days, without application of the 10% early withdrawal penalty tax. Qualified default investment alternatives must be used for the automatically contributed amounts, subject to modification by participants.
Seven. Repayment Deadline for Qualified Birth or Adoption Distributions (If Offered)
This is a mandatory change to a discretionary provision from SECURE 1.0. SECURE 1.0 introduced the option of allowing participants to take qualified birth or adoption distributions (QBADs), which are distributions from a 401(k) or 403(b) plan (or IRA) of up to $5,000 per parent that are not subject to the early withdrawal penalty tax and that are taken within one year of the date of a birth or finalization of adoption proceedings. SECURE 1.0 provided that these amounts may be repaid back to the qualified plan or IRA notwithstanding normal contribution dollar limits, but did not specify a deadline for repayment. For plan sponsors that did add QBADs to their plans, and for IRA custodians that made them available, SECURE 2.0 now requires that repayment be made within three years. The repayment period ends December 31, 2025 for QBADs that are currently outstanding.
Eight. Surviving Spouse Election to be Treated as Employee
Surviving spouses have several special options with regard to a spouse’s retirement accounts, that are not available to non-spouse beneficiaries. Effective for 2024, SECURE 2.0 adds one more option: the surviving spouse of the account holder who is the designated beneficiary of the account can irrevocably elect to be treated for RMD purposes as the deceased account holder of the retirement account him or herself. As a consequence, RMDs will be paid no sooner than when the account holder would have reached his or her required beginning date, and will be paid out according to the account holder’s life expectancy, rather than the spouse’s life expectancy, using the Uniform Life Table rather than the Single Lifetime Table. Note that this option is different from the surviving spouse electing to treat the account as his or her own, which would also result in use of the Uniform Life Table, but using the spouse’s birthdate. This new option under SECURE 2.0 would primarily be of interest to an older surviving spouse, as it would permit use of the younger account holder’s life expectancy for RMD purposes.
Nine. Required Annual Paper Account Statement
Under a Department of Labor “safe harbor” set forth in final Department of Labor regulations published in 2020, retirement plan sponsors may deliver plan disclosures such as Summary Plan Descriptions, quarterly or annual account statements, and other items, by electronic means, either through email or posting on a company website. EforERISA posted about the electronic disclosure safe harbor back in 2020. Effective for plan years beginning after December 31, 2025, SECURE 2.0 requires that defined contribution plans, which include 401(k) and 403(b) plans, provide a paper benefit statement at least once per year. The other three required quarterly statements may be delivered electronically provided the safe harbor delivery requirements are met. Participants are permitted to opt-out of paper delivery. SECURE 2.0 also instructs DOL to revise the electronic delivery regulations by December 31, 2024, to require a one-time initial paper notice to new participants that informs them of their right to receive all required disclosures on paper. This initial written disclosure would be required to be delivered prior to issuance of any electronic communications about the plan.
Ten. Annual “Reminder” Notice for Unenrolled Participants (Sec. 320)
This is a required provision for employers who opt to use simplified disclosure procedures for employees who are eligible under their plan, but do not actively participate. This is a discretionary provision under SECURE 2.0 and it is unclear how many employers will adopt it, due to the administrative challenges of segregating the two employee populations for different notice purposes. Currently required ERISA disclosures must be made to employees who have met eligibility requirements under a retirement plan, but do not actively participate, equally to those who are actively participating in a retirement plan. Effective immediately, a plan sponsor may carve unenrolled participants out of normal notification procedures, provided that they supply an annual notice of the employees’ eligibility to participate in the plan, and any applicable election deadlines. Other prerequisites to this simplified annual notice procedure are that (a) the employee is provided any notification they expressly request be supplied; and (b) the employee received a Summary Plan Description and all other required notices upon initially becoming eligible to participate in the plan.
If you are a 401(k) or 403(b) plan sponsor, or advise plan sponsors, and have questions about these required changes under SECURE 2.0, use the Contact form at EforERISA to get more information on next steps.
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.
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