SECURE 2.0 Legislation: Impact on Qualified Plans

The new law makes automatic enrollment mandatory. Under the law, 401(k) plans must automatically enroll eligible employees at a contribution rate of no less than 3 percent and no more than 10 percent of compensation, with annual automatic 1 percent increases until the participant’s contribution reaches at least 10 percent, but no more than 15 percent, of compensation. A participant must also be allowed to affirmatively opt out of the automatic contribution or automatic increases or elect to make contributions at a different percentage.

The new law also requires that participants have the ability to cancel automatic enrollment within 90 days after beginning and withdraw the contributions they have made.

This requirement is effective for plan years beginning after December 31, 2024, but is not required for: (i) plans established before December 29, 2022; (ii) any plan maintained by an employer in existence for less than three years (including any predecessor employer); (iii) any plan maintained by an employer that employs not more than 10 employees; and (iv) “SIMPLE” plans, governmental plans, and certain other plans.

Since SECURE 2.0 makes automatic enrollment mandatory only for plans that were not in effect on December 29, 2022, sponsors of existing 401(k) plans need not add an automatic enrollment feature to their plans. Of course, plan sponsors may consider doing so.

For 2023, the catch-up contribution limit for 401(k) and 457(b) plans for those age 50 or older is $7,500.

Individual retirement accounts (IRAs) have a $1,000 catch-up limit, which is not indexed for inflation.

Effective beginning January 1, 2025, the new law increases the catch-up contribution limit for individuals who have attained ages 60, 61, 62, and 63 to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2024.

The new law adjusts IRA catch-up contributions for inflation, beginning January 1, 2024.

Under existing law, catch-up contributions may be made as regular pretax contributions or, if the plan permits, as Roth contributions.

Roth contributions are made on an after-tax basis and if deferred until a qualified distribution occurs, neither the Roth contributions nor their earnings are taxable.

This feature may be of interest to participants, particularly those who have already opted for an in-plan Roth conversion or are making ongoing Roth contributions.

A plan amendment will be needed if an employer desires to implement this change.

In general, RMDs from tax-qualified plans must begin by April 1 of the year following the later of the year in which a participant reaches age 72 or retires. However, participants who own a 5 percent or greater interest in the employer must begin receiving RMDs by April 1 of the year following the year in which they reach age 72 regardless of whether or not they are retired.

Owners of IRAs also are required to begin receiving RMDs by April 1 of the year after the year in which they reach age 72.

A 50 percent penalty tax is imposed on individuals who fail to timely receive an RMD.

The new law defers the RMD age for both tax-qualified plans and IRAs from 72 to 73 beginning January 1, 2023, and from age 73 to 75 beginning January 1, 2033.

The penalty tax for failing to take RMDs is reduced to 25 percent (and in some instances to 10 percent), effective for taxable years beginning after December 29, 2022.

Effective January 1, 2024, RMDs will no longer be required from Roth accounts in employer retirement plans.

This change will benefit individuals who wish to delay the time at which they begin drawing down on their retirement savings under tax-qualified plans and IRAs, allowing them to accumulate additional tax-deferred earnings on their retirement savings. Of course, for tax-qualified plans, the terms of the plans will control how long retirees may defer receipt of benefits.

Plan sponsors, many of whom just updated their plans and administrative procedures to increase the RMD age from 70½ to 72 pursuant to SECURE 1.0, will need to amend their plans and adjust administrative procedures again to reflect the SECURE 2.0 change.

Under SECURE 1.0, long-term part-time employees must be eligible to participate in a 401(k) plan. An individual qualifies as a long-term part-time employee if he or she has at least (i) 1,000 hours of service in a 12-month period or (ii) 500 hours of service in a three-year consecutive period.

This requirement became effective for plan years beginning in 2021, but service recognized before 2021 need not be counted. Thus, the true effective date is for plan years beginning in 2024.

Under the new law, the three-year consecutive period is reduced to two consecutive years.

Effective for plan years beginning after December 31, 2024.

Under the new law, an automatic rollover may be made if the amount is between $1,000 and $7,000.

Effective for distributions made after December 31, 2023.

Under the new law, the 10 percent early distribution penalty tax will not apply to withdrawals of up to $1,000 for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.” Only one withdrawal may be made every three years or every year if the distribution is repaid within three years.

The early distribution penalty tax will also not apply to distributions that do not exceed the lesser of (i) $10,000 (as adjusted for inflation) or (ii) 50 percent of the present value of the individual’s nonforfeitable accrued benefit for individuals who need the funds due to domestic abuse or terminal illness.

These changes are effective for distributions made after December 31, 2023.

Under the new law, if desired, an employer may make matching contributions on student loan repayments as if the student loan repayments were elective deferrals.

Effective for plan years beginning after December 31, 2023.

Congress indicated that this change is intended to help employees who are unable to save for retirement because of student debt obligations by enabling employers to credit them with the matching contributions they would have received had their student loan repayments been elective deferrals to the plan.

A plan amendment will be needed to implement this change.

The new law allows an employer to amend its plan to allow non-highly compensated employees to defer (post-tax) up to the lesser of (i) 3 percent of compensation or (ii) $2,500 to an emergency savings account. These contributions may be made via an automatic contribution arrangement and may be matched. Unused funds in the emergency account are distributable following separation from service and may be rolled over to a Roth IRA.

Effective for plan years beginning after December 31, 2023.

It’s not clear from the legislation what emergencies will qualify for withdrawals or whether any emergency is actually required.

Funds withdrawn, however, are not subject to the 10 percent early distribution penalty tax discussed above.

The new law allows an employer to offer small financial incentives (such as gift cards) to encourage participation in retirement plans.

Effective for plan years beginning after December 29, 2022.

This change will allow employers to offer small gifts/rewards in return for an employee’s participation in a 401(k) plan. That could prove to be a useful tool in motivating employees to participate.

The legislation does not specifically state that small financial incentives can be used to incent participants to increase their contributions. Perhaps that will be addressed in further guidance.

The new law creates a national online database to aid employers to locate “missing” plan participants and for plan participants to locate retirement funds.

Dealing with unclaimed pension benefits always starts with making all reasonable attempts to locate lost participants. Hopefully, this database will prove a helpful tool in that effort.