Plan sponsors and the pension community have waited a long time for SECURE 2.0 to be enacted despite the fact that it had bipartisan support. SECURE 2.0 finally became law as part of the Consolidated Appropriations Act of 2023 signed by President Biden. Plan sponsors and administrators need to be on the alert for some law changes effective in 2023, though many provisions have delayed effective dates.
SECURE 2.0 implements comprehensive pension reform and includes many changes that have been on the benefit community’s wish lists for some time. Cohen & Buckmann will be doing a series on how these changes affect different types of plans, but here is summary of some of the major changes grouped under goals of the legislation. Provisions reflect these themes:
· Increasing employee participation. SECURE 2.0 takes direct aim at the retirement savings gap. Beginning in 2025, new 401(k) and 403(b) plans will be required to have automatic enrollment and automatic escalation starting with a default rate of 3%. Plans existing on the date of enactment are grandfathered, and there are a few exemptions, including one for employers with 10 or fewer employees. The participant Savers Credit will be modified after 2026 to make it refundable and turn it into a direct government matching contribution to an IRA or eligible retirement plan. In addition, beginning in 2025, the catch-up contribution limit for employees age 60-63 will increase to the greater of $10,000 or 150% of the regular catchup amount, indexed for inflation. A provision in the original SECURE Act has also been modified to require plans to allow long-term part-time employees who have worked at least 500 hours in two consecutive plan years to contribute to 401(k) plans and 403(b) plans after December 31, 2024 . (This last provision modifies a change in SECURE 1.0 that allowed part-time employees in 401(k) plans to contribute after 3 consecutive years of service with the minimum number of hours.) Employers are still not required to match these contributions, and pre-2023 service is not required to be taken into account under the new rule.
· Incentivizing new plan creation. These provisions include enhanced small employer plan start up credits beginning in 2023. SECURE 2.0 increases the startup cost credit for employers with 50 or fewer employees and adds an additional credit for contributions to a defined contribution plan available for up to 5 years. Beginning in 2024, a new “starter 401(k)” simplified plan option that does not require employer contributions will become available. SECURE 2.0 also provides for a new 403(b) safe harbor plan option. These new options will require enrolling all employees at a minimum deferral rate of 3%.
· More lenient RMD Rules. Required minimum distributions are delayed for participants who aren’t age 72 or older by December 31, 2022. The age after which payments must commence increases to 73 in 2023 and 75 in 2033. The excise tax for failure to take required minimum distributions will be reduced, and a number of changes to the annuity rules under Code Section 401(a)(9), which have generally required that annuities provide for level payments, will be modified immediately for commercial annuities. The changes will permit certain lump sum payments and annual benefit increases not exceeding 5%. In addition, for distributions required on or after after January 1, 2024, Roth 401(k)s will no longer be subject to pre-death RMD requirements.
· Encouraging ROTH contributions. Participants can be given the option of receiving matching or employer nonelective contributions as Roth contributions, effective in 2023. Roth 401(k)s have been subject to pre-death RMD rules, even though those rules do not apply to Roth IRAs. Beginning with distributions required on or after January 1, 2024, Roth 401(k) accounts will no longer be subject to pre-death RMD requirements. In addition, defined contribution plans will be permitted to set up emergency savings accounts funded by Roth contributions.
· Increasing Plan Options for 403(b) plans. 403(b) plans will be permitted to invest new money in collective trusts and to participate in multiple employer plans (MEPs), including pooled employer plans (PEPs), beginning in 2023.
· Encouraging Annuitization of Defined Contribution Benefits.
In addition to the annuity rule changes described above, SECURE 2.0 increases the dollar limit for qualified longevity annuity contracts (QLACs), which are annuities with deferred annuity starting dates. For new contracts, the dollar limit on the portion of a participant’s account that may be applied towards a QLAC increases to $200,000 and a percentage limit on the portion of the account that could be applied to purchase a QLAC has been eliminated.
· New Design Options for Defined Contribution Plans.
Reversing an IRS position, plan sponsors of 401(k), 403(b) and SIMPLE IRA plans will be able to match student loan repayments beginning in 2024. They may treat the loan repayments as elective deferrals. This will also incentivize participation by younger employees with student debt.
Two new options for providing payments to deal with participant emergencies are exempt from the 10% early distribution tax. In addition to the emergency savings accounts described above, plans may permit one penalty-free $1000 withdrawal for “unforeseeable financial needs or family emergency expenses “ that may be repaid to the plan.
· Simplifying Plan Administration. There are also a number of new initiatives that will simplify plan administration. As a few examples, the dollar limit for involuntary plan cashouts increases to $7000 beginning in 2024. The Department of Labor is directed to create a participant lost and found for plan benefits, and more flexible procedures to correct inadvertent administrative violations, including plan overpayments, will make it easier for plan sponsors to keep plans in compliance. Plan administrators will no longer have to distribute required disclosures to employees who do not participate in the plan.
This is just a summary of some of the changes that will affect 401(k) and 403(b) plans. Other provisions are targeted at SIMPLE IRA plans, defined benefit plans, IRAs and ESOPS. Stay tuned in 2023 for Cohen & Buckmann’s insights on the significant SECURE 2.0 changes.