On December 29, 2022, the Setting Every Community Up for Retirement Enhancement Act 2.0 (“SECURE 2.0” or the “Act”) was signed into law. An amalgamation of three previous bills, the Act covers a broad swath of topics that impact employers, plan sponsors, third-party service providers, and plan participants. In this newsletter, we provide a broad overview of the more significant changes under the Act and a summary of recent agency guidance pertaining to those provisions. Bear in mind, however, that the Internal Revenue Service (“IRS”) and Department of Labor (“DOL”) are still in the process of issuing guidance related to SECURE 2.0. Accordingly, the analysis in this newsletter may change as more information becomes available. In addition, many of these changes will require significant administrative and payroll support, so it will be important to coordinate with your plan administrative and payroll vendors prior to finalizing any decisions regarding new plan features.
Given the “grab bag” of changes to the rules governing retirement plans, we have organized this newsletter to first include a chronological list of the provisions that are most likely to impact plan design decisions for most qualified plans. We have also included separate discussions of various topics broken down into segments addressing: (1) the correction of plan compliance failures; (2) changes relevant to 403(b) plans only; and (3) other miscellaneous items.
Table of Contents
Changes Effective Immediately Following Enactment
Increase of “Required Beginning Date” for Distributions to Age 73, and Later, Age 75
In 2019, the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”) raised the age at which qualified plan participants and IRA owners were required to begin taking a required minimum distribution (“RMD”) from 70½ to 72. Effective January 1, 2023, SECURE 2.0 extended the age for the required beginning date (“RBD”) to age 73 for individuals attaining age 72 after December 31, 2022. Effective in 2033, for participants attaining age 73 after December 31, 2032, the RBD age is 75.
Matching and Non-elective Contributions Allowed as Roth Contributions
As of December 29, 2022, plan sponsors were permitted to allow participants in a 401(k), 403(b), or governmental 457(b) plans to elect to receive vested employer matching and non-elective contributions on a Roth basis, as opposed to the prior rule that only allowed for pre-tax employer contributions. However, significant unanswered questions relating to tax reporting and withholding effectively prevented implementation of this new feature until the IRS released Notice 2024-2 in December 2023. The Notice resolved the major stumbling blocks, and recordkeepers are now preparing to move forward.
Under the Notice, similar rules apply to designated Roth matching contributions and designated Roth non-elective contributions as apply to designated Roth elective contributions. An employee’s designation must be made before the contribution is allocated, and that designation is irrevocable. Additionally, the contribution must be fully vested to be designated as Roth, so if the contribution is of a type subject to a vesting schedule, an employee must meet the vesting requirements when the contribution is allocated to the employee’s account in order to designate it as Roth. The right to designate employer contributions as Roth is an “other right or feature” for purposes of the Internal Revenue Code’s (the “Code”) rules prohibiting the favoring of highly compensated employees in connection with the availability of rights and features, but Notice 2024-2 confirmed that requiring that an employee be fully vested in a matching contribution or non-elective contribution to designate it as Roth will not cause a plan to fail to comply with these rules.
Designated Roth matching contributions and designated Roth non-elective contributions are includible in gross income for the year in which they are allocated to the employee’s account. Plans must report these contributions using Form 1099-R in the same manner as in-plan Roth conversions are reported. Designated Roth employer contributions are not considered wages subject to withholding, and when made to a 401(k) or 403(b) plan, they are also excluded for FICA and FUTA purposes. Designated Roth employer contributions made to a governmental 457(b) plan are excluded for FUTA purposes but may be subject to FICA.
Subject to satisfying the nondiscrimination rules for rights and features, a plan may allow employees to elect to designate only elective deferrals as Roth contributions, or alternatively to designate only matching and/or non-elective contributions but not elective deferrals as Roth contributions, or it may allow all applicable contribution types to be designated as Roth contributions.
Rules for Use of Retirement Funds in Connection with Qualified Federally Declared Disasters
In the past, distributions for plan participants impacted by certain natural disasters have been exempted by special legislation from the normal 10% penalty tax on early distributions from retirement plans, and plans have been permitted to make these distributions to a qualifying participant even if the participant would not otherwise satisfy federal restrictions on eligibility for payment from retirement plans. The Act provides permanent rules relating to the use of retirement funds for those impacted by a federally declared disaster that generally align with the structure of past ad hoc legislation. The rules permit up to $22,000 to be distributed penalty-free from employer retirement plans or IRAs. These distributions can be taken into gross income over three years (mitigating the tax impact of the withdrawal), and can be repaid to a plan or IRA within three years.
To provide additional disaster relief assistance, the Act provides that amounts distributed prior to (or within a specified time after) the disaster to purchase a home in the impacted area which cannot be used for this purpose due to the disaster can be recontributed to the plan. In addition, the Act contains rules that liberalize plan loans to impacted participants. The overall loan limits are increased to the lesser of: (1) $100,000 (reduced in the event of a prior outstanding loan within the last twelve months) or (2) the greater of $10,000 or the participant’s vested benefit. Similarly, a one-year extension on loan repayments is available to impacted participants.
This section is effective for disasters occurring on or after January 26, 2021.
Revision of Prohibited Transaction Rules for De Minimis Participation Incentives
Effective beginning with the 2023 plan year, Section 113 of the Act revises the prohibited transaction rules under ERISA and the Code to allow employers to provide de minimis financial incentives not to exceed $250 in value, such as low value gift cards, to encourage participants to contribute to their 401(k) or 403(b) plans. Any incentives provided cannot be paid for with plan assets. Incentives may only be made available to employees for whom no election to contribute is already in effect, but an incentive may be provided to an employee in installments that require the employee to continue contributing to the plan to receive the full incentive, even if those installments are paid over more than one plan year. The Code rules that apply to a plan contribution do not apply to a de minimis financial incentive and a de minimis financial incentive is not subject to nondiscrimination testing or the contribution tax deduction rules. However, a de minimis financial incentive must be included in the recipient employee’s gross income and wages and is subject to applicable withholding and reporting requirements for employment tax purposes, unless the incentive satisfies an exception under the Code.
Self–Certification of Hardship
In-service hardship distributions are generally permitted from 401(k) and 403(b) plans if the participant can establish that he or she has experienced an immediate and heavy financial need and that the amount of the distribution does not exceed the amount of the need. The Act provides that beginning in 2023, participants can self-certify that they have had an event that constitutes a hardship, that the amount does not exceed the amount needed for the hardship and that there are no other available sources upon which the participant can draw to fund the hardship-related expenses. This provision provides statutory approval for a common existing practice of relying on participant certifications. It remains to be seen whether the IRS will continue to expect plans to adhere to certain safeguards it had previously called for in connection with the self-certification process.
Eliminating Intermittent Notice Requirements for Unenrolled Participants
In the past, plans were required to issue multiple notices to all eligible participants, regardless of whether or not they elect to participate. The Act eliminates most notices for individuals who are eligible to participate in defined contribution plans but have not enrolled, as long as those individuals have received a copy of the summary plan description and other required notices related to initial eligibility. However, plans are still required to provide an annual reminder of eligibility and any other required documents that such individuals may request. This section is effective for plan years beginning after December 31, 2022.
Early Distribution for Individuals with Terminal Illness
The Act creates an exception to the 10% early withdrawal tax on distributions made to a terminally ill individual. However, unlike some of the other new distribution provisions, this section of the Act did not create a separate access right. A terminally ill individual is someone who has been certified by a physician as having an illness or physical condition that can be reasonably expected to result in death 84 months or less after the date of the physician’s certification. That certification must be made on or before the date the individual takes a terminally ill individual distribution, and meet certain content requirements. A plan administrator may not rely on a self-certification from an individual, even if that individual is a physician. Generally, there is no limit on the amount an employee may receive as a terminally ill individual distribution and any portion of the distribution may be repaid to a plan or IRA under similar rules to those for qualified birth or adoption distributions which are described below.
If a plan does not provide for terminally ill individual distributions, participants may nonetheless treat otherwise-permissible in-service distributions (e.g., an age 59½ withdrawal) as terminally ill individual distributions on their tax returns to claim the tax benefits. This section is effective for distributions made after December 29, 2022.
Required Minimum Distribution Failure Penalty Tax Reduced
Prior to SECURE 2.0, failures by an individual to take minimum distributions were subject to a 50% excise tax. Under the Act, the tax is reduced to 25%. If a failure to take a required minimum distribution is corrected within the “correction window,” the tax is reduced to 10%. The correction window begins on the date the tax is imposed on the distribution and ends on the earlier of the date the tax is assessed, the date a notice of deficiency is mailed, or the end of the second tax year beginning after the tax is imposed. This provision applies to tax years beginning after December 29, 2022.
Repayment of Qualified Birth or Adoption Distribution Limitation
The SECURE Act allowed for recontribution of qualified birth or adoption distributions (“QBADs”) to a retirement plan at any time. However, unless the participant repaid the amounts during the period when the tax year of the distribution was still “open”, there could be no refund from the IRS of prior tax payments associated with the distribution. A number of plan sponsors also found the open-ended repayment right to be cause for administrative concern, and declined to offer the feature.
The Act amends the QBAD provision to restrict the recontribution period to three years (which is generally the time period during which the tax year of the distribution would remain open). This change is effective for distributions made after the December 29, 2022, and requires any repayment of distributions prior to that date to be completed before January 1, 2026.
Changes Effective in 2024
Catch-up Contribution Roth Requirement (Effective Date Delayed Until 2026)
Section 603 of the Act amends Section 414(v) of the Code, covering catch-up contributions for participants over age 50. Under the pre-SECURE 2.0 rule, catch-up contributions could be made on a Roth or pre-tax basis. Under the SECURE 2.0 rule, originally scheduled to take effect in 2024, participants in a defined contribution plan (other than a SIMPLE plan) who are eligible for a catch-up contribution and who have FICA wages in excess of $145,000 (indexed) or more for the previous year may only make catch-up contributions on a Roth basis. The IRS has granted a two-year “administrative transition period” extending from January 1, 2024 until January 1, 2026 with respect to the SECURE 2.0 rule. During the two-year administrative transition period, the IRS will regard catch-up contributions made by participants who have wages above the applicable limit for the previous year as satisfying the SECURE 2.0 rule, even if those catch-up contributions are not made on a Roth basis. Additionally, during this period, the IRS will regard a plan that does not require Roth catch-up contributions for participants with FICA wages above the threshold as nonetheless satisfying the SECURE 2.0 rule. Put simply, the deadline to comply with the SECURE 2.0 rule is effectively extended until 2026.
In an obvious drafting error, this section of the Act inadvertently deleted the general provision that authorizes catch-up contributions. However, guidance issued by the IRS has confirmed that participants may continue to make catch-up contributions despite the drafting error.
Matching Contributions on Student Loan Payments
To mitigate the adverse effect on retirement savings of the burdensome levels of student loan debt carried by many employees, starting in 2024, 401(k), 403(b), governmental 457(b) and SIMPLE IRA plans that provide matching contributions may treat a “qualified student loan payment” as an elective deferral for purposes of calculating the amount of matching contributions to be made to a given employee. A “qualified student loan payment” is defined as “a payment made by an employee on a qualified education loan.” In order to be eligible for the match, the employee must certify to the employer annually that he or she is making payments on a qualifying loan. The amount of the loan repayment that can be taken into account for purposes of calculating matching contributions is limited to the annual dollar limit on deferrals (reduced by any actual deferrals made by the participant).
Plan sponsors offering this option must provide matching on loan repayments at the same rate and on the same vesting schedule as matching contributions for elective deferrals under the plan. However, the IRS is authorized to issue guidance that would allow different timing rules for the remittance of student loan matching amounts. The match can only be provided to participants eligible for matching contributions on elective deferrals, and all employees eligible for elective deferrals must be eligible to receive the loan repayment match if this feature is offered.
For purposes of nondiscrimination testing, the Act contains provisions that allow participants that receive a student loan match to have their rate of elective deferrals tested separately. Matching contributions calculated based on student loan payments are tested on a combined basis with matching contributions on elective deferrals, and are treated as matching contributions for purposes of the “safe harbor” rules.
Emergency Savings Account
Starting in 2024, sponsors of defined contribution plans may choose to offer eligible employees, other than highly compensated employees, Pension-Linked Emergency Savings Accounts (“PLESAs”) to assist with short term savings. A PLESA is funded entirely by employee contributions on a Roth basis and the account balance is capped at $2,500 (or a lesser amount specified by the employer). The DOL indicated in a 2024 Frequently Asked Questions document that an employer can opt to have its plan disregard investment earnings when determining whether an employee’s PLESA is at the maximum and is closed to new contributions until the account balance decreases, or can opt to have the plan take earnings into account for this purpose.
If a PLESA feature is offered, employers must allow employees to withdraw from the account penalty-free at least once a month, must allow at least four fee-free withdrawals in the plan year, and may not set a minimum account balance for the PLESA. Contributions cannot be capped, other than in connection with enforcement of the account balance limitation, and employees must be permitted to make contributions in specified dollar amounts, although a plan can require that the dollar amounts be in whole-dollar increments and can also offer participants the ability to calculate contributions as a percentage of pay if they prefer. Participants are not required to demonstrate or certify the existence of an emergency before taking a distribution. Because the money is contributed on a Roth basis, and distributions from the account are considered qualified distributions, earnings on the account are also distributed tax-free. The DOL confirmed in its FAQ that a plan can impose reasonable charges on distributions in excess of four per year, and can also impose other fees and costs in keeping with ERISA’s normal standards.
Plan sponsors may also elect to have eligible employees automatically enrolled in the account at a rate of up to 3% with proper notice in advance of the enrollment date. Plans that offer matching contributions on elective deferrals must also provide a match at the same rate for amounts contributed to the PLESA, but not in excess of the maximum permissible PLESA account balance limit for the year. Matching contributions are made first on non-PLESA contributions, and are only made on PLESA contributions if the non-PLESA elective deferrals are insufficient for a participant to receive the maximum match. The matching contributions applicable to emergency savings are treated as pre-tax dollars and deposited in the participant’s retirement account.
A plan that offers PLESAs is permitted to employ reasonable procedures to limit the frequency or amount of matching contributions with respect to contributions to the PLESA, but solely to the extent necessary to prevent manipulation of the account. IRS Notice 2024-22 provided initial guidance regarding anti-abuse rules related to PLESAs. Of note, the guidance explained that a reasonable anti-abuse procedure is one that balances the interests of participants in using the PLESA for its intended purpose with the interests of plan sponsors in preventing manipulation of the plan’s matching contribution rules. Unreasonable procedures include: i) forfeiture of matching contributions, ii) suspension of participant contributions to the PLESA, and iii) suspension of matching contributions on participant contributions to the underlying plan. The IRS noted that the Code requires that matching contributions first be attributed to elective deferrals other than PLESA contributions, imposes a limit on annual matching contributions to a PLESA, and allows withdrawals to be limited to once per month, and that an employer might conclude that these features are sufficient to prevent abuse.
The DOL’s FAQ clarifies some other aspects of permissible PLESA design, and also discusses permissible PLESA investments. The Act “requires that PLESA contributions be held as cash, in an interest-bearing deposit account, or in an investment product designed to “maintain over the term of the investment the dollar value that is equal to the amount invested in the product and preserve principal and provide a reasonable rate of return, whether or not such return is guaranteed, consistent with the need for liquidity,” and that the investment product be offered by a regulated financial institution. While the DOL’s FAQ indicates that any investment that complies with these parameters and is otherwise permissible under ERISA is acceptable, it did warn that “An overall objective of the statute and the predicate for the ERISA [S]ection 404(c) relief set forth in SECURE 2.0 [S]ection 127(d) is capital preservation and liquidity consistent with immediate access to savings to respond to unexpected financial needs. Investment products that contain liquidity constraints, such as surrender charges at the participant or plan level, are generally incompatible with this objective.”
There are also new notice and reporting requirements applicable to these accounts, although the DOL is still considering how best to revise Form 5500 to accommodate PLESA data gathering. PLESAs do not need to be included in the plan’s regular benefit statements if the PLESA-specific disclosure requirements are met.
Penalty-Free Withdrawals for Emergency Expenses
The Act separately expands the exceptions to the 10% tax on early distributions from tax-preferred retirement accounts before age 59½ to include certain distributions used for emergency expenses that are unforeseeable or immediate financial needs relating to personal or family emergency expenses. Plans are permitted but not required to add this access right and plans which opt to do so can rely on the participant’s self-certification of the existence of a qualifying emergency. One distribution of up to $1,000 (or 100% of the account balance in excess of $1,000 if less) is permissible per year, and a taxpayer has the option to repay the distribution within three years. No further emergency distributions are permissible during the three-year repayment period unless such repayment is made, or unless the individual has made new contributions to the plan or IRA at least equal to the portion of the withdrawal that has not been repaid. This provision is effective for distributions made after December 31, 2023.
Cash-out Limit Raised to $7,000
Previously, terminated participants with account balances equal to or less than $5,000 could have their account balances distributed in full to an IRA (or in the case of balances of $1,000 or less) without their consent. SECURE 2.0 raises the cash-out limit to $7,000, effective for distributions in 2024 and later years.
Penalty-Free Domestic Abuse Withdrawals
Section 314 of the Act amends Section 72(t) of the Code to allow for penalty-free withdrawals for domestic abuse victims participating in certain defined contribution plans (generally those plans that are not subject to the qualified joint and survivor or qualified pre-retirement survivor rules). Domestic abuse victims can withdraw up to the lesser of $10,000 (indexed) or 50% of the participant’s vested account balance. The withdrawal can take place up to one year after any date the victim experiences domestic abuse. The withdrawal may be repaid to the issuing plan or an IRA within three years, but is not treated as an eligible rollover distribution when issued and hence is not subject to 20% tax withholding. To take the withdrawal, victims self-certify that they are victims of domestic abuse.
Top-Heavy Rules for Defined Contribution Plans Covering Excludable Employees
Under current law, plans that are deemed “top-heavy” (as a general matter, plans which have more than 60% of benefits attributable to certain owners and officers) are potentially required to provide employees with minimum contributions and accelerated vesting. Other nondiscrimination tests allow an employer to test “otherwise excludable” employees (i.e., those who are under age 21 and have less than 1 year of service) separately, but this has not previously been an option under the top-heavy rules. The Act now allows defined contribution plans to exclude “otherwise excludable” participants when determining whether a top-heavy plan has satisfied the minimum contribution requirements. This makes it easier for sponsors of plans which are top-heavy to permit “otherwise excludable” employees to make elective deferrals without necessarily committing to providing those employees with top-heavy minimum contributions. This section is effective for plan years beginning after December 31, 2023.
Roth Plan Distribution Rules
Prior to the Act, no lifetime required minimum distributions were required for Roth IRAs, but such distributions were required with respect to Roth accounts under qualified plans. The Act aligns the required minimum distribution rules for in-plan Roth amounts with the rules that were already applicable to Roth IRAs. This change is effective for taxable years beginning after December 31, 2023. However, it does not apply to distributions which are required with respect to years beginning before January 1, 2024, meaning that individuals who have a “required beginning date” of April 1, 2024 will need to calculate that initial distribution based on both Roth and non-Roth balances.
Changes Effective in 2025
Automatic Enrollment and Escalation Required for New Plans
Effective in 2025, newly established 401(k) and 403(b) plans with a deferral feature are required to include an automatic enrollment and escalation feature in their plan, subject to limited exceptions. All 401(k) and 403(b) plans in existence prior to December 29, 2022, are excluded from this requirement. The Act also makes exceptions for businesses with 10 or fewer employees, new businesses that have been in existence less than 3 years (including any predecessor employers), church plans, SIMPLE Plans, and governmental plans.
Though the requirement does not take effect until 2025, newly established plans should account for this requirement and the potential additional costs that may be associated with the auto-enroll and auto-escalation features once they are required. In addition, an employer that has joined or is considering joining a multiple or pooled employer plan on or after December 29, 2022 should bear in mind that, depending on the circumstances, it may become subject to this requirement when it joins the plan, and review the rules applicable to its situation with counsel.
For plans required to implement auto-enrollment and escalation, eligible employees would be enrolled at a minimum of 3% compensation (but not more than 10%), increasing 1% as of the start of each plan year following one year of participation up to at least 10%, unless the employee affirmatively opts out of the arrangement. For safe harbor plans, the maximum auto-escalation amount has been raised to 15%, for non-safe harbor plans, the maximum is 10% for plan years prior to 2025, and 15% for plan years after 2025. The plans must also allow permissible withdrawals within 90 days of the initial contribution and use a qualified default investment alternative for investments if the participant does not affirmatively elect his or her own investments.
IRS Notice 2024-2 provides clarity on the “newly established” plan rules in the context of mergers and spinoffs, addressing the following scenarios:
In the case of the merger of two single employer plans, each of which includes a pre-enactment qualified cash or deferred arrangement (CODA), the treatment of the qualified CODA included in the ongoing plan as a pre-enactment qualified CODA is unaffected by the merger.
If a plan that includes a qualified CODA that is not a pre-enactment qualified CODA is merged with a plan that includes a pre-enactment qualified CODA, the qualified CODA included in the ongoing plan will generally not be treated as a pre-enactment qualified CODA after the merger.
However, if, in connection with a business acquisition that meets certain requirements, a single employer plan that includes a qualified CODA that is not a pre-enactment qualified CODA is merged with another single employer plan that includes a pre-enactment qualified CODA, and the plan that includes the pre-enactment qualified CODA is designated as the ongoing plan, then the qualified CODA included in the ongoing plan continues to be treated as a pre-enactment qualified CODA after the merger, provided that the merger occurs by the end of the first plan year beginning after the year of the transaction.
If an employer with a plan that is NOT a pre-enactment qualified CODA merges its plan into a multiple-employer or pooled-employer plan which IS a pre-enactment qualified CODA, only the merging employer plan is considered a post-enactment qualified CODA; the rest of the plan maintains its pre-enactment exemption.
If a plan that includes a qualified CODA is spun-off from a plan that includes a pre-enactment qualified CODA, generally the qualified CODA included in the new spun-off plan is also treated as a pre-enactment qualified CODA.
Increased Catch-up Contribution for Participants Ages 60-63
Under current law, individuals 50 or older are permitted to make a catch-up contribution subject to IRS limits ($7,500 for 2024). Effective for 2025, Section 109 of the Act adds an additional tier of catch-up contributions for participants ages 60 to 63, as long as the participant does not turn 64 in the taxable year in question. For 2025, the increased limit for individuals ages 60-63 is the greater of $10,000 (indexed) or 150% of the regular catch-up limit for that year.
Reducing Barriers to Coverage for Part-Time Workers
The SECURE Act provided that 401(k) plans must permit an employee who has worked at least 500 hours per year with the employer for at least three consecutive years to make elective deferrals. SECURE 2.0 modifies the original SECURE Act rules to reduce the service requirement from three years to two years. Consequently, a 401(k) plan must permit an employee to make elective deferrals if the employee has worked at least 500 hours per year with the employer for at least two consecutive years. (However, plans are still allowed to exclude participants who have not attained age 21.)
For individuals who become participants as a result of these rules, each year (on or after January 1, 2021) during which they complete 500 hours will also count as a year of vesting service. These rules are also applicable to 403(b) plans that are subject to ERISA, and are effective for plan years beginning after December 31, 2024.
On November 27, 2023, the IRS issued proposed regulations providing guidance with respect to long-term, part-time employees. Under the proposal, the term “long-term, part-time employee” means an employee who is eligible to participate in a plan solely by reason of having: 1) completed two consecutive 12- month periods (three consecutive 12-month periods, for plan years beginning in 2024) during each of which the employee is credited with at least 500 hours of service, and 2) reached age 21 by the close of the last of the 12-month periods. However, the category of “long-term, part-time employees” does not include: 1) certain employees who are covered by a collective bargaining agreement, 2) employees who are nonresident aliens and who receive no earned income from the employer that constitutes income from sources within the United States, or 3) any other employees described in Section 410(b)(3) of the Code.
If an employee becomes eligible to participate as a long-term, part-time employee, then the employee’s eligibility to participate as a long-term, part-time employee would not be affected by the employee’s subsequent failure to be credited with at least 500 hours of service in a later 12-month period. Similarly, if a former employee who was eligible to participate as a long-term, part-time employee is rehired, then the 12-month periods during which the employee previously was credited with at least 500 hours of service with an employer maintaining the plan must be taken into account for purposes of determining whether the rehired employee is eligible to participate as a long-term, part-time employee.
This proposed regulation would permit an employer to elect to exclude long-term, part-time employees (but not former long-term, part-time employees) for purposes of determining whether a plan satisfies certain nondiscrimination rules. An employer may also elect to exclude all long-term, part-time employees from the application of the top-heavy vesting and benefit requirements.
Changes Effective in 2026 and Later
Retirement Plan Distributions for Long-Term Care Contracts
The Act allows retirement plans to make in-service distributions for certain long-term care insurance contracts covering the participant or his or her spouse. The maximum amount is the lesser of: (1) the cost of the coverage; (2) 10% of the vested account balance; or (3) $2,500 per year to pay for premiums of certain long-term care insurance contracts. Such distributions are exempt from the 10% tax on early distributions. In order to qualify for early distribution and waiver of the 10% tax, a policy must provide for “high quality coverage” as defined in the Act. This section is effective three years after December 29, 2022.
Participant Saver’s Credit Treated as Government Matching Contribution
Effective for 2027, the “Saver’s Credit,” a tax credit provided as a match for “qualified retirement savings,” will take the form of a pre-tax matching contribution to a designated retirement plan or individual retirement account in lieu of the previous system of allowing the recipient to apply the amount of the credit against the recipient’s tax liability. The “match” is issued to a retirement plan or IRA designated by the individual after the individual claims the credit on his or her return. The maximum amount of the credit remains at $1,000 for individuals making at least a $2,000 retirement contribution, with the percentage of the credit available to a given individual adjusted based on the individual’s modified adjusted gross income (“MAGI”). The credit phases out between $20,500 to $35,500 for single filers, $41,000 and $71,000 for taxpayers filing a joint return, and $30,750 to $53,250 for a head of household. Credit amounts under $100 will be available as a refundable tax credit rather than being required to be deposited as a match.
Plans and IRA custodians can choose whether to accept the pre-tax contributions from the IRS. Though they are pre-tax amounts, Saver’s Credit funds placed into the plan do not count toward future Saver’s Credit matches, or employer elective deferral matches. In addition, Saver’s Credit funds are not available for hardship distributions, do not count toward applicable limits, or for purposes of nondiscrimination testing. For participants eligible for the credit that have a plan or IRA custodian that chooses not to accept Saver’s Match Funds, the credit funds will remain with the IRS and will be treated similar to a tax overpayment, accruing interest until they are placed in an eligible plan or IRA.
Changes Impacting Correction of Compliance Failures
Expansion of Employee Plans Compliance Resolution System
The IRS’s Employee Plans Compliance Resolution System (“EPCRS”) includes three programs: the Self Correction Program (“SCP”), the Voluntary Correction Program (“VCP”), and the Audit Closing Agreement Program (“ACAP”). The only program that allows self-correction without IRS approval is SCP. Prior to the Act, SCP was only available for qualified plans and 403(b) plans and was limited in terms of the compliance failures that were eligible. For example, significant failures generally had to be corrected by the end of the third plan year following the initial error, and corrections by amendment were limited to certain types of situations. Similarly, certain loan failures have historically been ineligible for SCP.
The Act expands self-correction under EPCRS to cover any “eligible inadvertent failure” regardless of the timing or nature of the failure (including loan failures and failures related to IRAs). This provision took effect as of December 29, 2022. “Eligible inadvertent failure” is defined to include any type of failure that occurs despite compliance practices and procedures that satisfy the EPCRS standards for self-correction (as in effect in Revenue Procedure 2021-30 (or successor guidance)), except where failures are egregious, relate to the diversion or misuse of plan assets, or relate to an abusive tax avoidance transaction. In addition, self-correction is also not available if the issue is identified by the IRS before corrective actions have been initiated or if the self-correction is unreasonably delayed. Currently, certain errors considered “insignificant” may be self-corrected even during an IRS examination, so in that respect, the language of the Act may result in a narrowing of the scope of self-correction. In Notice 2023-43, the IRS clarified that pending the revision of EPCRS guidance, such insignificant errors may continue to be self-corrected amid an IRS examination. The Secretary is required to revise EPCRS guidance for the changes prescribed in the Act no later than two years from the December 29, 2022. Notice 2023-43 provides some clarity as to when, and how, a plan sponsor may self-correct an eligible inadvertent failure before EPCRS guidance is updated. However, Notice 2023-43 is only applicable for self-correction prior to the issuance of revised EPCRS guidance. We must wait to see whether similar conditions will be imposed on self-correction under the revised EPCRS guidance. Regardless, plan administrators should review plan operations frequently, and promptly initiate any corrective action that may be appropriate.
Retroactive Amendments to Increase Plan Benefits Permitted
Generally, a discretionary amendment to a qualified plan must be adopted no later than the end of the plan year in which it is effective. The Act provides that beginning in 2024, any permissible amendment that increases benefit accruals (other than matching contributions) can be adopted after the close of the plan year, as long as it is adopted prior to the due date of employer’s the tax return (including extensions) for the year containing the effective date of the amendment.
Optional Recovery of Plan Overpayments
Historically, in the event that a qualified plan made a mistaken payment, the plan fiduciaries generally were required to restore the plan to the position that it would have been in had no error occurred. This required that either the plan sponsor, the plan fiduciary, a third party such as a recordkeeper, or the participant remit the amount of the overpayment plus lost investment earnings back to the plan (or that the participant’s future benefit be reduced). For participants, this often could result in a severe financial hardship.
Effective in 2023, plan fiduciaries were granted substantially more discretion to forego recovery of overpayment from participants and beneficiaries who receive inadvertent benefit overpayments, rather than, as had often been the case, being obligated to seek repayment unless the employer or third party has made the plan whole. In fact, the new rules significantly restrict the ability of fiduciaries to seek repayment in certain circumstances.
In general, the new rules allowing (or requiring) waiver of recovery only apply to “inadvertent” overpayments, but this is a broadly defined category that should cover most good-faith payments from a plan maintaining appropriate safeguards against benefit overpayments. If the payment was inadvertent, no collection need be sought against the recipient, and in some cases, collection cannot be sought.
Plan fiduciaries also have more flexibility to decline to seek reimbursement for overpayments from the plan sponsor or other parties. In the case of defined contribution plans, plan fiduciaries may choose not to recover from contributing employers so long as participants’ and beneficiaries’ accounts are not adversely affected by the overpayment and failure to seek repayment. For example, if Participant A received too large a contribution and as a result Participant B received too small a contribution, Participant B would need to be made whole, either by a corrective contribution or from another permissible source (such as the plan’s forfeiture account). For defined benefit plans, overpayments need not be recovered from the plan sponsor or another person as long as the plan fiduciary determines that not recovering the overpayment would materially affect the ability of the plan to pay payments due to other participants and beneficiaries.
Overpayments are not required to be recovered from plan fiduciaries as long as the overpayment was not a result of a breach of fiduciary duty. The Act further clarifies that if policies and procedures exist to prevent overpayment and the relevant fiduciaries have followed such procedures, then no fiduciary breach will be deemed to exist merely as a result of the overpayment. However, if an overpayment does result from a fiduciary breach, the breaching fiduciary remains liable. For example, if a fiduciary knowingly directed payment of a non-vested benefit, that fiduciary would be responsible for making the plan whole.
A plan fiduciary may still seek recovery of an inadvertent overpayment, subject to certain new restrictions. Most notably, fiduciaries are limited in their ability to seek recovery unless the recipient participant or beneficiary was “culpable” for the mistaken payment (e.g., misrepresentations or omissions by the participant led to the overpayment, or the participant was aware that the payment was materially in excess of the correct amount). The Act does not seem to require any wrongful intent on the part of the participant or beneficiary in order for the individual to be “culpable,” and hopefully guidance will be issued to better define culpability. Absent culpability, no interest or other fees may be charged.
In addition, in the absence of culpability, for non-decreasing annuities, (i) any reduction of future benefit payments must cease when the amount of the overpayment has been recovered, (ii) the annual reduction cannot exceed 10% of the full amount of the overpayment, and (iii) the periodic benefit also cannot be reduced to less than 90% of the amount that should have been paid but for the error, and these dollar limitations also apply to installment payments that are negotiated with the participant to repay the overpayment. The Act also directs the DOL to establish requirements for overpayments that arose from distributions made in a form other than a non-decreasing annuity. In any event, recovery in the absence of culpability is generally only permitted if the participant receives written notice of the overpayment within three years of the initial payment date, and plans are not permitted to recover overpayments to a participant from beneficiaries of participants. The Act also makes it clear that participants have a right under the claims procedures of the plan to dispute recovery of overpayment amounts, and this right applies even if a participant is considered culpable for the overpayment.
A significant change to overpayments under the Act is that inadvertent overpayments that were distributed are now treated as eligible rollover distributions if the original distribution would have been eligible for rollover absent the overpayment, at least in circumstances where the plan is not seeking to recover the overpayment. Thus, if the original distribution included an inadvertent overpayment and was otherwise properly reported as rollover eligible, it is no longer necessary to notify participants that the overpayment portion of that distribution is not eligible for rollover. This rollover rule applies regardless of any culpability on the part of the participant or beneficiary. However, it is still possible in appropriate circumstances to seek recoupment from the rollover plan or IRA. Also, any overpayments in excess of the Code Section 415 or 401(a)(17) limits would not have been eligible for rollover, and it may be necessary to recover any amounts that exceeded those limits to maintain the paying plan’s qualification.
Plan administrators should revisit their plan documents and policies and procedures to adjust for the new limitations on overpayment recovered from a participant, including the three-year rule, the right to bring a claim under the plan to contest an overpayment recovery, the rules for rolled over overpayments, and the non-decreasing annuity recovery limitations, if applicable.
Safe Harbor for Corrections of Employee Elective Deferral Failures
Employers that adopt a retirement plan with automatic enrollment and/or automatic escalation features can be subject to significant liability if they fail to properly implement these automatic provisions. IRS remedial guidance that was scheduled to expire December 31, 2023 allowed a cost-effective correction if timely notice was provided to the impacted participants and any lost matching contributions were contributed to the plan. The Act creates a permanent statutory fix for these errors and expands the rule to include deferrals missed due to the improper exclusion of the participant (although it does not mention deferrals missed from erroneous administration of the participant’s election). The Act requires that the automatic deferral or escalation commence before the earlier of: (1) 9½ months after the end of the plan year in which the failure occurred; or (2) the first pay period after the end of the month following the month in which the participant notifies the plan of the failure. Missed matching contributions plus lost earnings must also be contributed to the plan, and the notice required under IRS guidance must be timely provided to the participant. Additionally, the Act allows this rule to be used even if the participant has terminated employment. This section of the Act is effective generally for errors for which the required correction date is after December 31, 2023. At least for now, the other correction methods under EPCRS remain available for missed deferrals that are not covered by this rule.
IRS Notice 2024-2 clarified that a plan sponsor is permitted to correct an implementation error with respect to both active and terminated employees by following the procedures laid out in EPCRS, except that the notice for terminated participants does not have to include i) a statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or that appropriate deductions and contributions will begin shortly), or ii) an explanation that the affected terminated employee may elect an increased deferral percentage to make up for the missed deferral opportunity.
Notice 2024-2 also clarified that a corrective allocation of matching contributions (adjusted for earnings) must be made within a reasonable period, as determined applying all relevant facts and circumstances, after the date on which the correct elective deferrals begin (or, with respect to a terminated employee, would have begun but for the termination of employment). Nonetheless, a corrective allocation of matching contributions that is made by the last day of the sixth month following the month in which correct elective deferrals begin (or, with respect to a terminated employee, would have begun but for the termination of employment) will be treated as having been made within a reasonable period. With respect to an automatic contribution error that begins on or before December 31, 2023, a corrective allocation of matching contributions made by the end of the third plan year following the year in which the error occurred will be treated as having been made within a reasonable period.
Changes Specific to 403(b) Plans
Enhancement of Investment Options for 403(b) Plans
Section 128 of the Act allows 403(b) Plans to invest in collective investment trusts (“CITs”). CITs are an investment option frequently used by larger 401(a) plans that were previously not allowed for 403(b) plans under the Code. Adding this option will provide 403(b) participants with a broader range of investment options at potentially lower costs to participants compared to annuity contracts and mutual funds. Section 128 is effective following December 29, 2022, but additional changes to securities law are needed before this provision can take effect.
Multiple Employer 403(b) Plans
The Act allows 403(b) plans to participate in multiple employer plans (“MEPs”) and pooled employer plans (“PEPs”). Additionally, the section includes relief from the “one bad apple” rule that had previously penalized the whole plan for the misconduct of a single participating employer. Under the Act, the failure of one employer in the MEP or PEP to provide information or take action that is needed to satisfy the qualification requirements under the Code will not affect the tax treatment of employees of compliant employers. This section is effective for plan years beginning after December 31, 2022.
Hardship Withdrawal Rules for 403(b) Plans
Prior to the Act, hardship withdrawal availability rules for 401(k) and 403(b) plans differed in certain ways. For example, the SECURE Act removed the prohibition on hardship withdrawals from investment earnings on elective deferrals, qualified non-elective contributions, and qualified matching contributions for 401(k) plans, but did not make corresponding changes for 403(b) plans. SECURE 2.0 conforms the rules for 403(b) plans to align with the rules applicable to 401(k) plans. This section is effective for plan years beginning after December 31, 2023.
Retiree Health Benefits from Pension Plan Assets
An employer may use assets from an overfunded pension plan to provide retiree health and life insurance benefits. These rules were set to expire in 2025. The Act extends the end date to December 31, 2032.
Termination of PBGC Variable Rate Premium Indexing
Defined benefit plans are required to pay premiums to the Pension Benefit Guaranty Corporation (“PBGC”). Such premiums can consist of both a fixed, per-participant premium and a variable premium that is based on the plan’s funding level. Both premiums have historically been indexed. The Act removes the indexing related to the variable rate premium and replaces it with a flat rate of $52 for every $1,000 of unfunded vested benefits. This section is effective as of December 29, 2022.
Establishment of Retirement Savings Lost and Found
Under Section 303 of the Act, the DOL is to establish an online “Lost and Found” database to help participants or beneficiaries recover retirement funds that they had left in prior employers’ plans with which they subsequently lost touch. The tool allows for entry of personal information and, in return, provides plan information in order to allow the searcher to make a claim for benefits.
The portal is expected to be active within two years of December 29, 2022. In addition, plans must submit to the DOL certain new information regarding participants and their benefits.
Auto Portability Providers Exempted Under Code Prohibited Transaction Rules
SECURE 2.0 creates exemption from the prohibited transaction rules in the Code (but not ERISA) for automatic portability providers (“APPs”) completing automatic portability transactions (“APTs”). This aligns with recent trends in legislation relating to APPs, entities that facilitate direct rollover of employer retirement plan funds to an IRA or another employer plan when an employee has terminated employment. In January of 2024, the DOL issued proposed regulations on APTs under SECURE 2.0 to allow APPs to receive small fees in connection with APTs should certain requirements be met.
Eliminating the Penalty on Partial Annuitization
If a tax-preferred retirement account also holds an annuity, current law requires that the account be divided between the portion holding the annuity and the rest of the account for the purposes of applying the required minimum distribution rules. The Act revises the rules to permit the account owner to elect to aggregate distributions from both portions of the account for purposes of satisfying minimum distributions. This change is effective as of December 29, 2022.
New ESOP Rules
Effective beginning in 2028, SECURE 2.0 expands existing rules to allow certain shareholders of S-Corporations to defer the recognition of gains from sale of employer stock to an ESOP if the money is reinvested into “qualified reinvestment property. Also effective for 2028, the definition of “publicly traded” securities is expanded for purposes of the ESOP rules.
Mid-Year Termination of SIMPLE Plan
While we have not generally focused on the provisions related to SIMPLE plans, a common issue that arises in business acquisitions is the current rule that requires that SIMPLE IRAs be maintained for the entire plan year (mid-year terminations are not permitted even in the context of a business transaction). The Act now permits an employer to terminate a SIMPLE IRA mid-year provided that it is replaced with a safe harbor plan. This section is effective for plan years beginning after December 31, 2023. Notice 2024-2 provides some details regarding the process for and consequences of the SIMPLE IRA termination and the operation of the replacement safe harbor plan.
Changes to Qualified Longevity Annuity Contracts (“QLAC”) Rules
Qualified Longevity Annuity Contracts or “QLACs” are a type of annuity used to protect retirees from the risk of outliving their plan benefits. Typically, benefits under a QLAC commence when a participant is older which created technical issues with the required minimum distributions rules. The Act makes several changes that are intended to address those technical issues and encourage the use of QLACs through increases in the amounts that can be allocated to such contracts. Under the current rules, purchasers may only purchase QLAC contracts not to exceed the lesser of 25% of their qualified account balance or $145,000.
The Act requires the Treasury to amend the QLAC rules to remove the percentage limitation, and increase the dollar limit to $200,000, subject to cost-of-living increases in future years. The new set of limitations is effective for QLACs purchased after December 29, 2022.
Deadline for Plan Amendments
Originally, the deadline for plan amendments related to required changes under SECURE 2.0 for most plans was the last day of the first plan year beginning on or after January 1, 2025 (December 31, 2025 for calendar year plans). For governmental plans and applicable collectively bargained plans (a plan maintained pursuant to one or more collective bargaining agreements ratified on or before December 29, 2022), the amendment deadline was the last day of the first plan year beginning on or after January 1, 2027. The Act includes anti-cutback relief for plans amended by the deadline. The Act also granted a conforming extension for amendments related to previous legislation (applicable provisions of the SECURE Act, Section 104 of the Bipartisan American Miners Act, Section 2202 or 2203 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), and Section 302 of the Taxpayer Certainty and Disaster Tax Relief Act.
Notice 2024-2 extended the deadline for IRAs and for qualified plans and 403(b) plans (other than applicable collectively bargained plans and governmental plans) to be amended to reflect the applicable provisions of all of these laws from the end of the plan year beginning on or after January 1, 2025 until December 31, 2026. The new deadline applies to both calendar and non-calendar year plans. For applicable collectively bargained plans, the amendment deadline is December 31, 2028 and for governmental plans the amendment deadline is December 31, 2029.
As always, please feel free to contact a member of the Employee Benefits & Executive Compensation group for more information about the items discussed in this newsletter, or for assistance in other matters.
 Due to a drafting glitch, the RBD age for individuals born in 1959 is unclear. It is expected that this will be clarified by technical correction legislation. A letter from four Congressmen to the IRS confirmed that Congress’ intent was to increase the required minimum distribution age to age 75 for individuals who turn 73 after 2032 (not for individuals who turn 74 after 2032).
 Given the need to secure a loan using the participant’s vested balance, most plans are likely to restrict use of the loan relief, if they allow it at all, to the lesser of 100% of the vested account balance or the $100,000 limit.
 Practitioners are hoping for additional guidance from the IRS about the impact of the SECURE 2.0 rules on plan practices for recouping payments made after a participant’s death and before the plan has been notified of the death and been able to halt benefit payments.