A Secure Retirement for All

Since the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act,” see our discussion of the SECURE Act here) additional retirement legislation has been an ongoing topic of discussion among practitioners, government officials, employers and the community at large.  Finally, on December 29, 2022 (the “Enactment Date”), the SECURE 2.0 Act of 2022 (the “Act”) became law as part of the Consolidated Appropriations Act of 2023. While many of the Act’s changes can be considered enhancements of the SECURE Act, some provisions are new, and result in additions to the Internal Revenue Code of 1986, as amended (the “Code”) and the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) that will change the landscape of retirement savings for years to come.

The provisions of the Act are categorized as follows: (i) Expanding Coverage and Increasing Retirement Savings, (ii) Preservation of Income, (iii) Simplification and Clarification of Retirement Plan Rules, (iv) Technical Amendments, (v) Administrative Provisions, and (vi) Revenue Provisions.  This OnPoint summarizes some of the most significant provisions impacting employer retirement plans and individual retirement accounts (“IRAs”). With more than 90 provisions, the Act will impact almost every type of retirement program.

This OnPoint summarizes some of the most significant provisions impacting employer retirement plans and individual retirement accounts (“IRAs”). With more than 90 provisions, the Act will impact almost every type of retirement program.

(i) Expanding Coverage and Increasing Retirement Savings

• Retirement Plan Automatic Enrollment. Subject to an exception for businesses having 10 or fewer employees and businesses in operation for less than three years, effective January 1, 2025, all new 401(k) and 403(b) plans must automatically enroll eligible employees (subject to an employee opt out) at a contribution level of 3 percent to 10 percent. The employee contribution rate must automatically increase by 1 percent a year until the contribution rate is at least 10 percent, but not more than 15 percent.
• Modification of Small Employer Pension Plan Startup Credit. Under current law, there is a three-year tax credit available for small employers (i.e., fewer than 100 employees) that establish a new retirement plan. The credit is equal to 50 percent of plan administrative costs, with an annual limit of $5,000. For taxable years beginning after December 31, 2022, the Act increases the startup credit to 100 percent of plan administrative cost for employers with up to 50 employees and provides an additional five-year credit for contributions to a defined contribution plan. The additional credit is generally a percentage of the amount contributed by the employer on behalf of its employees, up to no more than $1,000 per employee for employers with 50 or fewer employees. The contribution credit is also available to employers with 51 to 100 employees, but on a reduced basis. For purposes of determining the amount of the contribution credit, contributions for employees with compensation exceeding $100,000 are disregarded.
• Saver’s Match. Under current law, certain individuals who make contributions to IRAs and tax-qualified retirement plans are eligible for a nonrefundable tax credit. For taxable years beginning after December 31, 2026, the Act repeals the credit and replaces it with a federal matching contribution equal to 50 percent of the IRA or retirement plan contributions up to $2,000 per individual. This matching contribution must be deposited into the taxpayer’s IRA or retirement plan and is phased out at certain income levels.
• Multiple Employer 403(b) Plans. The Act will allow 403(b) plans, which are generally sponsored by charities, educational institutions and non-profits, to participate in multiple employer plans and pooled employer plans.  These pooled arrangements tend to be less costly for employers to maintain.
• Increasing the Age for Required Minimum Distributions (“RMDs”). Under current law, RMDs must begin at age 72. Under the Act, the age at which RMDs must begin will increase to age 73 for individuals attaining age 72 after December 31, 2022 and before January 1, 2033, and age 75 for individuals who attain age 74 after December 31, 2032.
• Indexing IRA Catch-Up Limit.  Under current law, the maximum IRA “catch up” contribution for individuals aged 50 and older is $1,000. Effective January 1, 2024, the Act indexes the catch-up amount for inflation.
• Increases in Catch-Up Contributions. Under current law, participants in 401(k) and 403(b) plans who have attained age 50 are permitted to make annual catch-up contributions of up to $7,500. Beginning January 1, 2025, the catch-up contribution limit for participants aged 60-63 will increase to the greater of $10,000 or 150 percent of the regular catch up amount in that year. After 2025, the increased catch-up amount is indexed for inflation.
• Student Loan Payments Treated as Elective Deferrals for Matching Contribution Purposes. The Act provides that 401(k) and 403(b) plans may treat “qualified student loan payments” as elective deferrals for purposes of receiving employer matching contributions. A “qualified student loan payment” is broadly defined as a payment to satisfy any indebtedness incurred by an employee to pay for qualified higher education expenses of the employee. An employer may rely on an employee’s annual certification regarding the amount of the employee’s qualified student loan payments. Plans may adopt this feature for loan payments made in plan years beginning after December 31, 2023.
• Small Financial Incentives for Plan Participation. The Act allows for small financial incentives (e.g., gift cards) to motivate employees to join the employer’s retirement plan. The incentive may not be paid with plan assets and must be of de minimis financial value. This provision is effective for plan years beginning on or after January 1, 2023.
• Emergency Withdrawals. The Act permits one withdrawal per year of up to $1,000 from certain retirement accounts, such as 401(k) plans and IRAs, for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Emergency withdrawals are not subject to the 10 percent early withdrawal penalty. The administrator of such account may rely on the participant’s written self-certification regarding eligibility for such a withdrawal. The participant has the option to repay the withdrawal within three years. However, no additional emergency withdrawals are permitted during the three-year period unless the prior withdrawal has been repaid.  Emergency withdrawals are permissible beginning January 1, 2024.
• Part-time Worker Protection. Under current law, employers are required to permit part-time employees to participate in an employer’s 401(k) plan if those employees worked for the employer for at least 500 hours per year for three consecutive years. For plan years beginning after December 31, 2024, the Act reduces the three-year period to two years and extends this part-time worker rule to 403(b) plans.
• Emergency Savings Accounts. The Act establishes emergency savings accounts (“ESAs”) as a new type of savings vehicle.  For plan years beginning after December 31, 2023, employers may offer ESAs connected to their 401(k) plans and 403(b) plan accounts. ESAs only allow participant contributions and are only available to non-highly compensated employees. Employers may automatically enroll employees into these accounts at no more than three percent of their salary. Employee contributions are capped at $2,500 and are made on an after-tax basis.
• Additional Contributions to SIMPLE Plans. Under current law, employers with 100 or fewer employees may sponsor a SIMPLE plan under which the employer is required to either provide matching contributions equal to 3 percent of each employee’s elective deferrals or make employer contributions to each employee equal to 2 percent of compensation (regardless of whether the employee elects to make elective deferrals). In addition, employee elective deferral contributions are limited to $15,500 (for 2023) and annual catch-up contributions beginning at age 50 are limited to $3,500 (for 2023). For taxable years beginning after December 31, 2023, the Act will: (i) with respect to employers with no more than 25 employees, increase the annual deferral limit and the catch-up contributions by 10 percent compared to the limit that would otherwise apply in the first year the change is effective; (ii) with respect to employers with 26 to 100 employees, permit higher deferral limits if the employer either provides a 4 percent matching contribution or a 3 percent employer contribution; and (iii) permit employers to make additional uniform contributions to each employee, but not to exceed the lesser of 10 percent of compensation or $5,000 (subject to future indexing).
• Starter Plans. Effective for plan years beginning after December 31, 2023, the Act permits an employer that does not sponsor a retirement plan to offer a “starter” 401(k) plan or a safe harbor 403(b) plan. Under such plans, all employees are required to be enrolled (subject to an employee opt out) at an elective deferral rate of 3 percent to 15 percent of compensation.  Annual deferrals are limited to the IRA contribution limit of $6,500 (for 2023) and an additional $1,000 catch-up limit beginning at age 50.
• Increasing 403(b) Plan Investment Options. Under current law, 403(b) plans are generally limited to investing in annuity contracts and publicly traded mutual funds.  Effective as of the Enactment Date, the Act permits 403(b) plans to invest in collective investment trusts. However, we note that this provision does not address aspects of federal securities laws which, while permitting collective trusts to be available to traditional tax-exempt plans, have not permitted investment in collective trusts by 403(b) plans.

(ii) Preservation of Income

• Adding Life Annuities to Defined Contribution Plans. The current RMD rules create a number of barriers for the use of life annuities within a defined contribution plan or IRA. The Act will eliminate many of these barriers and will permit life annuities with features such as period certain guarantees, certain lump sum payments, guaranteed annual increases of less than 5 percent and return of premium death benefits. This provision is effective January 1, 2023.
• Qualified Longevity Annuity Contracts (“QLACs”). QLACs are deferred annuities that begin payment at the end of an individual’s life expectancy and are designed to protect retirees from outliving their retirement savings. Under the current RMD rules, QLACs have limited application. The Act will permit participants of defined contribution plans and IRAs to use up to $200,000 (indexed for inflation) from their account balances to purchase a QLAC and will also permit QLACs with spousal survival benefits. This change is effective immediately, but is subject to further IRS guidance that must be issued within 18 months after the Enactment Date. 

(iii) Simplification and Clarification of Retirement Plan Rules

• Plan Overpayments. Plan fiduciaries have an obligation to recover plan overpayments, even when the overpayment is no fault of the retiree. This can result in a significant hardship for retirees living on a fixed income. The Act will allow plan fiduciaries discretion in deciding not to recoup plan overpayments. In addition, the Act imposes restrictions on the offset of future benefit payments and collection efforts, and requires plan fiduciaries to establish “prudent procedures” to prevent and minimize the overpayment of benefits. This change is effective immediately.
• Reduction in RMD Excise Tax. Effective as of January 1, 2023, the Act reduces the tax penalty for failure to take RMDs from a retirement plan or IRA from 50 percent to 25 percent. The Act further reduces the excise tax to 10 percent if the missed RMD is corrected by the end of the second taxable year after the year in which the RMD should have been made.
• Retirement Lost and Found. The Act requires the Department of Labor (“DOL”) to establish a national online searchable lost and found database that will assist plan participants and beneficiaries in locating lost retirement benefits. Beginning in 2025, plan administrators of both defined benefit and defined contribution plans will be required to provide the DOL with benefit information to be included in the database that missing participants can use to contact their prior plan administrators.
• Cash-Out Amount Increases. Effective January 1, 2024, the Act increases the retirement plan automatic cash out limit from $5,000 to $7,000.
• Expansion of Employee Plans Compliance Resolution System (“EPCRS”). The Act expands the applicability of EPCRS in a number of ways, including allowing more types of errors to be self-corrected and to encompass inadvertent IRA errors. Although this provision is effective as of the Enactment Date, the Internal Revenue Service has two years to update EPCRS and issue applicable guidance.
• IRA Charitable Distributions. The Act expands the IRA charitable distribution provisions to permit a one-time distribution of $50,000 to charities through charitable gift annuities, charitable remainder unitrusts and charitable remainder annuity trusts, effective January 1, 2023. The Act also indexes for inflation the IRA charitable distribution limit of $100,000 effective January 1, 2023.
• Repayment of Birth or Adoption Distributions. Current law permits defined contribution retirement plans and IRAs to allow for limited in-service distributions related to birth or adoption. Such distributions may be repaid at any time. In order to limit repayments of birth or adoption distributions to the period when a participant will be able to seek a refund of taxes paid with respect to such distributions, the Act restricts the recontribution period to three years.
• Employee Self-Certification for Hardship Distributions. Current law permits 401(k) and 403(b) plans to allow hardship distributions on account of an immediate and heavy financial need. Participants generally are required to document the need for a hardship distribution. For plan years beginning after the Enactment Date, the Act permits participants to self-certify without documenting the need for a hardship distribution.
• Domestic Abuse Withdrawals. Effective January 1, 2024, the Act will allow qualified retirement plans (other than defined benefit and money purchase plans) and IRAs to permit participants that self-certify that they (or their child or other family member in their household) have experienced domestic abuse to withdraw the lesser of $10,000 (indexed for inflation) or 50 percent of the participant’s account balance anytime within one year of the self-certification. A domestic abuse withdrawal is not subject to the 10 percent tax on early distributions. In addition, the participant has the opportunity to repay the withdrawal over a three-year period.
• Post-Year-End Amendment to Increase Benefits. Current law generally provides that discretionary plan amendments must be adopted by the last day of the plan year in which the amendment is effective. Effective for plan years beginning after December 31, 2023, the Act will allow discretionary amendments that increase participants’ benefits (other than increasing matching contributions) to be adopted by the due date of the employer’s tax return.
• Reduced Disclosure To Unenrolled Employees. Employees eligible to participate in a retirement plan must generally receive numerous annual notices even if they have not elected to participate in such plan. Provided that an employee received the plan’s summary plan description when first eligible, the Act would permit the plan to eliminate all annual notices required by ERISA and the Code subject to providing one annual reminder notice regarding the employee’s eligibility.
• IRA Prohibited Transactions. If an individual engages in a prohibited transaction with respect to their IRA, the IRA will be disqualified and treated as taxable to the individual. Effective for taxable years beginning after the Enactment Date, the Act clarifies that if an individual has multiple IRAs, only the IRA involved in the prohibited transaction is disqualified.
• Rollover Guidance. The Act requires the IRS to issue model forms that may be used by retirement plans or IRAs receiving or issuing a rollover distribution. The forms are to be released no later than January 1, 2025 and are intended to simplify and standardize the rollover process.
• Roth Distributions. Under current law, lifetime RMDs are not required to be taken by the owner of a Roth IRA, but are required to be taken by a participant with a Roth account in an employer plan. For taxable years beginning after December 31, 2023, the Act eliminates the pre-death distribution requirement for Roth accounts in employer plans.
• Terminal Illness Distributions. Effective for distributions made after the Enactment Date, distributions to a terminally ill individual (as certified by a physician) would not be subject to the 10 percent tax on early distributions.
• Surviving Spouse Election to be Treated as Employee. Effective January 1, 2023, the Act permits a surviving spouse to elect to be treated as the deceased employee for purposes of the required minimum distribution rules applying to qualified retirement plans and IRAs.
• Permanent Rules for Qualified Distributions Related to Federally Declared Disasters. Under current law, a federally declared disaster was typically followed by the federal government issuing specific guidance concerning special distributions with respect to each particular disaster. The Act provides permanent rules regarding qualified distributions related to all federally declared disasters occurring on or after January 26, 2021, permitting distributions of up to $22,000 from retirement plans or IRAs for affected participants. These qualified distributions are not subject to the 10 percent early distribution tax.
• Long-Term Care Distributions. The Act will permit retirement plans to allow distributions of up to $2,500 per year (indexed for inflation) for the purchase of long-term care insurance for the participant or the participant’s spouse. Such distributions will be exempt from the additional 10 percent tax on early distributions. This provision will apply to distributions made three years after the Enactment Date.

(iv) Technical Amendments

• The Act includes three technical and five clerical amendments to the SECURE Act. These changes are effective as if originally included in the SECURE Act.

(v) Administrative Provisions

• The Act allows plan amendments implementing provisions of the Act to be made on or before the last day of the first plan year beginning on or after January 1, 2025, provided the plan operates in accordance with such amendments as of the applicable effective date. 

(vi) Revenue Provisions

• SIMPLE and SEP Roth IRAs. Under current law, SIMPLE IRAs cannot accept Roth contributions and SEPs can only accept employer money and not as Roth contributions. For taxable years beginning after December 31, 2022, SIMPLE IRAs may accept Roth contributions and employers may offer employees the ability to treat employee and employer SEP contributions as Roth contributions.
• 403(b) Plan Hardship Withdrawals. The Act amends the hardship withdrawal rules applicable to 403(b) plans to be consistent with the 401(k) plan hardship withdrawal rules. 
• Catch-up Contributions To Be Roth Contributions. Under current law, catch-up contributions may be made on a pre-tax or Roth basis. The Act provides that effective for plan years beginning after December 31, 2023, catch-up contributions to 401(k) plans and 403(b) plans for employees whose compensation exceeded $145,000 in the immediately preceding tax year must be made as Roth contributions.
• Matching and Nonelective Contributions May Be Made As Roth Contributions. Under current law, employer matching and nonelective contributions made to a 401(k) plan or 403(b) plan must be made on a pre-tax basis. Beginning on the Enactment Date, plans may provide participants with the option of receiving matching or nonelective contributions on a Roth basis. 

The authors would like to thank Kim Lee for her contributions to this OnPoint.