SECURE 2.0 Act of 2022 modifies retirement plan provisions

On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023 into law. This legislation contains the SECURE 2.0 Act of 2022 (the “Act”). The Act includes a number of provisions related to retirement plans that:

  1. expand participant coverage;
  2. help participants preserve income; and 
  3. simplify plan rules and provide administrative procedures. 

This summary includes highlights from the Act, but is not intended to be an exhaustive list.

Expanding participant coverage and increasing retirement savings

Eligible Automatic Contribution Arrangement required for newly established 401(k) and certain 403(b) plans 

New 401(k) and 403(b) plans must automatically enroll eligible participants (who do not opt out) using a 3% minimum and 10% maximum contribution rate. Such plans must also provide for an automatic escalation feature that increases employee contributions by 1% per year up to at least 10% (capped at 15% of compensation). The plan must permit a participant to make withdrawals no later than 90 days after the date of the first contribution. For safe harbor plans, the cap on permissible auto escalation is 15%; for non-safe harbor plans, the cap on permissible auto escalation is 10% prior to 2025; for 2025 and later years, the cap is increased to 15%.

  • Exclusions: This provision does not apply to: (1) 401(k) and 403(b) plans that were adopted on or prior to December 29, 2022; (2) governmental or church plans; (3) SIMPLE 401(k) plans; (4) new businesses (in existence for less than three years); and small employers (normally employs 10 or fewer employees)
  • Effective date: Plan years after December 31, 2024
  • Applicable plans: 401(k) and 403(b)

Designation of a fiduciary for a Pooled Employer Plan (“PEP”)

Modifies the Employee Retirement Income Security Act of 1974, as amended (ERISA) to permit a PEP to designate a named fiduciary (other than a PEP employer) to collect employer contributions provided the fiduciary implements written contribution collection procedures that are reasonable, diligent, and systematic.

  • Effective date: Plan years after December 31, 2022  
  • Applicable plans: 401(k) and 403(b) plans

Extension of Multiple Employer Plans (MEPs) to 403(b) plans

Permits 403(b) plans to be maintained as a MEP, (provided that the MEP is only comprised of either governmental or non-governmental employers). Additionally, 403(b) plans subject to ERISA may maintain a 403(b) pooled employer plan (“PEP”).

  • Effective date: Plan years after December 31, 2022
  • Applicable plans: 403(b) plans

Increase in age for the beginning date of Required Minimum Distributions (RMD)

The required age for an RMD beginning date is increased under the following schedule for participants and spousal beneficiaries of a participant that died prior to reaching the RMD beginning date:

Age Individuals impacted
73 an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033
75 an individual who attains age 74 after December 31, 2032

 

 

 

 

 

  • Effective date: Calendar years after December 31, 2022 
  • Applicable plans: 401(a), 401(k), 403(b), and 457(b) plans and traditional IRAs

Increased catch-up limits at age 60, 61, 62 and 63

Increases age based catch-up limits to the greater of $10,000 or 50 percent more than the regular age 50 catch-up amount in 2025 (as indexed for inflation) for participants who have reached ages 60, 61, 62 and 63.

  • Effective date: Calendar years beginning after December 31, 2024  
  • Applicable plans: 401(k), 403(b), and governmental 457(b) but cannot be used in addition to 457(b) special catch-up  

Age 50+ Catch-up contributions made only as Roth contributions for certain highly paid employees  

If a participant’s wages subject to FICA in the previous year paid by the employer sponsoring the plan were more than $145,000 (subject to annual cost of living adjustments in $5,000 increments), the participant may only contribute the Age 50+ Catch-up as a Roth contribution.

  • Effective date: Tax years after December 31, 2023
  • Applicable plans: 401(k), 403(b) or governmental 457(b) plan

Treatment of student loan payments as elective deferrals for purposes of matching contributions

The definition of a matching contribution may include an employer contribution made to a defined contribution plan on behalf of an employee on account of a qualified student loan payment. 

  • Effective date: Plan years after December 31, 2023
  • Applicable plans: 401(k), 403(b) and governmental 457(b) plans and SIMPLE IRAs

Withdrawal for emergency personal expenses

Plans and traditional IRAs may permit one withdrawal per calendar year up to $1,000 for an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses. This emergency personal expense distribution is exempted from the IRS 10% premature distribution penalty tax. The distribution may be repaid within 3 years and a subsequent distribution cannot be made until the repayment is completed. The plan administrator may rely on a certification by an employee seeking an emergency withdrawal unless the plan administrator has actual knowledge to the contrary.

  • Effective date: Plan years after December 31, 2023
  • Applicable plans: 401(a), 401(k), 403(b), governmental 457(b) plans and traditional IRAs

Exemption for certain automatic portability transactions

Currently, plan sponsors may “cash out” terminated participant balances under $5,000 (which the Act has increased to $7,000) and, unless the participant elects otherwise, rollover cash outs over $1,000 to an established IRA. The Act permits an automatic portability provider (“APP”) to rollover an automatic cash out IRA established with a participant’s prior employer-sponsored retirement plan into a subsequent eligible defined contribution employer-sponsored retirement plan. Requirements: (1) the individual is an active participant in the subsequent plan; (2) the participant was given notice and did not opt out of the transaction; and (3) the APP acknowledges fiduciary status and satisfies certain additional elements. 

  • Effective date: Transactions occurring on or after the date which is twelve (12) months after the date of enactment
  • Applicable plans: 401(a), 401(k), 403(b), and governmental 457(b) plans, SEPs, and SIMPLE plans all with less than 100 employees

Improving coverage for part-time and seasonal workers

Further reduces the minimum eligibility service requirements from three years (set forth in SECURE Act 1.0) to two years. Individuals will now be eligible as of the earlier of (1) one year of service, or (2) the completion of a 24-month period consisting of two consecutive 12-month periods with 500 hours of service and attainment of age 21 by the end of the calendar year. This reduction does not apply to employees subject to collective bargaining or nonresident aliens and the 12-month period beginning before January 1, 2023, is not taken into account.

  • Effective date: Plan years after December 31, 2024
  • Applicable plans: ERISA 401(k) and ERISA 403(b) plans

Emergency savings accounts under defined contribution plans

A defined contribution plan may offer non-highly compensated participants an opportunity to contribute to an emergency savings account up to a maximum of $2,500. Contributions are made via a Roth contribution and the plan sponsor may automatically enroll participants at a maximum of 3% of their eligible compensation. The initial 4 withdrawals per plan year will not be subject to fees or charges and the unused amounts are portable. 

  • Effective date: Plan years after December 31, 2023
  • Applicable plans: 401(k), 403(b), and governmental 457(b) plans

403(b) investment enhancement to permit Collective Investment Trusts (“CIT”)

Generally, 403(b) plans can only invest in annuity contracts and mutual funds. CITs (which many argue are more cost effective) are not an available investment option. The Act made the necessary Internal Revenue Code changes to permit 403(b) plan investments in CIT’s, but the corresponding security law changes were not made (e.g., exemptions from registration).  Accordingly, these changes will need to be made before CITs are a viable option for 403(b) plans. 

Reduction in excise tax on certain accumulations in qualified retirement plans

The Internal Revenue Code currently imposes a 50% excise tax on RMD’s that are not taken in a timely manner.  The Act reduces the excise tax from 50% to 25%.

  • Effective date: Effective for taxable years beginning after the date of enactment.  
  • Applicable plans: 401(a), 401(k), 403(b), and 457(b) plans and traditional and Roth IRAs

Increased dollar amount for a mandatory distribution (“Cashout”)

The dollar amount which a plan may authorize a Cashout of a terminated participant’s vested account without the participant’s consent increases from $5,000 to $7,000.

  • Effective date: Distributions after December 31, 2023
  • Applicable plans: 401(a), 401(k), 403(b), and governmental 457(b) plans

Eliminate the “first day of the month” requirement for 457(b) governmental plans

Currently, 457(b) plan participants must make a deferral election in the month prior to the compensation being paid. The Act eliminates this requirement and aligns the deferral timing with 401(k) and 403(b) plans.  

  • Effective date: Effective for taxable years beginning after the date of enactment
  • Applicable plans: Governmental 457(b) plans

Distribution to private sector firefighters not subject to 10% tax penalty

“Qualified public safety employees” in governmental plans who are age 50 or older have an exemption from the 10% excise tax for early distributions. There is no such exemption for private sector firefighters. The Act creates this exemption for private sector firefighters. 

  • Effective date: Effective for taxable years beginning after the date of enactment. 
  • Applicable plans: 401(a), 401(k) and 403(b) plans (457(b) governmental plans are not subject to the tax).

Separate Top-Heavy testing of Excludable Employees

Currently, separate non-discrimination testing permits employees that are under 21 years of with less than 1 year of service to be excluded from testing (the “Excludible Employees”) since the Internal Revenue Code does not require them to be eligible for plan participation. Separate non-discrimination testing incents plan sponsors to include these Excludable Employees in the plan since their deferral rates will have no impact on non-discrimination tests. The same is not true for Top-Heavy testing. Including the Excludable Employees could cause Top-Heavy Test failures and be expensive for plan sponsors. The Act addresses this discrepancy and permits Excludable Employees to be excluded from top-heavy testing. 

  • Effective date: Plan years after December 31, 2023
  • Applicable plans: 401(a) and 401(k) plans

Timeframe for repaying Qualified Birth or Adoption Distribution (“QBAD”) limited to 3 years

A participant who has taken a QBAD may repay that distribution to an eligible retirement plan accepting rollovers during the three-year period beginning on the day after the date on which the QBAD was received. 

  • Effective date: Plan years after December 31, 2019
  • Applicable plans: 401(a), 401(k), 403(b), and governmental 457(b) plans and traditional IRAs

Reliance on employee’s self-certification of hardship and unforeseeable emergency withdrawals

A plan administrator may rely on an employee certification that a hardship withdrawal is based upon an immediate and heavy financial need, as described in the Treasury regulations, and that the amount requested is no more than is necessary to satisfy the financial need. Similar rules apply to the administrator of a governmental 457(b) plan with respect to unforeseeable emergency withdrawals.  

  • Effective date: Effective for plan years beginning after the date of enactment
  • Applicable plans: 401(k) and 403(b) plans (hardship withdrawals); governmental 457(b) plans (unforeseeable emergency withdrawals)

Penalty-free withdrawal from retirement plans for individual case of domestic abuse

Permits participants that self-certify they experienced domestic abuse to obtain a withdrawal (the lesser of $10,000, indexed for inflation, or 50 percent of the participant’s account). The distribution is not subject to the 10 percent tax on early distributions. Additionally, a participant has the opportunity to repay the withdrawn money from the retirement plan over 3 years and will be refunded for income taxes on money that is repaid.

  • Effective date: Distributions made after December 31, 2023
  • Applicable plans: 401(k) and 403(b) plans (hardship withdrawals); governmental 457(b) plans (unforeseeable emergency withdrawals)

Eliminating unnecessary plan requirements related to unenrolled participants

Provided a participant has received a summary plan description and other documents related to plan eligibility, a plan is not required to provide disclosures or notices to employees who are eligible to participate but have not enrolled in the plan, other than an annual reminder notice of the participant’s eligibility to participate in the plan and applicable deadlines as well as any required documents upon a participant’s request.

  • Effective date: Plan years after December 31, 2022
  • Applicable plans: 401(a), 401(k), 403(b), and 457(b) plans

Clarification of substantially equal periodic payment rule

A substantially equal periodic payment is not subject to a 10% penalty. The Act clarifies that the exception still applies if the amount is rolled over, or exchanged for an annuity that satisfy RMD requirements. 

  • Effective date: Transfers, rollovers, exchanges, and distributions (as applicable) occurring on or after December 31, 2023, and effective for annuity distributions after the enactment date.
  • Applicable plans: 401(a), 401(k), 403(b) plans and traditional IRAs

Roth plan distribution rules

The designated Roth account under a plan is not subject to RMD during the participant’s lifetime.

  • Effective date: Tax years after December 31, 2023
  • Applicable plans: 401(k), 403(b), and governmental 457(b) plans with a designated Roth feature

Surviving spouse election to be treated as employee (for purposes of RMDs)

If a participant dies before his or her required beginning date and designated their spouse as the sole beneficiary, then the spouse may elect to be treated as the participant under the plan for purposes of the RMD distribution period, including application of the Uniform Life Expectancy Table for calculating the spouse’s RMD.  For these purposes, the RMD of a spouse making such an election must begin no earlier than the date that the deceased participant would have attained the RMD beginning age.  The spouse’s election for such treatment is irrevocable, except with the consent of the Secretary of the Treasury.

  • Effective date: Calendar years after December 31, 2023
  • Applicable plans: 401(a), 401(k), 403(b) and 457(b) plans

Special rules for use of retirement funds in connection with qualified federally declared disasters

Permits participants who meet certain criteria to take a distribution up to $22,000 (aggregated across all of a participant’s plan accounts, including IRAs) due to a federal disaster declaration.  Distributions are not subject to the 10% tax penalty and can be amortized over a three-year period.  Amounts distributed prior to the disaster to purchase a home can be recontributed.  The employer is responsible for monitoring the $22,000 limit for each of the plans within its control group.  

  • Effective date: Disasters occurring on or after January 26, 2021
  • Applicable plans: 401(a), 401(k), 403(b), or governmental 457(b) plan or a traditional IRA 

Paper benefit statements in certain cases

Amends ERISA to require that a defined contribution plan provide at least one paper benefit statement to participants annually and one paper benefit statement every three years to participants in a defined benefit plan, unless a participant in either plan type elects otherwise. The Secretary of Labor is directed to update guidance no later than December 31, 2024.

  • Effective date: Plan years after December 31, 2025
  • Applicable plans: ERISA 401(a), ERISA 401(k) and ERISA 403(b) plans.

Safe harbor for corrections of employee elective deferral failures

Currently there is safe harbor guidance for correction of elective deferral issues, but it is slated to expire in 2023. The Act addresses the issue by providing a statutory safe harbor for the correction of a reasonable administrative error involving automatic contribution or automatic escalation.  To meet the safe harbor errors must be corrected prior to 9½ months after the end of the plan year in which the error occurred and is corrected in a manner that is favorable to the participant and consistently applied to similarly situated participants.

  • Effective date: Errors falling within the 9½ month correction period after the end of that plan year after December 31, 2023
  • Applicable plans: 401(k), 403(b), and 457(b) plans and traditional IRAs

Hardship withdrawal rules for 403(b) plans

Currently, 403(b) plan Hardship Distributions are available from limited sources (i.e., only employee contributions without earnings). The Act will conform 403(b) hardship criteria with 401(k) criteria.     

  • Effective date: Plan years after December 31, 2023
  • Applicable plan: 403(b) plans

Optional treatment of employer matching or nonelective contributions as Roth contributions

An employer may designate matching contributions or nonelective contributions as Roth contributions, provided that the participant is fully vested in such Roth employer contributions.  

  • Effective date: Contributions made after the effective date of the Act
  • Applicable plans: 401(k), 403(b) or governmental 457(b) plan

Plan Amendments

Plan amendments to satisfy the Act must be adopted no later than the end of the 2025 plan year for nongovernmental plans, and the end of the 2027 plan year for governmental plans and collectively bargained plans.  The Act also extends the plan amendment deadline for Setting Every Community Up for Retirement Enhancement Act of 2019, the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 to align with the plan amendment deadlines noted above. 

Voya continues to monitor any additional regulatory developments related to the Act that could impact retirement plans.

 

 

Related Items

IRS Circular 230 Disclosure

Any tax discussion contained in this communication was not intended or written to be used and cannot be used by the recipient or any other person, for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person. Any tax discussion contained in this communication was written to support the promotion or marketing of the transactions or matter discussed herein. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

Neither Voya Financial® or its affiliated companies or representatives offer legal or tax advice. Please seek the advice of a tax attorney or tax advisor prior to making a tax-related insurance/investment decision.

 

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