Secure 2.0: Twelve Key Provisions for Retirement Plan Sponsors to Know Now

SECURE 2.0 amends both the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (Code). SECURE 2.0 and its myriad provisions are intended to increase retirement savings opportunities, expand retirement plan coverage, and simplify plan administration for plan sponsors and fiduciaries. The Department of Labor and the Internal Revenue Service will be required to release regulations and guidance on many of the Secure 2.0 provisions in the coming months and years to ensure proper implementation and administration by retirement plan sponsors. The provisions have varied effective dates and some changes were effective upon enactment.

Since Secure 2.0 includes over 90 provisions, this article will highlight and summarize twelve key items of particular interest to retirement plan sponsor employers. We will continue to publish more in-depth details on significant Secure 2.0 provisions in the coming months.

1. Automatic Enrollment and Escalation

Most new 401(k) and 403(b) plans must include automatic enrollment with an annual automatic escalation feature:

• Automatic enrollment: New plans must automatically enroll eligible employees in the plans starting at a deferral rate between 3% and 10%; employees will have the ability to opt out of automatic enrollment.
• Automatic Escalation: Plans must automatically increase the employee’s deferral percentage annually at 1% per year up to at least 10%, but not more than 15%.

Current plans are exempt from this requirement as are church, SIMPLE, and governmental plans. Automatic enrollment is not required for the first three years of a new business or for at least one year after a small business first has more than 10 employees.

2. Age Increase for Required Minimum Distributions (RMDs)

This provision increases RMD age from 72 to 73 starting in 2023 for those who turn age 72 after 12/31/2022. RMD age increases again to 75 for those who turn age 74 after 12/31/2032.

3. Student Loan Repayments for Purposes of Matching Contributions

Permits employers to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to "qualified student loan payments"^[1] made by employees for student loan debt. These matching contributions must be made available to all match-eligible participants, and at the same rate as match contributions on elective deferrals. Plans may apply the average deferral percentage (ADP) test separately to employees who receive matching contributions for qualified student loan payments. Plans may also reasonably rely on participant certifications of qualified student loan payments made. This provision is intended to help employees overwhelmed with student debt to save for retirement, and reap the benefits of available matching retirement plan contributions.

4. Higher Catch-Up Limits to Apply at Ages 60, 61, 62, and 63

Plans may allow participants who are ages 60, 61, 62, and 63 to make catch-up contributions equal to the greater of $10,000 (indexed for inflation) or 150% of the then-effective regular catch-up contribution limit.

5. Penalty-Free Withdrawals

• Emergency Expense Withdrawals: Permits penalty-free withdrawals of not more than $1,000 for plan participants’ emergency expenses. The withdrawal may be repaid to the plan within three years, and a second distribution may be limited if repayment has not been made. In all cases, participants are limited to one emergency withdrawal per year.

• Domestic Abuse-Related Withdrawals: Permits victims of domestic violence to withdraw up to the lesser of $10,000 or 50% of their vested accrued benefit without incurring the early distribution 10% excise penalty tax.

• Terminal Illness-Related Withdrawals: Permits plan participants with a terminal illness to take a penalty-free withdrawal.

• Long-Term Care Premium Payment Withdrawals: Permits plan participants to take a penalty-free withdrawal of up to $2,500 per year for the payment of premiums for certain specified long-term care insurance contracts.

6. Emergency Savings Accounts

Permits non-highly compensated employees to establish plan-linked emergency savings accounts of up to 3% of compensation, up to a total contribution of $2,500 (indexed for inflation). Savings contributions must be made on a Roth basis, and plan sponsors may automatically enroll employees into these accounts, although participants may opt-out. If employer matching contributions are made under the plan sponsor’s 401(k) plan, amounts contributed to the emergency savings account must be matched at the same rate as applicable to regular participant deferrals, but the emergency savings matching contributions must be made to the plan account rather than the savings account. Eligible employees may take at least one tax-free, penalty-free distribution from the savings account per calendar month and the first four distributions received during a plan year must not be subject to any fees or charges. If an employee leaves the company, they may roll their emergency savings account into an available Roth defined contribution plan or IRA, or take a cash distribution.

7. Improving Coverage for Long-Term Part-Time Workers

Reduces the eligibility period for long-term part-time workers to contribute elective deferrals to a workplace retirement plan from three consecutive 12-month periods (in accordance with the Secure Act of 2019) to two consecutive 12-month periods. Twelve-month periods beginning before January 1, 2023 will not apply to this new two-year eligibility period. Employers are not required to provide employer matching or nonelective contributions on behalf of part-time employees eligible under this provision.

8. Roth Contributions

• Roth catch-up contributions: Requires age 50 catch-up contributions to be made on a Roth basis (except for participants with compensation of $145,000 or less).

• Roth Treatment of Employer Contributions: Permits employer-matching or non-elective contributions to be treated as Roth contributions.

9. Small Immediate Financial Incentives For Plan Contributions

Permits employers to offer de minimis financial incentives (must not be paid for with plan assets), such as low-dollar gift cards, to boost employee participation in workplace retirement plans.

10. Safe Harbor for Corrections of Employee Elective Deferral Failures

Codifies a safe harbor grace period for penalty-free corrections of reasonable errors in administering automatic enrollment and automatic escalation plan features. The grace period is 9 ½ months after the end of the plan year in which the mistakes were made. Notice must be provided to the affected employee, correct deferrals must begin within certain time periods, and the employer must provide the employee with any matching contributions that should have been made if the failure had not occurred.

11. Repayments of Qualified Birth or Adoption Distribution (QBADs)

The Secure Act of 2019 permitted penalty-free withdrawals for “qualified birth or adoption distributions” (QBADs) and the amount of such distributions were tax-free if repaid to the plan at any time. This unlimited timeframe for repayment created a tax issue since a taxpayer cannot receive a refund on past taxes paid following a three-year open tax period. This provision resolves this tax issue by limiting the repayment period for QBADs to three years from the date the distribution is received. This change aligns with the applicable statute of limitations rules for refunds related to individual tax returns and also provides a special repayment deadline of December 31, 2025, for QBADs made before December 29, 2022.

12. Discretionary amendments

Permits retroactive plan amendments increasing participant benefit accruals for the prior plan year to be adopted by the employer’s tax return due date for the taxable year of the effective date of the increase. Currently, such amendments must be adopted by the last day of the plan year.

Risk Strategies is following Secure 2.0 developments closely and will provide guidance updates when available. Contact us directly with any questions at benefits@risk-strategies.com.

[1] "Qualified student loan payment" means a payment made by an employee in repayment of a qualified education loan incurred by the employee to pay qualified higher education expenses. Moreover, the total amount of the participant’s qualified student loan payments cannot exceed the lesser of either 1) the participant’s compensation or 2) the deferral limit under Internal Revenue Code Section (IRC Sec.) 402(g).