SECURE 2.0 reduces the amount of communications that must be provided to unenrolled participants.
Signed into law by President Joe Biden on December 29, 2022, the Consolidated Appropriations Act, 2023, includes significant and far-reaching retirement plan legislation known as the SECURE Act 2.0 of 2022. This Alert, the first in a series, addresses the provisions of SECURE 2.0 that go into effect immediately in 2023. Subsequent Alerts will address the provisions of SECURE 2.0 that go into effect in later years and the unexpected inclusion of provisions addressing the correction of operational plan errors.
The following provisions of SECURE 2.0 are immediately effective in 2023.
Increase in Required Minimum Distribution Age
The initial 2020 SECURE Act increased the age at which individuals generally must begin taking withdrawals from age 70½ to age 72. SECURE 2.0 further increases that age to 73 starting in 2023 and age 75 starting in 2033. Individuals that reached age 72 prior to 2023 will remain subject to the prior rule; however, individuals reaching age 73 before 2033 will be subject to the age 73 required distribution date.
Reduction in Required Minimum Distribution Penalty
Prior to SECURE 2.0, a 50 percent excise tax was due on any amount that was required to be, but was not, distributed as a required minimum distribution each year. Effective for 2023, SECURE 2.0 reduces the excise tax to 25 percent and provides for a further reduction to 10 percent if an individual corrects the failure within a two-year correction period.
Roth Matching and Nonelective Contributions
Effective immediately, employers may permit participants in 401(k) and 403(b) plans to elect that matching or nonelective contributions be made as Roth (after-tax) contributions, thereby resulting in taxable income to the participant. Prior to SECURE 2.0, employers had to make matching and nonelective contributions on a pre-tax basis. This is an optional plan design change that employers may implement and, if implemented, any such matching and nonelective contributions must be fully vested (i.e., cannot be subject to potential forfeiture).
Small Financial Incentives for Plan Contributions
Starting in 2023, employers are permitted to offer immediate financial incentives to employees who contribute to a 401(k) or 403(b) plan; however, the financial incentive must be de minimis and not paid for with plan assets. While SECURE 2.0 does not define “de minimis” for these purposes, the Senate Finance Committee specifically mentioned “low-dollar gift cards” in its summary. Therefore, providing a $10 gift card to employees who make their first 401(k) contribution would likely satisfy these requirements. While not addressed in SECURE 2.0, employers considering such small financial incentives should also consider whether the financial incentive itself could be deemed taxable income. Pending further IRS guidance on this topic, it is likely that the financial incentive would be taxable in many cases.
Many plans permit employees to take in-service hardship withdrawals from their 401(k) or 403(b) accounts in the event of an immediate and heavy financial need. IRS regulations set forth certain safe harbor events that are deemed to constitute a hardship, and employees generally need to provide evidence of the hardship event in order to receive a withdrawal. Effective for plan years beginning in 2023, SECURE 2.0 provides that employers can rely on an employee’s self-certification of both the fact that they have a hardship and that the amount of the distribution is not in excess of the employee’s financial need. It is expected that this ability to rely on the employee’s self-certification―absent actual knowledge that the self-certification is untruthful―will significantly streamline plan administration.
Repayment of Qualified Birth or Adoption Distributions
The 2020 SECURE Act permitted plans to allow distributions in connection with certain birth or adoption expenses without being subject to the 10 percent early withdrawal tax. Such distributions were permitted to be recontributed to the plan at any time and treated as rollover contributions. SECURE 2.0 amends these provisions to restrict the recontribution period to three years. Employers that have previously amended their plans to allow such qualified birth or adoption distributions should take this change into account going forward.
Notices to Unenrolled Participants
Prior to SECURE 2.0, plan fiduciaries were required to provide eligible participants with a number of notices, regardless of their enrollment status in the plan. SECURE 2.0 reduces the amount of communications that must be provided to unenrolled participants. Specifically, an individual who receives the summary plan description and any other notices regarding plan eligibility and chooses not to enroll in the plan will be considered as an unenrolled participant and, going forward, will only need to receive an annual reminder of their eligibility to participate. This change to streamline the distribution of notices to unenrolled participants should further streamline plan administration.
While the provisions summarized above are not expected to impose any immediately significant administrative burdens on employers, they represent changes that employers must take into account in the ongoing operation of their qualified retirement plans. In addition, as will be discussed in follow-up Alerts, SECURE 2.0 contains a number of important provisions that become effective in future years and changes to the correction procedures available to employers for any operational errors that may arise from time to time.
For More Information
If you have any questions about this Alert and SECURE 2.0 implementation, please contact any of the attorneys in our Employee Benefits and Executive Compensation Group or the attorney in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.