As we have previously reported, Congress passed the SECURE 2.0 Act of 2022 (“SECURE 2.0”), a vast collection of retirement-related provisions having a profound effect on 401(k) plans, as part of the larger Consolidated Appropriations Act, 2023 (“CAA”) in late December of 2022. President Biden signed the legislation on December 29, 2022.
SECURE 2.0 supplements and expands upon many of the reforms included as part of the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) enacted in late 2019 (see our blog entitled “Congress Finally Passed SECURE Act – The Most Sweeping Pension Legislation in Over a Decade is Now Law” for a general overview). But SECURE 2.0 contains even more retirement-related provisions than did its predecessor, and arguably represents a more significant package of reforms, which are generally intended to help make retirement savings available to a wider range of employees and to streamline plan administration.
GEEK OUT! For those who wish to dig a bit deeper, the Senate Finance Committee has issued a nineteen-page summary of SECURE 2.0, available here.
NOTE: This article, along with past and future related articles, is intended only as a very broad overview of the most significant provisions contained in SECURE 2.0 applicable to most 401(k) plans. It is not intended to cover all 401(k)-related provisions, provide a detailed analysis of the provisions discussed, or address provisions applicable to other types of retirement plans, such as defined benefit retirement plans, Internal Revenue Code Section 403(b) plans, SIMPLE plans, SEPs, multiemployer plans, pooled employer plans, governmental plans, or individual retirement accounts (“IRAs”).
ITEMS INCLUDED IN THIS PART II.
As stated in our previous blog, due to the sheer number of SECURE 2.0 provisions affecting 401(k) plans, we plan to address the more significant of those provisions in a series of blog articles.
The first article in the series (“Part I”) focused on some of the more significant provisions affecting most 401(k) plans that are immediately effective, along with a brief discussion of how SECURE 2.0 changes the coverage rules regarding long-term, part-time employees that were originally implemented by the first (i.e., 2019) SECURE Act.
This second article in the series (“Part II”) will focus on some of the more significant provisions affecting most 401(k) plans that will become effective next year or in later years. We anticipate that a third article in the series (“Part III”) will address several additional noteworthy SECURE 2.0 provisions affecting most 401(k) plans that will become effective in future years.
PROVISION BECOMING EFFECTIVE DECEMBER 29, 2023:
- Automatic Portability Transactions Involving Default IRAs.
Current law generally requires an employer sponsoring a 401(k) plan to roll over a plan distribution into a designated individual retirement account (commonly known as a “Default IRA”) of its choosing, if the participant’s account balance as of his or her termination of employment is at least $1,000, and he or she does not affirmatively elect otherwise.
Effective December 29, 2023, SECURE 2.0 will permit retirement plan service providers to automatically transfer the balance in a participant’s Default IRA, that was established by a former employer upon termination of employment, into his or her new employer’s retirement plan, unless the participant affirmatively elects otherwise.
PROVISIONS BECOMING EFFECTIVE BEGINNING AFTER DECEMBER 31, 2023:
- Matching Contributions for Student Loan Payments.
Currently, employers may make matching contributions to 401(k) plans for participants who make elective deferral contributions to the plan. Matching contributions are generally equal to 100 percent, 50 percent. or some other set percentage of the dollar amount that the participant contributes to the plan. (See our article entitled “401(k) Employer Matching Contributions” for details.)
In a significant and somewhat surprising move, effective for plan years beginning after December 31, 2023, 401(k) plan sponsors will be able to make matching contributions to participants on the basis of certain “qualified student loan payments.” Broadly defined, these payments are described as any indebtedness (subject to certain limits) incurred by the participant solely to pay his or her “qualified higher education expenses,” as defined elsewhere in the Internal Revenue Code.
Although plan sponsors will generally be able to rely on an annual certification from a participant that he or she has made qualified student loan payments in a specified amount during the year, there are a number of technical rules (such as eligibility, vesting and equal access requirements) plan sponsors will have to follow in order to comply with the new law.
Importantly, for purposes of certain statutory nondiscrimination testing requirements, plans may separately account for participants who are receiving matching contributions based on student loan repayments, which could help the plan pass these tests and should, accordingly, eliminate what might otherwise be a significant concern in deciding whether to offer this new benefit.
- Increase in Small Benefit “Cash-Out” Limit.
Currently, 401(k) plans are prohibited from distributing participant accounts in excess of $5,000 without the participant’s consent. Amounts under this threshold generally may be “cashed out,” even without the participant’s permission. (See “Elections and Consents” in our article entitled “401(k) Plan Distributions and Vesting” for details.)
Effective for distributions made after December 31, 2023, this automatic cash-out limit will increase from $5,000 to $7,000.
- Mandatory “Roth” “Catch-Up” Contributions for Certain Participants.
In addition to regular pre-tax elective deferrals, 401(k) plans may permit participants to make “Roth” contributions, which are made on an after-tax basis and included in gross income in the taxable year contributed. (See our article entitled “401(k) Contributions and Funding” for details.)
Effective for tax years beginning after 2023, “catch-up” contributions (see Item 8, below) made by participants whose wages exceed $145,000 per year (as indexed for inflation) must be made on a “Roth” (e., after tax) basis. Such participants may, of course, continue to make ordinary pre-tax elective deferrals up to the statutory, inflation-adjusted limit ($22,500 for 2023).
- Penalty-Free Withdrawals for Domestic Abuse.
Effective for distributions made after December 31, 2023, SECURE 2.0 expands the list of permissible in-service withdrawals from 401(k) plans to include self-certified cases of domestic abuse. The amount available to affected participants in these cases is up to the lesser of $10,000, indexed for inflation, or 50 percent of the participant’s account balance.
The withdrawals are not subject to a ten-percent early withdrawal penalty tax on early withdrawals, and if the distribution is repaid within three years, the participant is entitled to a refund of the amount of regular income tax paid on the distributed sum. (See Part I in this series, “401(k): What Do I Need to Know About SECURE 2.0? Overview of Significant Provisions, Part I” for information about similar penalty-free withdrawals for participants having terminal illnesses.)
- Creation of Online Retirement “Lost and Found.”
According to the Senate Finance Committee Report (see above), thousands of 401(k) plan participants and beneficiaries annually are unable to find and receive the benefits they earned, often because a company they worked for relocated, changed its name, or was involved in a merger or acquisition. Similarly, sponsoring employers often seek to pay benefits to retirees, terminated employees or beneficiaries, but are unable to find such individuals because they have changed their names or addresses.
Although there is some existing guidance for plan sponsors seeking to find missing participants (see our article entitled “401(k) Plan Distributions and Vesting”, along with DOL Field Assistance Bulletin No. 2021-01 for details), until now there has been little in the way of similar assistance for participants seeking to find former plan-sponsoring employers.
SECURE 2.0 tackles this dilemma head-on by directing the DOL, in consultation with the IRS, to create, within two years of enactment (i.e., prior to December 29, 2024), an online searchable database that will permit participants and beneficiaries to search for retirement benefits to which they may be entitled. Specifically, the database is intended to provide such participants and beneficiaries with current contact information for the plan administrators of any and all 401(k) plans under which they may be due a benefit. To help create and maintain the database, 401(k) plans will be required to share their updated contact information with the DOL.
PROVISIONS BECOMING EFFECTIVE BEGINNING AFTER DECEMBER 31, 2024:
- Automatic Enrollment and Auto-Escalation for New 401(k) Plans.
Effective for plan years beginning after December 31, 2024, new 401(k) plans established after December 29, 2022 that are not exempt (see below) must automatically enroll eligible employees, starting at a deferral rate from between three percent and ten percent of their compensation. Thereafter, the deferral rate must automatically increase by at least one percent each year, until the deferral rate reaches at least ten percent of compensation, but not more than fifteen percent of compensation.
Employees must be able to elect a different deferral rate, and also must be allowed to opt-out of the plan altogether. Amounts contributed via the automatic contribution feature must be initially invested in the plan’s qualified default investment alternative (“QDIA”), unless and until the participant chooses to invest them in another plan fund or funds. (See our reference article entitled “401(k) QDIA” for more information on QDIAs.)
Plans of small businesses normally employing fewer than ten employees, and plans of employers having been in business for less than three years, are generally exempt from this requirement. Also, plans that were already in existence on December 29, 2022 are generally exempt.
NOTE: Intended to open wide the doors to increased retirement plan participation by many who are currently not receiving coverage under any plan, many observers consider this to be one of the hallmarks of SECURE 2.0, if not one of the most significant retirement-related provisions to emerge in recent times.
- Enhanced “Catch-Up” Contributions.
401(k) plan participants who are age 50 or older as of the end of the calendar year currently are eligible to make additional “catch-up” elective deferral contributions up to certain inflation-adjusted limits ($7,500 for 2023). The “catch-up” contribution limit is in addition to the regular inflation-adjusted elective deferral limit ($22,500 in 2023), which means that, for example, participants who are age 50 or older by the end of 2023 could defer up to a total of $30,000, subject to plan provisions.
Effective for tax years beginning after December 31, 2024, SECURE 2.0 increases the statutory “catch-up” contribution limit to the greater of (i) $10,000; or (ii) 150 percent of the regular “catch-up” amount for 2025, applicable to participants who are reach ages 60, 61, 62 or 63 during the year. These increased dollar amounts will be indexed for inflation after 2025.
PROVISION BECOMING EFFECTIVE BEGINNING AFTER DECEMBER 31, 2026:
- Government “Saver’s Match.”
Current law provides for a nonrefundable tax credit (commonly known as the “saver’s tax credit”) for eligible individuals having income within certain limits who make elective salary deferral contributions to 401(k) plans. The amount of the credit is determined by factors such as the amount of retirement plan contributions, tax filing status, and adjusted gross income (AGI).
Effective for years beginning after December 31, 2026, the Federal government will replace the saver’s tax credit with a program that will directly deposit matching contributions into eligible 401(k) plan participants’ accounts. The matching contribution will generally be equal to 50 percent of the amount of such participants’ elective deferral contributions, up to a maximum of $2,000 per individual.
Eligibility for this “Saver’s Match” phases out for participants having incomes between $41,000 and $71,000 in the case of taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers and married taxpayers filing separately). In addition, certain age, dependency status and residency requirements apply.
EDITORIAL COMMENT: As previously noted, the items discussed above are some of the more prominent 401(k)-related provisions contained in SECURE 2.0 that will become effective next year or in later years. Other provisions not appearing above, and not previously covered in Part I of this series, generally will also become effective next year or in later years, and the more notable of these provisions that will apply to most 401(k) plans will be covered in a later blog.
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.