Secure Act 2.0 Changes Impacting Qualified Retirement Plans

On December 29, 2022, President Biden signed into law the 2023 Consolidated Appropriations Act (“CAA”). Within the CAA, the SECURE 2.0 Act of 2022 (“Act”) contains significant retirement plan changes. Below is a summary of some of the key provisions impacting qualified retirement plans.

Changes to Required Minimum Distributions

For inactive participants, all retirement plans must begin making minimum benefit distributions no later than the participant’s Required Minimum Distribution (“RMD”) age. As you may recall, the first SECURE Act delayed the required age from 70.5 to 72. SECURE 2.0 delays it further; first to 73, then to 75. For those born in 1951-1958, their RMD age is now age 73. For those born during 1960 and later it’s now 75. We will need clarification for those born in 1959. For those born in 1950 or earlier, there is no change. Therefore, for those inactive participants who turned 72 in 2022, their initial RMD must still be made by April 1, 2023.

The Act also allows a deceased participant’s surviving spouse (assuming they are the sole beneficiary) to use their age for any RMD rather than the deceased participant’s birthdate.

SECURE 2.0 lowers the tax penalty (excise tax) from 50% to 25% on participants who do not receive their required RMDs when due. The Act further reduces the 25% to 10% if the late distributions are made within a two-year correction period. Participants and plan administrators will still be allowed to request a reduction and/or waiver of the tax.

Beginning in 2024, any Roth accounts in a qualified Defined Contribution Plan will be exempt from the RMD rules while the participant is alive.

Threshold for Small Cashouts

Beginning in 2024, the Act increases the threshold for small automatic cashouts from $5,000 to $7,000. Further, the Act allows plans to establish automatic transfers to a default IRA and then to the former participant’s new employer retirement plan.

Annual Funding Notice for Defined Benefit Plans

Effective for plan years beginning in 2024, the Act makes changes to the Annual Funding Notice (“AFN”) for Defined Benefit Plans. The Act simplifies the funded status portion to only show the funded percentages. It also requires the disclosure of asset return information and if the assets are sufficient to cover PBGC benefit guarantees.

Establishment of a Retirement Benefits “Lost and Found”

Within two years, the Act requires the IRS and DOL to establish an online “lost and found” for participants and beneficiaries to use for searching for benefits they may be eligible for. Plans will be required to share data with the DOL for this purpose.

Plan Recovery of Overpayments

Effectively immediately, a plan (and fiduciary) no longer risk disqualification if it is decided to not recover unintended overpayments or to make the plan whole through other means. In addition, it puts the following restrictions on any recovery:

• Only the principal is recovered (the plan cannot charge interest)

• Only 10% of the initial principal can be recovered in any year

• The actual pension cannot be reduced by more than 10%

• After the participant’s death, payments cannot be recouped from their spouse or other beneficiary

• Unless the overpayment resulted from fraud/misrepresentations, the recoupment must begin within three years

• The ability to threaten litigation is greatly limited.

Revamping of the IRS’s Employee Plans Compliance Resolution System (EPCRS)

The Act directs the IRS to modify their EPCRS program to allow self-corrections for most errors and expanded corrections for loan errors. The Act also extended EPCRS favorable corrections for certain auto enrollment and auto escalations errors.

Periodic Paper Benefit/Account Statements

Under the Act, starting with the 2026 plan year, a defined contribution plan must provide at least one statement each year in paper format. A defined benefit plan must provide at least one pension benefit statement every three years in paper format. Exceptions apply for plans that deliver these statements in accordance with certain electronic delivery requirements or if the recipient requests electronic delivery.

 Other Retirement Plan Provisions

The changes noted above should have the most impact on the plans, participants and Trustees we work with. However, there are many other significant retirement plan provisions in the Act, some, but not all, of which are summarized below:

• Beginning in 2025, for participants aged 60-63, the catch-up contributions will now be the greater of $10,000 or 150% of the normal catch-up (which is $7,500 for 2023). The $10,000 will be indexed for inflation.

• Beginning in 2024, any catch-up contributions for those earning over $145,000 must be made as Roth contributions. The $145,000 is indexed and based on the prior year’s pay.

• Effective immediately, if a plan permits, an employee can elect for employer contributions (match or otherwise) to be made as Roth contributions.

For plan years beginning after December 31, 2024, most new 401(k) or 403(b) plans must have auto enrollment and auto escalation for employee deferrals (contributions). The initial auto enrollment must be at least 3% and increase 1% per year to at least 10% (but no more than 15%). Participants must be allowed to elect out of either.

• Effective immediately, plan sponsors can now offer small direct incentives to those employees who choose to participate in their 40(k) or 403(b) plan.

• Beginning in 2024, employers can make matching contributions based on an employee’s qualified student loan payments.

• The Act includes several changes to how participants can withdraw money from their retirement accounts; including $1,000 for personal or family emergency, $10,000 if they have been the victim of domestic abuse by a spouse or domestic partner, no 10% penalty if they are terminally ill, up to $22,000 for suffering economic loss in a federal disaster area.

• Beginning in 2024, for non-highly compensated employees, sponsors can create an Emergency Savings Account (EAS) as part of a defined contribution plan. After-tax basis contributions of up to 3% of compensation can be made with a $2,500 max (indexed for inflation).  Each month, participants may take withdraws from their EAS and the first four withdrawals for a year cannot be subject to distribution fees.

• Starting in 2023, the start-up tax credit for employers with 50 or fewer employees increases from 50% to 100%.

• The SECURE Act requires part-time employees with at least 500 hours of service for 3 consecutive years be permitted to make elective deferrals to an employer’s 401(k) plan. Beginning in 2025, the eligibility service requirement is reduced from 3 years to 2 years and will also apply to 403(b) plans.

There are other retirement plan and IRA provisions in the Act, this is simply a summary of many of the key ones.

The Act includes a substantial number of changes and options for Trustees and other Plan Sponsors to review and consider. As always, please feel free to reach out to your Zenith team, or your other plan professionals, with any questions you have.