Employee Benefits & Executive Compensation Group

On December 29, 2022,  President Joe Biden signed the SECURE 2.0 Act of 2022 (“SECURE 2.0”), a division of the Consolidated Appropriations Act, 2023 into law.  SECURE 2.0 includes a wide range of changes geared toward expanding retirement plan access and encouraging retirement savings, while building on certain provisions of the SECURE Act of 2019 (“SECURE 1.0”).

This advisory is the first of multiple client advisories addressing SECURE 2.0 and provides a brief summary of key SECURE 2.0 changes that are now in effect for existing retirement plans (currently effective SECURE 2.0 provisions applicable to new plans will be addressed in a separate advisory). This advisory is broken into two parts: (1) Immediate Retirement Plan Changes and (2) Changes Not Requiring Plan Amendment.

Amendments required to comply with SECURE 2.0 must be adopted on or before the last day of the first plan year beginning on or after January 1, 2025 (January 1, 2027 for governmental and applicable collectively bargained plans).  SECURE 2.0 also officially extends these same remedial amendment deadlines to the changes required under SECURE 1.0, the CARES Act, and the Taxpayer Certainty and Disaster Relief Act of 2020. Although plan sponsors will have time to prepare SECURE 2.0 plan amendments, certain SECURE 2.0 changes are currently in effect (and others will be going into effect prior to the remedial amendment deadline), so plan administrators must ensure that their plans are being operated in compliance with applicable SECURE 2.0 requirements pending remedial amendment.

This summary does not cover every provision of SECURE 2.0, and plan sponsors should consider reviewing the entirety of the legislation and working with ERISA counsel to ensure compliance.  Our Employee Benefits Group is available to assist clients with navigation of these new rules. Unless noted otherwise, references to “401(a)” plans generally refer to all defined contribution and defined benefit plans under Internal Revenue Code (“Code”) Section 401(a) (including 401(k) plans, ESOPs, money-purchase pension plans, and profit-sharing plans).

Immediate Retirement Plan Changes

Increase in Age for Required Beginning Date

• Effective for: Distributions required to be made after December 31, 2022.
• Applicability: Mandatory for 401(a), 403(a), 403(b), and 457(b) plans.
• Description: SECURE 2.0 raises the age for required minimum distributions from age 72 to age 73 for individuals attaining age 72 after December 31, 2022; additional age increases are set to take effect after December 31, 2032.

Removal of Required Minimum Distribution Barriers for Life Annuities

• Effective for: Calendar years ending after December 29, 2022.
• Applicability: Mandatory for 401(a), 403(a), 403(b) and governmental 457(b) plans (excluding defined benefit plans).
• Description: SECURE 2.0 modifies the required minimum distributions rules to eliminate previous barriers to the availability of certain common lifetime annuity features for commercial annuities issued in connection with an eligible retirement plan (excluding defined benefit plans). Such commercial annuities can now offer certain additional types of payments, such as annual payments that increase by a constant percentage (at a rate that is less than 5% per year) and certain lump sum payments.

Addition of a Qualified Birth or Adoption Distribution (“QBAD”) Recontribution Period

• Effective for: All QBADs.
• Applicability: While generally applicable to any applicable eligible retirement plan that accepts rollovers, relevant language in 401(a), 403(a), 403(b), and governmental 457(b) plans that offer QBADs should be conformed.
• Description: SECURE 1.0 did not impose a recontribution deadline for participants receiving QBADs. Under SECURE 2.0, the window for recontributing QBADs occurring after December 29, 2022, is limited to three years from the date of distribution. For QBADs that occurred on or before December 29, 2022, a recontribution must be made before January 1, 2026.

Option to Designate Certain Employer Contributions as Roth Contributions

• Effective for: Contributions made after December 29, 2022 (additional guidance will be required before implementing).
• Applicability: Optional for defined contribution 401(a), 403(b), and governmental 457(b) plans.
• Description: SECURE 2.0 introduces a new option for plans to permit participants to designate whether employer matching contributions and nonelective contributions will be made as Roth contributions. These employer contributions must be 100% vested when made. This option will also be made available for qualified student loan payments, which will be discussed in a later advisory.

Relief for Qualified Federally Declared Disasters

• Effective for: Disaster incident periods beginning on or after January 26, 2021.
• Applicability: Optional for 401(a), 403(a), and 403(b) plans that provide plan distributions and loans in cases of qualified federally declared disasters.
• Description: In the past, Congress granted disaster relief on a case-by-case basis. SECURE 2.0 creates statutory provisions for certain qualified federally declared disasters, including:
  • qualified disaster recovery distributions of up to $22,000 (with a three-year window to recontribute such distributions to the plan);
  • the ability to recontribute certain home purchase distributions that were not used due to disaster;
  • increased maximum loan limits (up to $100,000 or 100% of the participant’s account balance) for qualified individuals; and
  • extension of the maximum loan repayment period for qualified individuals.

Distributions and loans from all of applicable plans across an employer’s controlled group are aggregated for purposes of determining the limits.

Expanded Withdrawal Relief for Qualified Public Safety Employees in Governmental Plans

• Effective for: Distributions after December 29, 2022.
• Applicability: Optional for 414(d) governmental plans.
• Change: Prior to SECURE 2.0, distributions to qualified public safety employees in governmental plans who attained age 50 were excepted from the 10% early withdrawal penalty. SECURE 2.0 loosens this requirement to allow distributions as of the earlier of attainment of age 50 or 25 years of service under the plan.  Additionally, the definition of “qualified public safety employees” is expanded to include corrections officers and forensic security employees.

Changes Not Requiring Plan Amendment

Hardship Withdrawals – Employer Ability to Rely on Employee Certification

• Effective for: Plan years beginning after December 29, 2022.
• Applicability: Optional for 401(k), 403(b) and governmental 457(b) plans that permit hardship withdrawals.
• Description: Generally, plan sponsors may permit a hardship distribution for immediate and heavy financial need or unforeseeable emergency if the distribution is limited to the amount necessary to satisfy the financial need and meets other specific requirements. Prior to SECURE 2.0, plan sponsors could rely on participant certifications that they have insufficient cash or liquid assets available to satisfy the need but generally were required to evaluate the existence of an eligible event based on the facts and circumstances.  SECURE 2.0 permits plan sponsors to rely on employee self-certification that they have experienced a safe harbor event constituting a deemed hardship for withdrawals from a 401(k) or 403(b) plan. Similar rules apply for unforeseeable emergencies under governmental 457(b) plans.

Terminal Illness Distributions

• Effective for: Distributions made after December 29, 2022.
• Applicability: Automatically applies to 401(a), 403(a), and 403(b) plans.
• Description: SECURE 2.0 creates a new exception to the 10% early withdrawal penalty for distributions to employees who are terminally ill (as determined by a physician). The employee must provide sufficient evidence of the terminal illness.  The distribution can be repaid under the same rules as applicable to qualified birth or adoption distributions; however, this new law does not create a new distributable event for 401(k)  or 403(b) plans.

Reduction of Excise Tax on Required Minimum Distribution Failures

• Effective for: Taxable years beginning after December 29, 2022.
• Applicability: Automatically applies for 401(a), 403(a), 403(b), and 457(b) plans.
• Description: The Code imposes an excise tax on individuals who fail to take the full required minimum distribution for a plan year. Currently, the excise tax is equal to 50% of the amount that is not properly distributed.  SECURE 2.0 reduces the applicable excise tax to 25% with a further reduction to 10% if the distribution is corrected during a correction window of up to two years.

Changes to Qualifying Longevity Annuity Contracts (“QLACs”)

• Effective for: Generally, contracts purchased on or after December 29, 2022.
• Applicability: Optional for 401(a), 403(a), and 457(b) plans.
• Description: Prior to SECURE 2.0, a defined contribution plan could permit participants to pay for a QLAC using up to the lesser of 25% of their accounts or $125,000 (indexed). SECURE 2.0 eliminates the 25% limit and increases the dollar limit to $200,000 (indexed).  Additionally, SECURE 2.0 provides that divorce occurring after a QLAC is purchased but before payments begin does not affect the permissibility of the joint and survivor annuity benefits under the contract and that contracts may permit participants to rescind the purchase within 90 days of the purchase (these additional changes are effective for contracts purchased or received on or after July 2, 2014).

De Minimis Financial Incentives for Plan Contributions

• Effective for: Plan years beginning after December 29, 2022.
• Applicability: Optional for 401(k) and 403(b) plans.
• Description: Prior to SECURE 2.0, the contingent benefit rule generally prohibited employers from paying financial incentives (except for matching contributions) to encourage plan contributions. Under SECURE 2.0, participants in 401(k) and 403(b) plans can receive “de minimis financial incentives” (not paid for with plan assets) without violating the Code or ERISA if they make plan contributions. “De minimis financial incentives” is not defined, although a Senate Finance Committee section-by-section summary mentions “low-dollar gift cards.”

EPCRS Expansion

• Effective: IRS is directed to revise the Employee Plans Compliance Resolution System (“EPCRS”) Revenue Procedure within two years of December 29, 2022.
• Applicability: 401(a), 403(a), and 403(b) plans.
• Change: Prior to the changes directed to the IRS under SECURE 2.0, the self-correction program under the EPCRS was generally only available to correct certain types of operational failures, subject to certain timeframes after occurrence of the failure. SECURE 2.0 expands the EPCRS by allowing more types of errors (referred to as “eligible inadvertent failures”) to be self-corrected, subject to certain exceptions. For instance, eligible inadvertent failures relating to plan participant loans are eligible for self-correction and the Department of Labor must treat the correction as meeting the requirements of the Voluntary Fiduciary Correction Program (subject to certain conditions). “Eligible inadvertent failures” are failures that occur despite the existence of practices and procedures intended to comply with applicable Code requirements.

Discretion Regarding Overpayment Recovery

• Effective: December 29, 2022 (certain retroactive relief applies for good faith interpretations of previously existing guidance).
• Applicability: 401(a), 403(a), 403(b), and governmental (but not 457(b)) plans.
• Change: Prior to SECURE 2.0, plan fiduciaries that mistakenly overpaid a participant or beneficiary were required to take reasonable steps to recoup the overpayment. SECURE 2.0 provides that Section 401(a), 403(a), 403(b), and governmental (but not 457(b)) plans will not lose their tax favored status if the plan: (1) does not recoup an “inadvertent benefit overpayment” or (2) is amended to increase past or decrease future benefits payable to offset the inadvertent benefit overpayment. Additionally, certain inadvertent benefit overpayments are treated as eligible rollover distributions. For plans subject to ERISA, SECURE 2.0 provides fiduciary relief if the plan fiduciary exercises discretion not to seek recovery of all or part of an overpayment. Additionally, if the fiduciary seeks to recoup the overpayment, certain restrictions and participant protections will apply (g., no interest may be collected, a three-year recovery window applies, threats of litigation are impermissible, etc.).

Reduction in Disclosure Obligations for Unenrolled Participants

• Effective for: Plan years beginning after December 31, 2022.
• Applicability: Defined contribution plans.
• Description: Prior to SECURE 2.0, employees who were not enrolled in employer-sponsored defined contribution plans were entitled to receive numerous plan communications. Now, plan sponsors are required to only provide to unenrolled employees a summary plan description in connection with initial plan eligibility, an annual notice of eligibility and enrollment deadlines, and certain documents upon request.

If you have questions regarding these changes or any employee benefits issues, please contact a Sherman & Howard Employee Benefits attorney.