7 SECURE 2.0 Errors and Unintended Consequences

We are all painfully aware of the complexity of the tax and labor laws we work with. It is, therefore, no surprise that Congress makes drafting mistakes when amending these laws—particularly with voluminous and technical laws, such as the SECURE 2.0 Act of 2022.

Unfortunately, once enacted, many of the errors can only be corrected by going through …an act of Congress. The Treasury and IRS (going forward, I’ll refer to the IRS) can only interpret and administer the laws as written—not as intended—by Congress. The IRS does, however, have regulatory flexibility when the law is unclear. 

In most cases, there is no immediate need for Congress to fix drafting errors, either because the error is relatively inconsequential or because there is a delayed effective date of a provision. As we previously reported, some errors in SECURE 2.0 do need to be fixed sooner rather than later—particularly the error that will eliminate the ability of participants to make catch-up contributions after 2024.

On May 23, 2023, key members of Congress sent a letter to the Treasury and IRS, identifying four errors where they intend to submit technical correction legislation.[1] The purpose of the letter is to encourage the Treasury and IRS to administer the law as Congress intended, even though the technical corrections will be made at a later date.

Congress stated there may be additional erroneous statutory language in SECURE 2.0 included in the technical corrections bill, but the letter did not identify what these errors might be. The ARA Government Affairs Committee has identified some of these errors, as well as other changes that may better effectuate the underlying policies of the law. 

Starter 401(k)/Safe Harbor 403(b) Plans

The ARA lobbied extensively to have Starter 401(k)/Safe Harbor 403(b) plan provisions in SECURE 2.0. The goal was to give employers alternatives to payroll deduction IRAs in order to satisfy state mandates that employers offer a retirement savings program to their employees. Employee contributions to these plans were intended to have the same contribution limits as IRAs.[2] As enacted, however, the law limits contributions to a Starter 401(k)/Safe Harbor 403(b) plan to $6,000 (indexed), which is lower than what the IRA limit will be in 2024 when the provision becomes effective.[3] ARA considers it to be a high priority to have the contribution limit modified to be the same as the limit for IRAs.

Another ARA concern with Starter 401(k)/Safe Harbor 403(b) plans is that these plans are not automatically exempt from the eligible automatic contribution arrangement (EACA) mandate whereas payroll deduction IRAs are exempt from the mandate. This is probably just due to oversight rather than a drafting error. Nevertheless, the concern is whether the EACA mandate will make Starter 401(k)/Safe Harbor 403(b) plans less appealing than payroll deduction IRAs. The ARA is therefore lobbying to eliminate the mandate regarding Starter 401(k)/Safe Harbor 403(b) plans.[4]

Roth Employer Contributions

The ability of participants to designate employer contributions as Roth contributions is one of the highlights (and struggles) of SECURE 2.0. The law attempts to address how vesting impacts the ability to designate employer contributions as Roth contributions. When referring to matching contributions that may be designated as Roth contributions, the law requires that the contribution be “…nonforfeitable at the time received.” When referring to nonelective contributions that may be designated as Roth contributions, the law states that any nonelective contribution designated as a Roth contribution “…shall be nonforfeitable..” This may be interpreted in a way that would allow participants to circumvent a plan’s nonelective vesting schedule by designating the contribution as a Roth contribution. We hope the IRS finds the language to be ambiguous so that the provision can be interpreted as intended without the need for a technical correction.

Roth Catch-up Contributions

The significant drafting error that was part of the Roth catch-up provision is the primary reason for the Congressional letter to the Treasury (i.e., the inability of all participants to make catch-up contributions). Another potential error relates to the $145,000 income threshold. That threshold is based on FICA wages, which means those individuals with no FICA wages (e.g., sole proprietors and partners) would continue to be able to make pre-tax catch-up contributions regardless of their earned income. We believe this is an error and it is not clear if the IRS can find a way to interpret the statute differently without a technical correction.   

Replacement of SIMPLE IRA Plan Mid-Year With a Safe Harbor Plan

SECURE 2.0 generally permits a SIMPLE IRA plan to be replaced mid-year with a 401(k) or 403(b) plan that meets the safe harbor requirements. Starter 401(k)/Safe Harbor 403(b) plans are types of safe harbor plans and are included as permissible replacement plans for a SIMPLE IRA. This is probably not what Congress intended because it permits an employer with a SIMPLE IRA plan, which has required employer contributions, to switch mid-year to a plan that cannot permit employer contributions. Arguably a technical correction isn’t needed to correct this because an employer isn’t eligible to have a Starter 401(k)/Safe Harbor 403(b) if another plan, including a SIMPLE IRA, has been maintained during the year. If, on the other hand, Congress intended to permit the use of Starter 401(k)/403(b) plans as replacement plans, then a technical correction would be helpful because of this eligibility condition.   

Terminal Illness Distributions

SECURE 2.0 adds an exception to the 10% early withdrawal penalty if a taxpayer has a terminal illness. This provision, unlike other exceptions to the penalty that were included in SECURE 2.0 (disaster relief, emergency savings, long-term care, etc.), does not allow a plan to make a distribution from a qualified plan or 403(b) plan due to terminal illness (a participant would need to qualify for a distribution for some other reason). Informally, an individual who worked for Congress when SECURE 2.0 was being drafted stated this was an error and the intention was to permit distributions due to terminal illness. If that is indeed what Congress intended, then a technical correction would be needed to effectuate that intent.  

While not an error in the law, the ARA is recommending that a minimum Congress amend the terminal illness provision to eliminate the requirement that a participant provide the plan administrator with evidence of the participant’s terminal illness.[5] As we explained to some members of Congress: “Providing such sensitive health information to a plan administrator, who does not otherwise have any reason to know such information is inappropriate and places on the participant an unreasonable risk that this extremely sensitive information could be disclosed.”

Vesting for Long-Term Part-Time Employees—What’s in a Number?

One of the changes to the rules made by SECURE 2.0 was to expand the long-term part-time (LTPT) employee rules to ERISA covered 403(b) plans. Congress accomplished this by amending ERISA to include provisions that are those that were added to the IRC. In doing so, the special vesting rule for LTPT employees refers to ERISA Section 202(a)(3)(A) for the vesting computation period. That section defines computation periods for eligibility purposes (which always begins on an employee’s date of hire). ERISA  Section 202(a)(2)(A), on the other hand, defines computation periods for vesting purposes, where a plan can establish an initial 12-month computation that doesn’t begin on the date of hire (most plans use the plan year). We don’t believe the special vesting requirement will apply to many plans, but for those situations where it does apply, then plans would not be able to use the usual vesting computation periods to determine vesting under the special rule for LTPT employees.[6]            

Higher Catch-up Limits for Ages 60-63

The Senate Finance Committee’s explanation of the higher catch-up limit for participants who are ages 60-63 is that the limit will be 150% of the 2025 regular catch-up limit (and then adjusted for COLAs).[7] The provision for SIMPLE Plans correctly references the 2025 limit. The provision for qualified plans and 403(b) plans, however, references the 2024 regular catch-up limit. A technical correction to the law is needed to correct the limit for qualified plans and 403(b) plans. 

What’s Next?

We don’t know which of the above, if any, will be included in a technical corrections bill. Furthermore, we may find that additional corrections are needed depending how the IRS interprets certain provisions. All we know is that a technical corrections bill will be introduced. We don’t know when that will be, nor details on what it will include other than the four errors identified in the Congressional letter. Also, introduction of a bill does not mean there’s a clear path to enactment. The problem is that while there is bipartisan support for the SECURE 2.0 technical corrections, it’s a tax bill. That means there will be partisan attempts to add additional tax provisions. The ARA will continue to monitor and adjust our priorities as necessary.     

Advocacy for your profession—and the nation’s private retirement system

ARA members enjoy the benefits of a strong advocacy program that represents their career interests as well as the interests of their clients and participants. You can learn more—and expand your contributions via the American Retirement Association PAC. More information is found here.

Robert M. Richter, J.D., LL.M., APM, is Retirement Education Counsel for the American Retirement Association.

Footnotes