Legislation
SECURE 2.0 is a reality now — and two industry experts offered their insights in a Jan. 25 webcast as the dust settles. American Retirement Association Director of Regulatory Affairs Kelsey Mayo, who also is a Partner at Poyner Spruill LLP, and American Retirement Association Director of Legislative Affairs Andrew Remo offered their insights on the measure and what it means for retirement plan professionals and participants.
Mayo and Remo highlighted provisions that are especially relevant to the industry and those it serves.
Auto Enrollment
Beginning with the 2025 plan year, defined contribution plans — including 403(b)s — established after enactment are required to include auto enrollment as a feature. They are to be enrolled at a 3%-10% contribution rate, which is to increase by 1 percentage point a year to at least 10%, but to no more than 15%.
There are certain exceptions, however:
- businesses with fewer than 10 employees;
- businesses less than three years old; and
- churches and governments.
Starter 401(k)s (and 403(b)s)
Under SECURE 2.0, beginning in 2024, starter 401(k)s are to be available through employers that have no retirement plan and generally must cover all employees. Employees are automatically enrolled at 3% to 15%, with automatic escalation after 2025. There is no ADP testing, nor top-heavy testing.
There is “still work to do to make this a good plan design,” said Remo.
Distributions
Remo and Mayo outlined provisions that concern various kinds of distributions.
Emergencies. SECURE 2.0 creates a new hardship distribution — one for emergencies — beginning Jan. 1, 2024. But it is not unlimited — it is limited to $1,000 per year, and a plan participant who takes one is then not eligible to take another emergency distribution until the earlier of (1) three years having passed or (2) the amount distributed has been recontributed to the plan.
SECURE 2.0 also contains a provision allowing the establishment of emergency savings accounts beginning in 2024. These “side car” accounts:
- have a $2,500 limit;
- are not subject to distribution limits regarding timing;
- are subject to an anti-abuse provision; and
- are not subject to fees on the first four distributions.
Natural Disasters. SECURE 2.0 also has made natural disaster relief permanent, in a manner similar to COVID-related distributions allowed at the height of the pandemic. Distributions of up to $22,000 are allowed, as are loans of up to $100,000.
QBADs. Repayment of qualified birth or adoption distributions is limited to three years. SECURE 1.0 had no limit, Mayo noted, which she added could have been “a huge administrative headache.”
LTPT Employees
SECURE 2.0 includes a provision that addresses long-term part-time (LTPT) employees. Under the provision , beginning with the 2025 plan year, retirement plans — including 403(b) plans — must allow LTPT employees to make deferrals after to years with 500 hours of work. “We’ll see how it’s going to impact the 20-hour requirement” for ERISA 403(b)s, said Mayo.
RMDs
SECURE 2.0 has a variety of provisions affecting required minimum distributions.
New Required Beginning Dates: 73 in 2023, 75 in 2033.
No RMDs from Roth Accounts (2024): Beginning in 2024, they have parity with Roth IRAs.
Reduction in RMD Excise Taxes: Beginning in 2023, it cuts the excise tax in half from 50% to 25%. It further the reduces excise tax to 10% if taken before an IRS audit or (if earlier) in the second year after that in which the excise tax is imposed. Mayo remarked that the drop to 10% is “fantastic news.”
Calculation for Partial Annuity: Eliminates penalty for annuitization, effective on the date of enactment — Dec. 29, 2022.
Qualifying Longevity Annuity Contracts (QLACs): QLACs can satisfy entire RMD requirement up to $200,000, also effective on Dec. 29, 2022.
Remove Requirements for Certain Life Annuities: Starting in 2023, one can satisfy an RMD by purchasing a fixed annuity with a circumscribed set of features.
Special Needs Trust (2023): A special provision for special needs trusts is effective in 2023.
Surviving Spouse Elections: Beginning in 2024, a spouse may elect to be treated as an employee.
Additional DC Plan Provisions
SECURE 2.0 includes additional provisions that affect defined contribution plans.
401(k)s. Retroactive first-year deferrals for sole-proprietors will be allowed, as will small
financial incentives for contributing to a retirement plan, beginning in 2023.
403(b)s. Under SECURE 2.0:
- hardship rules for 403(b) plans kick in in 2024;
- Insurance exchange traded funds (ETFs) are permitted, beginning in 2029; and
- MEPs are permitted, beginning in 2023.
457(b)s. SECURE 2.0 eliminates the first day of the month requirement for government 457(b) plans starting in 2023. But while 457s “should be throwing confetti,” said Mayo, this provision does not affect tax-exempt 457(b)s.
Consolidation of Notices
SECURE 2.0 includes a provision that directs consolidation of retirement plan notices. Remo called consolidation of notices “a massive project” that is “mind-boggling.”
Catch-up Contributions
Beginning with the 2025 plan year, SECURE 2.0 sets a catch-up limit of $10,000 or 150% of the 2024 catch-up limit. And age-based catch-ups must be Roth for participants who made more than $145,000 in the previous year; this does not apply to the special 403(b)s catch-up.
Major Glitch
Remo noted that the ARA found “a major glitch” concerning catch-up contributions for Roth plans. Congress unintentionally has prohibited catch-ups after 2024, he said. It’s “very scary,” Remo said, but increases the possibility of Congress addressing the situation.
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