The SECURE Act 2.0: What’s in It for You?

By Timothy C. McDonald, JD

Enacted Dec. 29, 2022, as part of the Consolidated Appropriations Act of 2023, the SECURE 2.0 Act makes a number of changes to the law related to retirement plans. Following are some key changes.

Effective in 2023

Required minimum distribution (RMD) age: The RMD age increases, with a phase-in, from 72 to 75. The RMD age is:

• 73 for those reaching age 72 after 2022 and age 73 before 2033, and

• 75 for those who reach age 74 on or after 2032.

An individual could turn age 73 before 2033 and age 74 after 2032, so technical correction is likely.

RMD excise tax: The 50% excise tax on missed RMDs is reduced to 25%. It is further reduced to 10% of the missed RMD if the individual receives past-due RMDs and pays the tax within two years after the year of the missed RMD and before receiving an IRS notice assessing the excise tax.

Hardship: An employer may rely on an employee’s certification as to the occurrence of a hardship event, as to the amount needed to address the hardship and that he/she does not have sufficient other liquid assets to satisfy the hardship.

De minimis incentives for elective deferrals to 401(k) plans: Employers now may provide, in addition to matching contributions, de minimis financial incentives (e.g., low-dollar gift cards) to encourage employees to make elective deferrals.

Employer Roth contributions: 401(k), 403(b), government 457(b) and other defined contribution plans may allow employees to elect to have immediately vested employer matching and nonelective contributions contributed as Roth contributions. Plans can include Roth contributions (and in-plan Roth rollovers/conversions) whether or not they permit elective deferrals.

Effective in 2024

Small benefit cash-out: and government 457(b) plans may automatically cash out a participant’s benefit on termination of employment, without consent, if his/her vested benefit does not exceed $7,000 (increased from $5,000).

Age 50 and over catch-up contributions: 403(b) and government 457(b) plans must treat as Roth contributions any catch-up contributions made by participants age 50 and over who received compensation greater than $145,000 (as indexed) in the preceding year.

No Roth RMDs: take RMDs from a Roth account under 401(k), 403(b), governmental 457(b) or other defined contribution plans during their lifetimes. The RMD rules applicable at death continue to apply to inherited Roth accounts.

Matching student loan payments: government 457(b) plans may permit employer matching contributions on employees’ qualified higher-education loan repayments. For testing purposes, the match is treated as match on elective deferrals.

Emergency savings account: 457(b) and other defined contribution plans may permit participants who are not highly compensated to make deposits to an emergency savings account. An eligible participant may be enrolled automatically to contribute to the account at a rate of not more than 3% of pay. His/her contributions must be Roth contributions and capped so the account balance does not exceed $2,500 (indexed). The deposits must be invested in a vehicle designed to preserve principal. An employee may take withdrawals from the account monthly. Matching contributions must apply to emergency savings account contributions at the same rate applicable to employee elective deferrals.

In-service withdrawal options for emergencies or domestic abuse: 401(k), 403(b), government 457(b) and other defined contribution plans may permit a participant to take a withdrawal for a personal or family emergency and/or in response to domestic abuse. These withdrawals will not be subject to the 10% penalty tax applicable to distributions taken prior to age 59-½ or 20% income tax withholding. Employers may rely on the employee’s certification that he/she has suffered a personal or family emergency or been the victim of domestic abuse. Certain limits apply.

Effective in 2025

Automatic enrollment: Beginning in 2025, 401(k) or 403(b) plans established on or after Dec. 29, 2022, generally must automatically enroll newly eligible employees at a rate of at least 3% of pay and provide an annual automatic increase of at least 1% until the employee’s contribution is at least 10% (but not more than 15%) of pay. The arrangement must be an eligible automatic contribution arrangement, allowing employees to withdraw automatic enrollment deferrals within 90 days of automatic enrollment.

Age 50 and over catch-up contributions: The catch-up contribution limit for a participant who is age 60, 61, 62 or 63 will be the greater of $10,000 (indexed) or 150% of the regular age 50 and over catch-up dollar limit.

Part-time employees: Beginning in 2024, defined contribution plans (other than union plans) permitting employee elective deferrals must allow part-time employees who complete at least 500 hours of service in each of three consecutive years to participate. Beginning with the 2025 plan year, the three-year threshold is reduced to two consecutive years of at least 500 hours of service.

Employee stock ownership plans (ESOPs)

Under Code section 1042, a shareholder of a C-corporation that is not publicly traded may sell stock to the corporation’s ESOP and elect to defer the recognition of gain on the sale provided that following the sale the ESOP owns at least 30% of the corporation’s stock. The gain deferral applies to the extent the shareholder invests the sale proceeds in qualifying replacement property. Certain other requirements must be satisfied. Effective for sales after 2027, this option is extended to S-corporation shareholders for up to 10% of the proceeds from the sale of stock to an ESOP.

Defined benefit plans

Lump-sum window: Effective upon issuance of regulations, employers offering a lump-sum window under a defined benefit plan will need to satisfy new notice requirements. The regulations will require advance notice to eligible participants and beneficiaries (i.e., at least 90 days before the window election period), advance notice to the Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC) (i.e., at least 30 days before the window election period) and notice to the DOL and PBGC within 90 days after the close of the window reporting how many individuals elected the lump sum.

Annual funding notice: Starting with the 2024 plan year, annual funding notices must disclose different information, including the percentage of plan liabilities funded, the average return on assets for the plan year and whether the assets are sufficient to fund liabilities not guaranteed by the PBGC.

PBGC variable rate premium: Starting with the 2024 plan year, the PBGC variable rate premium for underfunded defined benefit plans is fixed $52 per $1,000 of unfunded vested benefits and is no longer to be indexed.

The IRS is directed to update the Employee Plans Compliance Resolution System (EPCRS). The EPCRS update will allow employers to correct inadvertent qualification errors in 401(k), 403(b) or other qualified retirement plans at any time under the Self-Correction Program (SCP) without needing to submit the correction to the IRS for approval. The SCP time limit for correcting “significant” errors will be eliminated. Correction under SCP will not be available if the IRS identifies the error before the employer demonstrates a commitment to correct.

Timothy C. McDonald, JD, is a shareholder with von Briesen & Roper s.c. His practice focuses exclusively on compensation and benefits/ERISA issues for publicly traded and private for-profit businesses, tax-exempt entities, municipalities and school districts, and religiously affiliated institutions. Contact him at timothy.mcdonald@vonbriesen.com.