The SECURE Act 2.0 was signed into law by President Biden on December 29, 2022. Included as part of the Consolidated Appropriations Act of 2023, it provides additional retirement savings reforms designed to expand access to and increase participation in workplace retirement plans. Beyond this, there are also several provisions impacting employers from new and expanded tax provisions to administrative updates that need to be made in the coming months and years. This includes the elimination of notice requirements for unenrolled participants, expansion of the Employee Plan Compliance Resolution System (EPCRS), and an increase in the RMD age. To help clients, prospects, and others make sense of the changes, Smith Schafer has provided a summary of the key details below.
- Notice Requirements Unenrolled Participants – There are several notifications, notices, and updates that must be sent to plan participants. Under prior regulations, this also included employees eligible to participate in a 401(k) plan even in situations where an election was made not to participate. SECURE Act 2.0 changes this to only require such notices to be sent to those participating in the plan. The only information which will now need to be sent to unenrolled participants includes the summary plan description and annual notice about eligibility to enroll.
- Employee Plan Compliance Resolution System (EPCRS) – Under SECURE Act 2.0 there were significant changes to when a plan sponsor can use the Self Correction Program (SCP) to remedy eligible plan issues. Under the new regulations, a plan sponsor (403(b), 401(k), SEPs, and SIMPLE IRAs) can now correct an eligible inadvertent failure using SCP. An eligible inadvertent failure is defined as any failure that occurs despite the existence of policies designed to promote compliance with established requirements. It does not include egregious failures related to diversion or misuse of plan assets. Finally, the SCP can not be used if the failure was identified by the IRS first, or the self-correction was not made within a reasonable time after identification.
- Optional Roth Employer Contributions – Under prior regulations, all matching contributions were made on a pre-tax basis. Meaning the participant pays tax on the distribution at the time it is made, typically when the individual’s effective tax rate is lower. Under SECURE Act 2.0, this has been changed. Now an employer may allow workers to receive employer matching and elective deferral contributions to be made as Roth contributions. This means taxes are paid at the time the contributions are made and not when a distribution is taken. It is important to note this is a change that employers can make, but are not required to do so.
- Automatic Enrollment & Escalation – A new change is the requirement for newly established 401(k) and 403(b) plans to include an automatic enrollment and escalation provision. Eligible employees must be automatically enrolled at a contribution percentage of at least 3% but not to exceed 10%. In addition, each year an employee completes a year of service the contribution rate must increase 1% until the rate reaches 10% (with a maximum of 15%). It is important to note, businesses that join a multi-employer plan are considered to have created a new plan and must comply with the requirement.
- Long Term Care Distributions – Under new regulations, plan participants can now take a penalty free distribution to cover expenses related to certified long term care insurance. The amount of the distribution is the lesser of: the amount paid or assessed by the employee during the year for long term care insurance, 10% of the vested accrued benefit in the plan, or $2.500.
- Victims of Domestic Abuse – There is also a provision which allows for penalty free withdrawals for victims of domestic abuse. Under new rules, participants can self-certify and can take the lesser of $10,000 or 50% of the account balance. Once taken the funds must be repaid within a three-year period and the participant will receive a refund on income taxes paid.
- RMD Age Increased – Building upon increases made under the SECURE Act, there are additional increases in the RMD age. Starting January 1, 2023, the age at which participants must take Required Minimum Distributions is increased to 73 (for those who turn 72 after December 31, 2022). The minimum age again increases in 2033 to 75 years old.
The SECURE Act 2.0 ushered many beneficial and useful changes designed to expand access and participation. Concurrently, there were several operational and administrative changes made that plan sponsors need to carefully review. If you have questions about the information outlined above or need assistance with your next plan audit, Smith Schafer can help. For additional information call 952-920-1422 or click here to contact us. We look forward to speaking with you soon.