The SECURE 2.0 Act is here: No more surprises for plan sponsors

Late last week Congress passed the Consolidated Appropriations Act, 2023 (CAA 2023), the long debated and expected changes to employer-sponsored benefit programs known as Setting Every Community Up for Retirement Enhancement (SECURE) 2.0. The SECURE 2.0 Act of 2022 appears as Division T about halfway through the Senate Appropriations document.

There are over 90 provisions addressed in the new law, expanding coverage and increasing retirement savings, preserving income, simplifying and clarifying retirement plan rules, making technical amendments to the original SECURE Act of 2019, and changing certain other administrative, revenue, and tax court retirement provisions. As with early versions from the House and Senate, many or perhaps most provisions affect defined contribution (DC) plans and IRAs. There are several provisions for defined benefit (DB) plans, and there are a number of ERISA compliance and disclosure items affected. Here are some key provisions of the new law with the Section of Division T in parentheses:

1. Starting in 2025 automatic enrollment becomes mainstream, as most new 401(k) and 403(b) plans must include automatic enrollment and automatic escalation, with an initial automatic enrollment deferral contribution amount upon participation of at least 3% but not more than 10% (unless the participant opts out or elects a different percentage). After the first year, the automatic enrollment rate must increase by 1% each year up to at least 10% but not more than 15% (unless the participant opts out or elects a different percentage). (Section 101)
2. The required minimum distribution (RMD) age increases to age 73 in 2023, then rises to age 75 beginning in 2033. (Section 107)
3. The annual limit on catch-up contributions will increase beginning in 2025 for those who are ages 60 through 63 (inclusive) up to $10,000 (or, if greater, 150% of the regular catch-up amount for 2024). That dollar amount will be indexed for cost-of-living increases after 2025. (Section 109)
4. In order to generate federal tax revenue for the increased catch-up contribution limits in item 3 above, starting one year earlier, i.e., in 2024, if a participant earns over $145,000 from the plan sponsor in the prior year, then all catch-up contributions must be made as Roth after-tax contributions. The $145,000 is defined in Internal Revenue Code (IRC) section 3121(a), which does not have to be the same as the plan’s compensation definition, and is indexed for cost-of-living adjustments. (Section 603)
• Another federal tax revenue-raising provision is for participants to choose to receive employer matching or nonelective contributions as Roth after-tax contributions. (Section 604)
5. Starting in 2024, employers may make matching contributions to a 401(k), 403(b), or governmental 457(b) plan on account of employees who are making qualified student loan payments and may rely on the employee’s self-certification of making such payments. The 401(k) Actual Deferral Percentage (ADP) nondiscrimination test may be applied separately to employees who receive matching contributions on account of qualified student loan repayments. (Section 110)
6. Participants can withdraw up to $1,000 once a calendar year from a tax-preferred retirement plan, such as a 401(k) or 403(b) plan, for certain unforeseeable or immediate financial need “emergency expenses” starting in 2024, without incurring a 10% early distribution penalty tax. The withdrawal must be paid back within three years before another such withdrawal can be requested within each three-year repayment period. (Section 115)
7. For plan years beginning in 2025, long-term part-time workers who do not meet the one year of service with 1,000 hours rule for 401(k) plan eligibility can start making elective deferral contributions to the plan after two consecutive years of service with 500 hours, reduced from three consecutive years under prior law (the SECURE Act of 2019). This provision also extends the long-term part-time coverage rules to ERISA-covered 403(b) plans. The counting of the two-year period for both eligibility and vesting starts on or after January 1, 2023. Employer contributions (whether matching or nonelective) are not required to be made on behalf of long-term, part-time employees, even if employer contributions are made on behalf of other eligible plan participants. (Section 125)
8. Upon enactment of the new law, plan sponsors now have the discretion to decide not to seek repayment of retirement plan overpayments to retirees. (Section 301)
9. Starting in 2024, under the automatic rollover provisions applicable to involuntary cash-outs of small benefits, plan sponsors can transfer former employees’ retirement accounts to an IRA or other eligible retirement plan if the balance is between $1,000 and $7,000 (increased from $5,000). (Section 304)
10. An employer can rely on an employee’s self-certification that they have met the deemed hardship requirements for a 401(k) or 403(b) plan hardship distribution. Employee self-certification of a qualifying severe financial hardship is also permitted for an unforeseeable emergency distribution from a governmental 457(b) plan. (Section 312)
11. Employers can permit early withdrawals from a 401(k), 403(b), or governmental 457(b) plan, free from the 10% early distribution penalty tax, if a participant self-certifies to being a victim of domestic abuse by a spouse or domestic partner. The distribution amount is limited to the lesser of $10,000 (indexed for cost-of-living adjustments) or 50% of the vested account. (Section 314)
12. Beginning in 2023, defined contribution plan sponsors no longer have to provide ERISA or Internal Revenue Code required plan notices or disclosures to otherwise eligible employees who are “unenrolled,” that is, employees who did not elect to participate in the plan, provided upon initial eligibility such employees have received the summary plan description and any other initial notices related to plan eligibility. In lieu of otherwise required notices and disclosures, such unenrolled participants must receive an annual reminder notice of eligibility to participate in the plan during the annual enrollment period or within a reasonable period prior to the beginning of each plan year and any otherwise required document upon the participant’s request. (Section 320)
13. The following provisions affect single employer defined benefit plans.
• Future mortality improvements in the applicable mortality table cannot exceed 0.78% for the actuary’s life expectancy assumption. (Section 335)
• The projected interest crediting rate for a cash balance (statutory hybrid) plan that uses a variable interest crediting rate is capped at 6%. (Section 348)
• The indexing on the Pension Benefit Guaranty Corporation (PBGC) variable rate premium rate is eliminated, fixing the rate at $52 per $1,000 (5.2%) of unfunded vested benefits (UVB) starting immediately. (Section 349)
14. Plan sponsors who have been making corrections of missed automatic enrollment and automatic escalation elective deferrals under the IRS Employee Plans Compliance Resolution System (EPCRS) safe harbor that expires on December 31, 2023, are given extended relief. Going forward, those corrections can still be made 9½ months after the end of the plan year in which the mistake was made. (Section 350)

This Benefits Alert is not intended to be a comprehensive review of the new law, but rather highlights some of the key provisions that employers, their advisors, and plan administrators will need to consider for their plans. For those provisions that are implemented, additional consideration should be made to account for any required changes to administrative systems and communications to plan participants before the effective date of the change.

Stay tuned for future Client Action Bulletins, which will dive deeper into the SECURE 2.0 provisions and discuss how they may impact retirement plans.

Please contact your Milliman consultant for additional information that affects your employer benefit programs.