March 8, 2024 Update: IRS issued Notice 2024-2 in December 2023 extending the deadlines for plan sponsors to adopt required and discretionary plan amendments related to SECURE 2.0. Changes to this article are shown in green.

The Consolidated Appropriations Act, 2023 (CAA 2023), signed into law on December 29, 2022, includes the long debated and expected changes to employer-sponsored benefit programs known as SECURE 2.0.

While there are over 90 provisions addressed in the new law, this article is the first of a series that looks for any harmonizing theme among the provisions.

Clearly, the members of Congress were keen to change retirement plan laws with respect to adding funds where an “emergency” spend by an individual or family could be anticipated, particularly with an increase in the consumer price index (CPI) of approximately 14% since January 2021. See CPI Inflation Calculator (bls.gov). The provisions in SECURE 2.0 will statutorily permit prudent and reasonable rules for withdrawals from a qualified plan that plan sponsors will have to implement or choose to implement immediately or over the next few years.

Here are seven key provisions of the new law regarding withdrawing funds from a qualified plan, and any subsequent optional or required repayments, with the relevant section of SECURE 2.0 in parentheses. We note that a few of the actions by participants executing the distributions may require a review of their personal federal income tax filings. State of residence personal income tax rules could also be affected. We express no opinion nor are we offering any tax or investment advice on federal or state of residence personal income tax rules in this article.

Effective in 2023

1. The required minimum distribution (RMD) age increases to age 73 in 2023, then rises to age 75 beginning in 2033 for retirement plans. The federal personal income tax penalty of missing an RMD has decreased from 50% to 25% of the RMD amount. (Section 107)
   • Observation: Defined benefit (DB) plans that change the RMD age must remember to provide actuarial increases to benefits beginning on the April 1 following the participant’s age 70½.
2. Beginning in 2023, 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)
   • This provision is optional for a plan sponsor to add to the plan.
   • Observation: If a plan sponsor allows this, there could be unintended consequences—an increase in hardship withdrawals, which means increased leakage from the plan.
3. Qualified birth or adoption distributions (QBOADs) were established under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. SECURE 2.0 modifies the repayment schedule of such withdrawals to clarify repayment is limited to three years. (Section 311)
   • Repayment of a QBOAD is voluntary.
   • For new QBOAD recipients, meaning those whose distributions occurred after December 29, 2022, repayment may start at any time during the three-year period beginning on the day after the date the QBOAD was received.
   • For those who have already received a QBOAD, meaning a distribution prior to December 29, 2022, the repayment period ends on December 31, 2025.

Effective in 2024

4. Participants will no longer be required to take RMD amounts from Roth accounts in an employer-sponsored retirement plan, such as 401(k) or 403(b), beginning after December 31, 2023. (Section 325)
5. Beginning in 2024, employers may permit a withdrawal by a participant once a year of no more than $1,000 from a tax-preferred retirement plan other than a defined benefit plan, such as a 401(k) or 403(b), for certain unforeseeable or immediate financial need “emergency expenses,” without incurring a 10% early distribution penalty for federal personal income tax. The employee can self-certify that their request satisfies this immediate need. Any withdrawal must be paid back before another such withdrawal can be requested within each three-year repayment period, unless the participant has subsequently contributed an amount equal to the prior withdrawal. (Section 115)
• This provision is optional for a plan sponsor to add to the plan.
• Observation: A plan could be amended to allow an in-service withdrawal for this event.
6. Employers may permit early withdrawals from a 401(k), 403(b), or governmental 457(b) plan, beginning in 2024, free from the 10% early distribution penalty for federal personal income 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. The distribution is not eligible for rollover and the participant may choose to repay the distribution. (Section 314)
• This provision is optional for a plan sponsor to add to the plan.
• Observation: A plan could be amended to allow an in-service withdrawal for this event.
7. Employers may establish an emergency savings account (ESA) that is part of the qualified savings plan to which Roth (post-tax) employee deferrals can be made in plan years beginning after December 31, 2023. (Section 127)
• This provision is optional for a plan sponsor to add to the plan.
• The ESA is only available to non-highly compensated employees (NHCEs), which in 2024 will mean earnings of no more than $150,000.
• The employer may elect to automatically enroll participants into an ESA or allow for voluntary participant election.
• Employee contributions cannot exceed 3% of compensation, and total employee contributions cannot exceed $2,500. The employer, at its discretion, can cap the total account balance to a value lower than $2,500. The participant incurs no processing or administrative fees for effecting a withdrawal for the first four withdrawals only.
• If allowed by the plan, the employer may match the ESA contributions at the same rate of match on employee deferrals. The matching contributions would not be contributed to the ESA, they would be contributed to the match account in the plan.
• Observation: An ESA may help participants avoid taking a hardship withdrawal or a loan. The contribution cap is limited but it helps satisfy the need for access to short-term savings.

Plan amendments

As it stands now, a plan must be amended for any changes by December 31, 2026 (December 31, 2028, for collectively bargained plans, and December 31, 2029, for most governmental plans), as long as the plan has operated as if the amendment was in effect from the applicable effective date of the amendment. A full summary of the amendment deadlines can be found here.

As this article is being published, plan sponsors, plan administrators, recordkeepers, and advisors are eagerly anticipating formal guidance from the IRS and U.S. Department of Labor (DOL) to implement these SECURE 2.0 changes. 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.

It is unclear when formal guidance will be released, and perhaps IRS and DOL will not enforce any penalties on early adoption and instead will permit any technical changes to be made after formal guidance is released. We can assume there will be “good faith compliance” in that vacuum of formal guidance.

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