As we have mentioned in previous Perspectives articles, on December 29, 2022, President Biden signed into law the Consolidated Appropriations Act, 2023, which included a major package of retirement savings provisions known as SECURE Act 2.0. In the eight months since, we have been busy reviewing and unpacking both the mandatory and optional provisions of this legislation that affects qualified defined contribution retirement plans. This is a massive piece of legislation which includes over ninety provisions which, for the most part, are helpful to the cause of promoting retirement security. As a nation, we are growing increasingly serious about closing the coverage, participation, and savings gaps and the social equity disparities that exist with respect to those gaps. This legislation contains significant provisions for making the private, employer-based retirement system a success for more workers than ever before. That said, there is a lot in SECURE Act 2.0. Consideration of and compliance of provisions will require due diligence.

Before I proceed a little history and backdrop might be helpful. SECURE 1.0 was part of the Further Consolidated Appropriations Act, 2020, enacted in 2019 and included provisions aimed at expanding retirement plan access and making retirement savings easier for employers and employees. A few examples of these provisions included lifetime income disclosures, portability for in-plan annuities, elimination of stretch Individual Retirement Accounts (IRAs) and Required Minimum Distributions (RMDs) moved to age 72.

The Relationship Management team within the Retirement Plan Division have been meeting with our clients throughout this year to provide updates as mandatory provisions become effective and provide information and guidance on optional provisions. We are excited and energized for most of these new options and provisions and, while not all are appropriate for every retirement plan, many of them will help improve individuals’ ability to save for retirement and ease plan administration for employers.

Amendments related to SECURE Act 2.0 are required by the end of the 2025 plan year (2027 for governmental and union plans) and plans must operate in accordance with the mandatory provisions of the new Act as of the applicable effective dates.

I would like to discuss a few of the more significant and impactful provisions for all plan sponsors of qualified retirement plans to be aware of and prepare for now and in the years to come.

Provisions Effective by January 1, 2023 (mandatory and optional)

  • Increase in Age for Required Minimum Distributions (RMDs) and No RMDs on Roth Dollars (effective 2024) – Mandatory. The RMD age will increase to age 73 from age 72 and will increase further over the next decade.
  • Treatment of Vested Employer Contributions as Roth Contributions – Optional. Retirement plans may allow participants to elect some or all vested matching and/or non-elective employer contributions to be deposited to the participant’s designated Roth account within the qualified plan. If the participant makes this election, the contribution amount is includible in the employee’s income. While effective this year, we must wait for considerable guidance and clarification from the Internal Revenue Service (IRS) and Department of Labor (DOL) to proceed. Premature implementation will be difficult due to individual written election requests and programming of payroll and recordkeeping systems.
  • Self-Certification of Hardship Distributions – Optional. Plan Sponsors can rely on an employee’s self-certification (unless they have knowledge to the contrary) of an immediate and heavy financial need, that is not in excess of the amount required to satisfy the need, that a distribution is being made on account of one of the seven safe harbor hardship reasons. Collecting source documents is not required.
  • Withdrawals for Participants with Terminal Illness – Optional. There is an additional 10% tax on early distributions from qualified retirement plans subject to some exceptions.
  • SECURE Act 2.0 adds an exception for distributions to a terminally ill participant with certification from a physician. It also allows for the distribution to be repaid within three years.

Provisions Effective by January 1, 2024 (mandatory and optional)

  • “Rothification” of Catch-Up Contributions for Certain Higher Compensated Employees – Mandatory. If participants are taking advantage of catch-up contributions and their wages exceed $145,000 in the prior calendar year, such participants will be required to make catch- up contributions on a Roth (after-tax) basis.
  • Student Loan Payments Count as Elective Deferrals Towards Employer Matching Contributions – Optional. Permits a plan sponsor to make employer matching contributions under a 401(k) Plan and 403(b) Plan with respect to “qualified student loan payments” if they meet the plan eligibility provisions.
  • In-Plan Emergency Savings Accounts – Optional. Non-highly compensated employees may save up to $2,500 (indexed annually) in a retirement plan-linked savings account. Must be funded with Roth contributions and invested in a conservative investment. Withdrawals are penalty free and can be for any reason. Automatic enrollment option is available up to three percent.
  • Penalty-Free Withdrawals for Victims of Domestic Abuse – Optional. Allows retirement plans to permit participants that self-certify that they experienced domestic abuse to withdraw up to the lesser of $10,000 or 50% of the vested balance within one year of the incident without penalty.

Provisions Effective by January 1, 2025 (mandatory)

  • Long-Term, Part-Time (LTPT) Workers Rule is Reduced to Two Years – Mandatory. SECURE Act 2.0 reduced the LTPT rule to two years (from three years under SECURE 1.0). This rule states that employees working 500+ hours in two consecutive years must be eligible to defer into the plan. Employer contributions are not required nor does LTPT participation affect nondiscrimination testing.
  • Plan Amendment Provisions – Mandatory. Plan amendments made pursuant to this Act must be made on or before the last day of the first plan year beginning on or after January 1, 2025 (2027 for governmental and union plans).

SECURE Act 2.0 is not the end. There will be more retirement legislation in the coming years. The combination of SECURE Act 1.0 and 2.0 with the growth in state retirement mandates (and possibly a future federal mandate) presents us with a toolkit that likely will play a major role in prompting a wave of new plan formation among small businesses and rising participation and savings rates across the retirement system. The coming years will be an exciting and eventful. Please know that the Retirement Plan Division within Greenleaf Trust stands ready to meet the demands of this legislation and are prepared to walk our clients through the maze.