The SECURE 2.0 Act of 2022 was signed into law by President Biden on Dec. 29, 2022. The act was folded into the $1.7 trillion Consolidated Appropriations Act 2023. Many of the provisions of SECURE 2.0 are geared toward providing increased access to defined contribution (DC) plans, helping boost participant savings levels and simplifying plan rules.
Background on Secure 2.0
SECURE 2.0 represents a next step in retirement plan legislation following the Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019. SECURE 2.0 includes nearly 100 provisions, and below we highlight the most noteworthy to DC plans.
- Student Debt “Match”: Expanding on the tenets laid out in the Abbott private letter ruling, employers will have the ability to make matching contributions in a DC plan with respect to participant student loan repayments, meaning student loan repayments will be treated as elective deferrals for the purposes of nondiscrimination testing and safe harbor rules. This will take effect in 2024 and applies to 401(k) plans, 403(b) plans, and 457(b) plans. This is an optional provision.
- Roth Catch-Up Requirements: Age 50+ catch-up contributions for employees whose compensation exceeds $145,000 in the prior year must be made on a Roth basis. DC plans that do not offer a Roth will need to add this additional catch-up source in the plan document and program the source with their recordkeeper. It is unclear if the Roth would need to be offered for regular deferrals in a 401(k) plan, although it appears that the Roth must be added as a regular deferral type in a 403(b) plan due to the universal availability requirement. The compensation limit will be subject to an annual cost-of-living adjustment in $5,000 increments. This required modification will take effect in 2024 and applies to 401(k) plans, 403(b) plans, and 457(b) plans.
- Increased Catch-Up Limits: The limit on catch-up contributions for participants aged 60-63 will be increased to the greater of $10,000 (indexed) or 150% of the regular catch-up contribution. This will take effect in 2025 and applies to 401(k) plans, 403(b) plans, and 457(b) plans but does not apply to 457(b) special catch-up provisions. Plans are not required to implement this provision.
- Automatic Features for New Plans: New DC plans established after the date of SECURE 2.0 enactment (Dec. 29, 2022) will be required to include automatic enrollment and automatic escalation features beginning with the 2025 plan year. These new plans will be required to automatically enroll participants at a rate between 3% and 10% of compensation and increase the deferral rate by at least 1% per year, up to at least 10% but not more than 15% of compensation.
- Emergency Savings Accounts: Non-highly compensated employees will be able to contribute up to $2,500 to an in-plan emergency savings account, if offered by an employer, and take monthly withdrawals, as needed. Only employee contributions will be permitted to these accounts, which will be treated as Roth deferrals and receive related matching contributions. Participant assets in these accounts will be required to be invested in a liquid principal preservation option. This optional provision will take effect in 2024.
- Increased Age for RMDs: The required minimum distribution (RMD) age will increase from 72 to 73 on Jan. 1, 2023, and to 75 on Jan. 1, 2033. This will apply to 401(a) plans, 401(k) plans, 403(b) plans, and 457(b) plans. Beginning in 2024, RMDs will no longer be required from Roth accounts in DC plans, furthering the benefit of those accounts. Finally, in response to a common plan operational failure, the penalty for missing a RMD payment was also reduced from 50% to 25%.
- QLAC Purchase Limit: The previous limit on the purchase of a qualified longevity annuity contract (QLAC) was the lesser of $155,000 and 25% of an individual’s account balance. SECURE 2.0 removes the 25% limit and raises the dollar limit from $155,000 to $200,000 in 2023.
- Cash-Out Limit: Previously, plan sponsors could “cash out” terminated participant balances under $5,000 to an IRA. SECURE 2.0 increases the cash-out limit to $7,000. This provision will be effective for distributions after 2023.
- Collective Investment Trusts and 403(b) Plans: SECURE 2.0 includes language amending ERISA that paves the way for 403(b) plans to be able to invest in collective investment trusts and unregistered insurance company separate accounts. However, certain securities laws exemptions were not included in SECURE 2.0, meaning further legislation will be necessary before such investments are permitted in 403(b) plans.
- Other topics: SECURE 2.0 also made changes to the “long-term part-time employee” eligibility requirements put in place by SECURE 2019, adds automatic portability options, enhances emergency withdrawal availability, establishes a “Retirement Lost and Found” searchable database, directs the DOL to provide guidance on asset-allocation fund benchmarks, and much more. Callan will provide further updates in the upcoming weeks.
SECURE 2.0 represents a sweeping piece of retirement plan legislation intended to improve American workers’ retirement security and flexibility. Importantly, many provisions will require action from plan sponsors, recordkeepers, and other key players in the DC space. Plan fiduciaries may wish to consult with the appropriate parties to ensure necessary actions are taken in a timely manner.
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Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which Callan has not necessarily verified the accuracy or completeness of or updated. The views contained in this content are for informational purposes only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of the content is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation.