SECURE 2.0: Guidance for retirement plan sponsors for 2023, 2024 and beyond

Employers are still getting their arms around the scope of change represented by SECURE 2.0. We’ve created an outline that trims the Senate Finance Committee summary down to those provisions most relevant to defined contribution plans without taking all the meat off the bones. Our goal is to give plan sponsors an approachable entry point for understanding where the rubber meets the road.

Hailed as landmark retirement reform, SECURE 2.0 builds on the SECURE Act of 2019 to enhance the long-term financial security of millions of Americans by providing wider access to retirement savings. President Biden signed SECURE 2.0 into law on December 29, 2022, as part of a $1.7 trillion omnibus spending bill that also includes funds for national defense, medical research, safety, veteran health care and disaster recovery.

While most provisions within the 358-page SECURE 2.0 package apply to plan years beginning January 1, 2024, or later, certain provisions apply for the 2023 plan year. SECURE 2.0 provisions that will affect a majority of large and mid-sized defined contribution (DC) plan sponsors can be summarized as follows.

Mandatory changes to required minimum distribution (RMD) rules

• Effective December 29, 2022, expands the amount that can be excluded from RMD rules if used to purchase qualified longevity annuity contracts.
• Effective January 1, 2023, raises the RMD age (the age at which participants must begin withdrawing from their retirement accounts) from 72 to 73, with a subsequent increase to 75 effective January 1, 2033.
• Effective January 1, 2023, reduces the individual tax penalty for failure to take the RMD.
• Effective January 1, 2023, provides more flexibility in the allowable timing, amounts and features of life annuities to satisfy RMD requirements by removing an existing actuarial test.
• Effective January 1, 2024, allows the surviving spouse of a participant who dies before commencing RMDs to elect to be treated as the employee for RMD purposes.
• Effective January 1, 2024, eliminates RMD requirements on Roth accounts prior to a participant’s death.

Other changes to retirement plan distributions

• Effective for federally declared disasters occurring on or after January 26, 2021, provides permanent rules related to the permitted use of retirement funds by affected individuals including penalty-free withdrawals of up to $22,000, taxation over three years, repayment provisions and special loan considerations.
• Effective December 29, 2022, eliminates the 10% early withdrawal penalty on distributions to terminally ill participants.
• Effective December 29, 2022, limits the repayment period for distributions taken for qualified birth or adoption expenses to three years.
• Effective January 1, 2023, permits employers to rely on employee self-certification of an event that constitutes a hardship.
• Effective January 1, 2024, eliminates the 10% early withdrawal penalty on amounts up to $1,000 in a year for personal or family emergencies. No other such emergency distribution may be made within three years unless the initial distribution is repaid.
• Effective January 1, 2024, creates a new, penalty-free withdrawal for victims of domestic abuse. Income taxes will be refunded to the participant for distributions repaid within three years.
• Effective January 1, 2024, increases the mandatory distribution cap to $7,000 (formerly $5,000).
• Effective December 29, 2025, permits distributions of up to $2,500 to pay for long-term care insurance premiums with no early withdrawal penalty.

Additional operational changes

• Effective December 29, 2022, allows employers to give DC plan participants the option to receive employer matching contributions on a Roth (after-tax) basis.
• Effective January 1, 2023, allows employers to offer de minimis, immediate financial incentives (such as gift cards) to encourage employees to join retirement plans.
• Effective January 1, 2023, limits the types of plan disclosures required to those who have not elected to participate.
• Effective January 1, 2024, requires that all catch-up contributions to qualified retirement plans by highly paid participants be made on a Roth (after-tax) basis.
• Effective January 1, 2024, allows employers to offer individuals the option to pay down a student loan instead of contributing to a 401(k) plan and still receive an employer match in their retirement plan. Plan sponsors may conduct separate non-discrimination testing for these individuals.
• Effective January 1, 2024, allows plan sponsors to offer non-highly compensated employees an emergency savings account. Employers may auto-enroll employees at no more than 3% of compensation. Contributions are capped at $2,500, after which time contributions must be stopped or directed to an employee’s Roth IRA until the balance falls below the cap.
• Effective January 1, 2024, modifies top-heavy testing so that a plan sponsor may test non-excludable and excludable employees separately.
• Effective December 29, 2023, allows plan providers to offer the ability to automatically deposit a participant’s default IRA from a previous employer into a new employer’s qualified plan.
• Instructs the Department of Labor to issue new guidance by December 29, 2024, on benchmarking target date funds against appropriate indices.
• Instructs the Department of Labor to create a central data repository (the ‘Retirement Savings Lost and Found’) by December 29, 2024, for participants to search for their plan administrator’s contact information.
• Effective January 1, 2025, requires new 401(k) and 403(b) plans to automatically enroll employees unless they specifically opt out.
• Effective January 1, 2025, creates new, higher catch-up contribution limits for those ages 60 through 63 who participate in employer-sponsored retirement plans.
• Effective January 1, 2025, requires plan sponsors to allow part-time employees who work at least 500 hours a year for two consecutive years (not three years, as under current law) to participate in company 401(k) plans.
• Effective January 1, 2026, requires plan sponsors to provide participants with at least one paper account statement per year, unless the participant elects otherwise.

Updates to plan correction methods

• Effective December 29, 2022, expands the IRS’ Employee Plans Compliance Resolution System (EPCRS) by allowing more errors to be corrected through self-correction, extending applicability to inadvertent IRA errors and exempting certain RMD failures from excise taxes.
• Effective December 29, 2022, limits the degree to which plans may seek to recoup excess retirement plan payments from participants and gives plan sponsors the ability to choose not to recoup overpayments.
• Effective January 1, 2024, allows for correction of reasonable errors in administration of automatic enrollment and automatic escalation within 9½ months after the end of the plan year in which the mistakes occurred (alleviating concern over the existing safe harbor correction method under EPCRS that expires December 31, 2023).

This list is not exhaustive. The full text of SECURE 2.0, including provisions that affect pension and cash-balance plans, may be found on pages 2046-2404 of the omnibus Consolidated Appropriations Act of 2023. The Senate Financial Committee’s 19-page summary of SECURE 2.0 may be found here.

For retirement plan sponsors, the question is not whether SECURE 2.0 impacts them, it’s which of the more than 90 provisions apply to them and when do they take effect. Determining the portions of the law relevant to each plan’s unique situation is the first step in building a comprehensive plan of action that will keep employers in compliance with minimal disruption to participants and administrative teams.

Andy Adams is founder and principal of Strategic Benefits Advisors and Lynn Bullard is principal of Strategic Benefits Advisors.