SECURE 2.0: Key provisions for plan sponsors

2022 wrapped with a bang for plan sponsors nationwide as President Biden signed The Consolidated Appropriations Act of 2023, including the SECURE 2.0 ACT of 2022, into law. SECURE 2.0 is the evolution of the 2019 Setting Every Community Up for Retirement Enhancement Act, and, as expected, sweeping changes will come into effect. There are said to be over 90 retirement plan-related provisions addressed or implicated in some way in the updated legislation, some with future year effectiveness, and with a variety of employer activity, or inactivity, resulting in potential liability issues and organizational exposure involving employer decision makers.

In many instances, the provisions of the SECURE Act are designed to address the general concern that American workers are failing to accumulate sufficient financial resources to properly fund individual retirement lifestyles. As a result, employers and plan administrators need to determine which provisions apply to their plans, and how to remain in compliance as SECURE 2.0 comes into effect. Plan sponsors need to properly prepare, otherwise they could be at risk of a fiduciary breach. A fiduciary breach would almost inevitably result in litigation brought by the federal government, affected employees, or financially damaged third parties, and this could be quite costly to an organization without appropriate fiduciary liability insurance.

Distilling the changes moving the needle now

SECURE 2.0 increases the age of individuals mandated to begin Required Minimum Distributions (RMDs), previously set at 72 in the initial SECURE Act, to the age of 73 this year, and 75 beginning in 2033.  Retired workers will now be able to accrue greater potential tax-deferred earnings for a longer period of time.

The new provisions increase “catch up contributions” to both 401(k) and 403(b) plans by qualified participants aged 50 and older. Effective in 2023, this additional “catch up” limit is $7,500. It is important to note that in 2025, plan participants who are ages 60-63 will be allowed to make a “catch up” contribution of $10,000, which is indexed for inflation. Additionally, plan participants affected by SECURE 2.0 are allowed to decide if their “catch up” contributions are to be treated as pre-tax contributions or after-tax Roth IRA contributions. If the latter approach is selected, it would require that such contributions be included in the plan participant’s income for the year made – a taxable event for the affected employee.

Although SECURE 2.0 aims to increase saving opportunities for workers, it also recognizes that emergencies and hardships continue to befall many families, and thus allows for both emergency savings and hardship withdrawals. These distributions by employers are eased, in that the early withdrawal penalty, generally at 10%, is waived if either the withdrawal is made before age 59 ½ or if the employee’s physician certifies that they are reasonably expected to die within 84 months. SECURE 2.0’s new provisions increase catch-up contributions to both 401(k) and 403(b) plans, by qualified participants aged 50 and older. Effective in 2023, the catch-up limit bumps up $1K to $7,500. It is important to note that in 2025, plan participants who are ages 60-63 will be allowed to make a catch-up contribution of $10,000 (indexed for inflation). Additionally, plan participants affected by SECURE 2.0 are allowed to decide if their catch-up contributions are to be treated as pre-tax contributions or after-tax Roth IRA contributions. If the latter approach is selected, it would require that such contributions be included in the plan participant’s income for the year made – a taxable event for the affected employee.

Preparing for changes beyond 2023

The SECURE 2.0 Act also pushes for future changes that come into effect in 2024 and 2025. In 2024, the expected enhancements can offer employers more options to support plan participants in their retirement goals. Employers will be allowed to make contributions to defined workplace savings plans on behalf of employees who cannot contribute to 401(k)s because of student loan burdens. Additionally, to further aid plan participants, employers may authorize individual account-defined contribution plans to offer short-term emergency savings accounts, up to a maximum of $2,500, funded with after-tax Roth contributions and limited to one withdrawal per month. Likewise, employees can play a larger role in their plan’s trajectory; should the balance in a 401(k) or 403(b) dip below a specified amount, the employee may force a distribution of the balance without employer consent, increased to $7,000 from the existing $5,000. Beginning in 2025, new 401(k) and 403(b) plans must provide for automatic contributions between 3% and 10% of compensation, with automatic escalations of at least 1% per year, of up to at least 10%, but not more than 15% per year.

Related: SECURE 2.0: Mandatory retirement plan changes for employers and plan sponsors

Importantly, part-time employees working at least 500 hours per year for at least three consecutive years, and who are at least 21 years old at the end of the three-year period, must be allowed to enroll in and be eligible for elective deferrals under the employer’s 401(k) plan at the conclusion of each three-year period.

Creating a protection blanket for plan sponsors

Overall, SECURE 2.0 brings a variety of new details and considerations for company retirement plan sponsors to steward. The litany of new 401(k) and 403(b) benefit plan provisions staggered across multiple years places imposing compliance and reporting pressures upon employers to grasp, implement and plan accordingly. Realistically, even with diligent effort, plan sponsors will make mistakes. 2022 was the second most active year on record for ERISA litigation against plan sponsors, with 24 settlements totaling more than $160 million to date. Unfortunately, plan sponsors bear personal exposure for third-party claims of not meeting fiduciary obligations. Additionally, some plan sponsors think if they outsource administration, oversight, or supervision of employee benefit plans, that they’re also outsourcing the liability. The liability exposure in that instance is the decision that’s made to utilize third party services. Fiduciary liability insurance is an indispensable measure to ensure sponsors and their businesses are protected with defense costs and penalty limits.

The sweeping SECURE 2.0 ACT of 2022 was designed to make saving and planning for retirement easier for Americans. Though many of the changes are not controversial, there is a proliferation of technical adjustments plan sponsors will need to monitor headed toward 2025, when most of the provisions become effective. Plan sponsors famously have to balance the interests of their companies, both current and former plan participants, and regulatory compliance. Those who proactively get ahead of the game’s new rules will be best positioned to serve the needs of all stakeholders – while also protecting themselves and their organizations against liability.

Richard Clarke is Chief Insurance Officer at Colonial Surety Company.