SECURE 2.0: Plan sponsors, check off mandatory provisions first, then new options

 If the beginning of the year wasn’t busy enough for DC plan sponsors, the passage of SECURE 2.0 likely added to the backlog of “tasks to do” for 2023. While the process of reviewing, evaluating, and seeking regulatory guidance is underway by consultants, attorneys, industry organizations, and some plan sponsors, the question of “What is mandatory vs. voluntary” is top of mind for many.

The mandatory SECURE 2.0 provisions that must be implemented within the next two years are generally action items for human resource and benefits professionals, benefits committees, and recordkeepers.

2023

Required Minimum Distributions (RMDs) changes: The required beginning date for RMDs will increase from age 72 to 73 in 2023. If an individual turns age 72 after December 31, 2022, the new RMD age (73) is applicable to them. Given the immediate effective date, a main concern is that RMD notices could be distributed to individuals who don’t have to take an RMD in 2023. Likely to impact: recordkeepers, participant communications.

Good news from the Internal Revenue Service (IRS): According to a Notice released on March 7, 2023, the IRS “will not consider an RMD statement provided to an IRA owner who will attain age 72 in 2023 to have been provided incorrectly if the IRA owner is notified by the financial institution no later than April 28, 2023, that no RMD is actually required for 2023.” Likely to impact: recordkeepers, participant communications.

 Qualified Birth or Adoption Distribution (QBAD) changes: If a qualified retirement plan currently offers QBADs (voluntary provision), administrative changes are required. Prior to 2023, a parent could repay a QBAD at any time and it would qualify as a rollover contribution. Going forward, a parent will have up to three years to recontribute a distribution to qualify as a rollover contribution, which is consistent with the rules on disaster relief distributions.  Likely to impact: recordkeepers, participant communications.

2024

Roth accounts exempt from pre-death RMD rules: No RMDs will be required from Roth accounts in qualified retirement plans during a participant’s lifetime – a positive for retaining retiree assets. Essentially, the same RMD treatment will apply for Roth plan accounts (e.g., 401(k)) and Roth IRAs. Likely to impact: recordkeepers, participant communications.

Catch-Up Roth contributions: All catch-up contributions must be made on a Roth basis for employees whose wages are over $145,000 (indexed) in the prior year. This means that for certain employees to make catch-up contributions, the plan must offer Roth deferrals. This provision is applicable for 401(k), 403(b) and government 457(b) plans. Certain technical corrections to the legislation are required, and additional guidance from the U.S. Treasury Department and IRS are needed. Likely to impact: recordkeepers, participant communications, payroll system, plan design.

New lost & found database: The Department of Labor (DOL) must establish a national database within two years of enactment that will collect information on benefits owed to lost or non-responsive participants of retirement plans subject to ERISA vesting provisions. Plan sponsors may be expected to start reporting information in 2024. Additional guidance from the DOL on reporting requirements and timing is needed.

Once plan sponsors address the shorter-term mandatory SECURE 2.0 provisions, there are a stack of voluntary provisions to consider, and plan sponsors will need to prioritize based on their unique needs. New research from PGIM DC Solutions, which was based on a survey of 155 DC plan sponsors, finds that the top priority for 6 in 10 plan sponsors is Participant communications and engagement. With the passage of SECURE 2.0, there are new tools for plan sponsors that can support participant engagement – three are highlighted below:

1. Struggling with low participation or savings rates? Plan sponsors can now use small (“de minimis”) financial incentives, such as gift cards, to encourage employee savings in 401(k) and 403(b) plans. For example, an employer could offer a $40 gift card for any employee who signs up for the 401(k) plan. Keep in mind that this would be a cost to the employer, and taxable for the employee.
2. Have an employee population with student loan debt? Employers will be permitted to make matching contributions under a 401(k) plan and 403(b) plan with respect to qualified student loan payments starting in 2024. Government employers will be permitted to make matching contributions into a 457(b) plan (or another plan) as well. This provision will be particularly beneficial for employees who struggle to make their student loan payments and contribute to their 401(k) to receive the employer match. It will allow participants to start building a retirement nest egg much sooner, while continuing to pay down their student loans. This provision could increase employer contributions (e.g., cost) and will require recordkeeper and administrative enhancements.
3. Roth vs. pre-tax? More Roth please. Employers can now allow employees to elect for some or all their matching and nonelective contributions (including student loan matching contributions) to be treated as Roth contributions under a 401(k), 403(b), or government 457(b) plan. For plans with vesting schedules, note that the law requires Roth matching and nonelective contributions to be 100% vested. While some DC plans may already offer the ability to convert balances from pre-tax to Roth, this provision may be of greater interest for certain employee populations where Roth is a more tax efficient vehicle for saving for retirement. Despite being allowed today, additional guidance from Treasury and the DOL is needed, and it will require recordkeeper and administrative changes, which may take time.

Related: SECURE 2.0: Mandatory and optional provisions for employers

My suggestion is that DC plan sponsors should start with the shorter-term mandatory items to ensure compliance by the applicable dates and then look to the longer-term mandatory items and voluntary provisions to determine their next best steps.

Mikaylee O’Connor is VP & Senior Defined Contribution Strategist at PGIM DC Solutions, which has published “DC Solutions: The Buzz from Washington SECURE 2.0 Edition.