SECURE 2.0 signed into law: What does that mean for you?

President Joe Biden signed into law SECURE 2.0 Act of 2022 which is intended to enhance the American retirement system by making it easier for Americans to participate in and benefit from their employer’s retirement plan in various ways, along with easing some of the administrative burdens for employers. Plan Sponsors should take proactive steps now to understand the new requirements and related applicability to their company’s retirement program.  

Included in SECURE 2.0 are over 100 provisions intended to expand coverage, increase retirement savings, and simplify and clarify retirement plan rules. SECURE 2.0 makes even more aggressive changes to retirement plan governance, including key provisions such as:

• Mandatory automatic enrollment.  Effective for plan years beginning after December 31, 2024, new 401(k) and 403(b) plans will have to automatically enroll participants upon attaining eligibility.  The automatic deferrals will start at between 3% and 10% of compensation, increasing by 1% each year to a maximum of at least 10% but no more than 15% of compensation.

Since the onset of automatic enrollment rules in 1998, these provisions have increased retirement saving participation by certain lower wage individuals and minority groups up to 75%. This new rule will improve those numbers even more.

• Increased age for RMDs.  The SECURE Act increased the RMD age to 72.  SECURE 2.0 further increases the age to 73, beginning on January 1, 2023, and again to age 75 beginning on January 1, 2033.  In addition, SECURE 2.0 would reduce and sometimes eliminate the excise tax imposed on failing to take RMDs.
  
  
• Increase the catch-up limit.  Under current law, participants who age 50 or older may defer an additional amount over the statutory maximum, referred to as a “catch-up.”  Beginning in 2025, SECURE 2.0 increases the catch-up amount by at least 50% for participants who are between the ages of 60 and 63.   

The increased catch-up limits will also be indexed annually for inflation starting in 2025.

• Matching of student loan repayments. Effective for plan years beginning after December 31, 2023, employers have the option to match student loan repayments as if the student loan repayments were deferrals.

This allows lower earning college graduates entering the workforce to service their student loan debts and not miss out on employer matching contributions because they had to choose between making their monthly student loan payment or deferring into their 401(k) plan.

• Small financial incentives for participation.  Employers could offer de minimis financial incentives, such as low-dollar gift cards, to boost participation in retirement plans.  The financial incentives cannot be purchased with plan assets.

• Emergency withdrawals.  SECURE 2.0 allows penalty-free distributions for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” up to $1,000.  Only one distribution would be permitted every three years, or one per year if the distribution is repaid within three years. 

According to the Federal Reserve Bank, almost 50% of Americans would struggle to meet an unexpected bill of at least $400 due to a lack of emergency savings. 60% of these people tap into their 401(k) for emergency funding while only 9% of Americans with an emergency savings cache sufficient to meet one-month’s living expenses do so. This provision will help Americans face these emergency situations without jeopardizing their long-term retirement savings.

• Emergency Funds for Victims of Domestic Violence. SECURE 2.0 permits penalty-free withdrawals of small amounts (up to $10,000 or ½ of the vested account balance – whichever is smaller) for participants who need the funds in cases of domestic abuse.

Employers will allow domestic violence victims to self-certify their abuse. This will allow much quicker access to funds to allow victims to relocate into a safer space as fast as possible, thus reducing the chance of danger from assault. It is made without the 10% premature distribution penalty and may be repaid into the plan as a loan.

• Emergency Funds for Individuals With Terminal Illness. SECURE 2.0 allows individuals with a terminal illness to access their retirement savings and avoid the 10% premature distribution penalty.

• Automatic rollovers.  SECURE 2.0 permits the transfer of default IRAs into the participant’s new employer’s plan, unless the participant affirmatively elects to the contrary. SECURE 2.0 also increases the limit for automatic rollovers from $5,000 to $7,000. This is effective twelve months after SECURE 2.0 goes into effect.

• Eligibility for long-term, part-time workers.   SECURE 2.0 reduces the three-consecutive-years rule to two-consecutive years, for plan years beginning after December 31, 2024. Employees with at least 1,000 hours of service in a 12-month period or 500 hours of service in a two-consecutive-year period must be eligible to participate in the employer’s qualified retirement plan. Caution, there is a slight problem with how the rule presently reads. The effective date language is specific to ERISA and does not mention the Internal Revenue Code with a corresponding provision. This means that as of now it has two effective dates. Under ERISA it is December 31, 2024. However, the Code rule is the one adopted in SECURE 1.0. So, until this is addressed, this rule 401(k) plans will be prohibited from applying this rule until December 31, 2025 while 403(b) plans on the intended effective date.

• Emergency savings accounts.  Employers now have an option to amend the plan to permit non-highly compensated employees to defer up to the lesser of 3% of compensation or $2,500 (post-tax) to an emergency savings account under the plan. 

• Lost and found.  SECURE 2.0 requires the DOL to create a national online searchable database to enable employers to locate “missing” plan participants, and plan participants to locate retirement funds. 

This will greatly ease the burden on employers in locating missing participants for distributions. It also makes it easier for individuals to locate any “lost” retirement savings left behind in former employer plans when they switched jobs.

• Unenrolled employee notices.  SECURE 2.0 eliminates the requirement to send certain notices to employees who have elected not to enroll in an employer’s retirement plan; provided that the employees are given an annual reminder notice of eligibility to participate.

While we hope the information shared provides clarity, we understand that there is a lot to digest, and we are here to help. We encourage you to join us on Thursday, February 2, 2023 for a 1-hour webinar where Marsh McLennan Agency’s Lisa Buffington, Vice President Retirement Services – New England Region, will host a panel of esteemed ERISA experts including Fred Reish and Bradford Campbell from Faegre Drinker, and MMA’s ERISA Consulting Leader Frank Bitzer in a discussion about the applicability and impact of SECURE 2.0 for plan sponsors and retirement savers. Register here