Some of these have to do with operational rules, others only apply to 401(k) plans, and still others provide additional small credits that any sponsor of a defined contribution plan with under 100 employees can use. Plan sponsors need to learn what these changes are and discuss them with their plan advisors and their accountant to make sure they comply with and take advantage of the provisions that apply to them.
Section 304 of the SECURE 2.0 Act changes the upper limit for mandatory cash-outs that a plan may establish from $5,000 to $7,000 for distributions made after December 31, 2023.
A potentially vexing issue for plan sponsors is what happens when an administrative error causes an overpayment to employees getting a distribution. If the company pays, is this harmful to existing participants? Does the company have to try to get the money back? Section 301 of the SECURE 2.0 Act now allows flexibility on this, no longer requires the overpayments be recouped, and allows certain overpayments to be treated as eligible distributions for rollover purposes.
Section 305 of the SECURE 2.0 Act now allows self-correction under the Employee Plans Compliance Resolution System (EPCRS) of any inadvertent compliance failure no matter when it occurred and regardless of its degree unless (1) the IRS identified the failure before actions were taken to correct it, or
(2) the self-correction is not completed within a reasonable period.
Currently, if a company has no more than 100 employees and, in the three years before the first year a new retirement plan is in place, the company did not have an existing plan covering substantially the same people, it could claim a retirement plan startup credit of up to 50% of administrative costs, not to exceed a credit of $5,000 per year. Section 102 of the SECURE 2.0 Act now increases the credit to up to 100% of administrative costs for companies with no more than 50 employees. It also provides an additional per-employee credit for five years that is progressively reduced year by year and is gradually phased out for company sizes of more than 50 employees, up to the limit of 100 employees. The new rules apply to taxable years beginning after December 31, 2022.
Previously, required minimum distributions (RMDs) had to start at 72 (the SECURE Act of 2019 changed it from 70 ½). Under Section 107 of the SECURE 2.0 Act, this increases to 73 for those who attain age 72 after December 31, 2022, and age 73 before January 1, 2033. It increases to 75 for those who attain age 74 after December 31, 2032.
Section 112 of the SECURE 2.0 Act creates a new tax credit for employers with 100 or fewer employees who employ military spouses and make them eligible for defined contribution plans within two months after hire, make them eligible at that time for any employer contributions that employees would otherwise receive at two years of service, and immediately 100% vest the military spouse in all employer contributions. The tax credit equals $200 per military spouse plus 100% of all employer contributions up to $300, for a $500 maximum credit per spouse. The credit applies for three years and is limited to non-highly compensated employees. This provision is effective immediately after enactment.
Under Section 101 of the SECURE 2.0 Act, companies that sponsor a new 401(k) plan (and schools and tax-exempt organizations sponsoring new 403(b) plans) must automatically enroll participants upon becoming eligible. The employer must set a default employee contribution rate of at least 3% but not more than 10% (which the participant may opt out of or increase), with an automatic escalator of 1% per year up to at least 10% but not more than 15%. There are exceptions for new businesses that have been in existence for less than three years, small businesses employing no more than 10 employees, and governmental or church plans. Existing plans established before the enactment of the SECURE 2.0 Act are exempted entirely from the new auto-enrollment rule, except when a multiple employer plan is adopted after enactment. The new rules are effective for plan years beginning after December 31, 2024.
Under Section 115 of the SECURE 2.0 Act, an employee can make one emergency withdrawal per year of up to $1,000 from a retirement account (such as a 401(k) plan or IRA) and not pay the 10% penalty tax on early distributions. (Although this technically applies to ESOPs too, ESOPs almost never allow withdrawals like this.) The participant has the opportunity to repay the withdrawal during the following three years. During this three-year period, no further emergency withdrawals may be made unless the participant fully repays the amount, or subsequent deferrals and contributions are at least equal to the amount of the previous withdrawal. The new rules apply to distributions made after December 31, 2023.
The original SECURE Act of 2019 required 401(k) plans to allow “long-term, part-time workers,” defined as those who did not meet the 1,000-hours-in-a-year rule but instead had worked at least 500 hours per year for three consecutive years, to make elective deferrals to the 401(k) plan. (Employees covered by collective bargaining agreements are exempted from the requirement.) Section 125 of the SECURE 2.0 Act reduces this three-year period to two years, effective for plan years beginning after December 31, 2024. It also extends the 500-hour/two-year rule to 403(b) plans.
Currently, employees aged 50 or older can make additional “catch-up” contributions to eligible plans such as 401(k)s in an amount that is subject to adjustment yearly for the cost of living. The catch-up amount for 2022 was $6,500, and for 2023 it will be $7,500 (except for SIMPLE plans, for which it is lower). Section 109 of the SECURE 2.0 Act increases the catch-up limit, for taxable years beginning after December 31, 2024, to the greater of $10,000 or 150% of the standard catch-up amount for that year, but only for employees who attain the age of 60, 61, 62, or 63 during the taxable year. (SIMPLE plans get a similar increase but again with lower limits: $5,000 or 150%.)