Re: SECURE 2.0 Act
To The Valued Clients of PASI, LLC (PASI):
The SECURE 2.0 Act (SECURE 2.0), which enjoyed broad bipartisan support and was signed into law on December 29, 2022, is the most sweeping legislation impacting retirement plans in decades. This document is segregated into two separate sections as described below. The format is designed to enable you to read a high-level summary of each provision, and then utilize a link to read a more detailed explanation for those topics of interest to you.
EXECUTIVE SUMMARY
This section provides only a high-level overview of the applicable provision. Each subject line is a link that will open a separate window with a more detailed analysis. It is not necessary to read each detailed analysis – you can select those topics which you find most relevant.
Please do not hesitate to reach out to your Plan Consultant if you would like to schedule a call for additional discussions.
Click here for the FULL VERSION with links!
Please do not hesitate to reach out to your Plan Consultant if you would like to schedule a call for additional discussions.
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Analysis provided by David Beck, CPA, QPA, ERPA.
EXECUTIVE SUMMARY
Mandatory Provisions
The term “recordkeeper” as used throughout this piece means the service provider generally responsible for the following functions (among many others):
• Participant-level accounting, including generation/distribution of quarterly participant statements and providing on-line access.
• Maintaining and implementing participant investment elections.
Catch-Ups Must Be Roth for High Income Individuals
Summary: Beginning in calendar 2026 (delayed from the initial effective date of 2024), Catch-up contributions for Participants with Compensation greater than $145,000 must be made on a Roth basis (as opposed to pre-tax). Plans must offer Roth 401(k) no later than January 1, 2026 in order to permit catch-up contributions.
Increased Catch-Ups For Participant Between ages 60 and 63
Summary: Beginning in calendar 2025, the “Catch-up” contribution limit (which is $7,500 in calendar 2023) will be increased to 150% of the normal limit for Participants who are ages 60 to 63.
Long-Term Part-Time Employee Rule Revisions
Summary: Plans which exclude employees from participating in payroll deduction contributions (401(k) or 403(b)) because they have not satisfied a minimum hours of service requirement, may now be required to accelerate participation as of the first day of the Plan Year beginning on or after January 1, 2024. Employees who are credited with 500 hours of service in two consecutive 12-month periods (was initially three consecutive 12-month periods) must be eligible to participate in the payroll deduction portion of the Plan.
Top-Heavy Minimum Contribution Relief
Summary: Prior to the enactment of SECURE 2.0, any employee eligible to participate in a “top-heavy” 401(k) plan was required to receive the top-heavy minimum contribution (3% of gross pay). SECURE 2.0 eliminates this requirement for those Participants who either a) have less than a year of service; or b) have not attained 21 years of age. This change is effective for Plan Years beginning on or after January 1, 2024. 403(b) Plans are exempt from top-heavy rules.
Mandatory Automatic Enrollment Feature (New Plans)
Summary: Plans established after December 29, 2022 are required to include an automatic enrollment feature with respect to payroll deduction contributions. The Plan must automatically enroll Participants with a default contribution rate of at least 3%. Furthermore, Participants must generally be “auto increased” by 1% per year.
Increase in Age for Required Minimum Distributions (RMDs) (No “Detailed Analysis”)
Summary: Beginning in calendar 2023, RMD’s must generally begin at age 73. Beginning in 2033, RMDs must generally begin at age 75. As has been the case for many years, Participants who do not own, and who are not treated as owning, more than 5% of the Plan Sponsor are not required to begin RMDs until they retire.
Elimination of Required Minimum Distributions (RMDs) from Roth Accounts
Summary: Beginning in 2024, RMDs are no longer required from Roth 401(k) or Roth 403(b) accounts.
Repayment of Qualified Birth and Adoption Distributions (QBADs)
Summary: If the Plan allows Participants to withdraw up to $5,000 upon the adoption or birth of a child, a Participant’s option to re-deposit those distributions to the Plan expires three years following the date of that distribution. Previously, there was no expiration date on that option.
EXECUTIVE SUMMARY
Optional Provisions
Matching Contributions on Student Loan Repayments
Summary: With respect to Plan Years beginning on or after January 1, 2024, Plans have the option of determining any matching contributions based on the sum of a) payroll deduction 401(k)/403(b) contributions; and b) student loan payments paid by the Participant.
Participant Election to Treat Employer Contributions as Roth
Summary: Participants may elect to have Employer Contributions made to 401(k) or 403(b) Plans treated as Roth. Any such Employer Contributions affected by such an election will be included in federal and, if applicable, state taxable wages when funded. This optional provision is available with respect to any contributions “made” on or after December 29, 2022.
Hardship Distribution Self-Certification
Summary: Prior to SECURE 2.0, Plan Administrators were required to verify the existence of the hardship being claimed by the Participant (e.g., copies of medical invoices). SECURE 2.0 allows Participants of 401(k) and 403(b) Plans to self-certify the existence of any applicable hardships as of the first Plan Year beginning on or after January 1, 2023.
Distributions Paid To Victims of Domestic Abuse
Summary: Participants may withdraw the lesser of 50% of their vested accounts or $10,000 if they certify to the Plan Administrator that they are a victim of domestic abuse (as defined).
Qualifying Longevity Annuity Contracts (QLACs)
Summary: A QLAC is an annuity purchased by a Participant which pays an income stream only after attainment of a certain age (not to exceed 80). The purpose of a QLAC is to insure against the risk that the Participant will outlive their retirement savings. SECURE 2.0 increases the limitations on how much a Participant can invest in QLAC’s. These increases become effective on December 29, 2022. Importantly, the amount of any premiums paid to acquire QLACs is excluded from the determination of Required Minimum Distributions.
Long-Term Care Insurance Withdrawals
Summary: A Plan may permit Participants to withdraw funds from their retirement plan accounts to purchase Long-Tern Care Insurance.
Increase Force-Out Threshold to $7,000 (No “Detailed Analysis”)
Summary: Prior to the enactment of SECURE 2.0, Participants who a) terminated employment with the Plan Sponsor; and b) had a vested account balance of less than $5,000; could be forced out of the Plan as either a taxable distribution or a rollover to an Individual Retirement Account. SECURE 2.0 has increased this threshold to $7,000 as of December 31, 2023 (not indexed for inflation).
Emergency Expenses Distribution Option
Summary: Participants may withdraw up to $1,000 once every three years in the event of a financial emergency. Plan Administrators may rely on the Participant’s certification regarding the existence of an emergency.
Pension Linked Emergency Savings Account (PLESA)
Summary: A startling 37% of Americans do not have enough money to cover a $400 emergency expense (Fortune.com). Congress added PLESAs to enable Participants to accumulate up to $2,500 in these accounts using Roth 401(k)/403(b) contributions. These accounts must be 100% held in a money-market or similar investment. Distributions can be made for any reason—they are not contingent on the existence of a financial emergency.
403(b) Hardship Distribution Rules Aligned with 401(k) Plans
Summary: The following provisions are available as of the first Plan Year beginning on or after January 1, 2024.
1. Investment gains in a Participant’s payroll deduction contribution 403(b) account are now available for hardship distributions.
2. Participants in 403(b) Plans are not required to take any available Participant loan prior to qualifying for a hardship distribution.
3. Qualified Nonelective and Matching Contributions (including “Safe Harbor Contributions”) are now available for hardship withdrawals in 403(b) Plans.
EXECUTIVE SUMMARY
Legislative Changes That Do Not Require Plan Amendment
Additional Exceptions to 10% Excise Tax on “Early” Distributions
Summary: SECURE 2.0 has added several new exceptions to the 10% penalty tax on distributions prior to the attainment of age 59½.
De minimis Financial Incentives to Increase Plan Participation
Summary: A literal reading of the rules prior to the enactment of SECURE 2.0 lead to the conclusion that even small giveaways designed to reward/encourage plan participation were not permitted. SECURE 2.0 eliminates this prohibition with respect to “de minimis” financial incentives (e.g., $25 gift cards) effective for the first Plan Year beginning on or after January 1, 2023.
Elimination of Notices to Unenrolled Participants
Summary: SECURE 2.0 eliminates the requirement to send most annual notices to Plan Participants who do not have an account balance in the Plan. Ironically, relief from sending annual notices to these “unenrolled participants” is contingent upon sending them an annual notice (albeit one that is much shorter). These new notice requirements are effective for Plan Years beginning on or after January 1, 2023.
New Restrictions on e-Delivery of Participant Statements
Summary: The Department of Labor has provided substantial guidance over the years enabling plan sponsors to deliver regulatory notices and participant statements electronically, provided certain pre-conditions were satisfied. SECURE 2.0 now generally requires that a paper participant statement be provided at least once each Plan Year unless the participant elects to receive all statements electronically.
Excise Tax on Missed Required Minimum Distributions (RMD)
Summary: SECURE 2.0 reduces the excise tax payable by Participants on missed RMDs from 50% to 25%. Furthermore, the excise tax is reduced to 10% if the RMD is withdrawn and applicable taxes are paid within a two-year window.
Retirement Savings Lost and Found
Summary: The Internal Revenue Service (IRS) is required to establish a searchable on-line database of terminated Plan Participants with account balances remaining in retirement plans. The data in this database will be supplied to the IRS by plan sponsors (similar to the 8955-SSA filing).
Savers Match Funded by US Government
Summary: Participants with income below certain thresholds are eligible to receive a matching contribution funded by the US Government of up to 50% of the first $2,000 which they contribute to a 401(k) or 403(b) Plan.
Tax Credits for New Plans
Summary: Plan sponsors who establish new retirement plans are eligible for generous tax credits to help cover both administrative expenses and Employer Contributions funded on behalf of its employees.
