The omnibus spending bill known as H.R.2617 – Consolidated Appropriations Act, 2023 contained more than 90 provisions relating to the Securing a Strong Retirement Act of 2022 (SECURE 2.0), which was signed into law on Dec. 29, 2022.
SECURE 2.0 builds on and expands reforms made in the SECURE Act of 2019 (SECURE 1.0) to significantly improve retirement savings opportunities for Americans.
2024 mandatory requirements
Long-Term, Part-Time Employees Vesting Clarification:
Offering employer contributions is optional under SECURE 1.0 and appeared to make vesting begin from the date they were hired and worked 500 hours. SECURE 2.0 clarifies that vesting service only counts from 2021 forward when they worked 500 hours. This does not apply to union plans.
Revised Family Attribution Rules:
Ownership rules have changed to include parents and minor children when parents reside in separate property states, but when the business is in a community property state. This is effective for plan years after Dec. 31, 2023.
Defined Benefit Plan Changes:
There are updated mortality tables for determining RMDs.
The annual funding notice has been edited to include:
- Financial information on a market-value basis for three years.
- Participant counts at year-end for three years.
- Average return on assets for the year of the notice.
2024 optional considerations
Starter 401(k) Plans:
Effective for plan years beginning after Dec. 31, 2023, employers that do not currently offer a 401(k) or 403(b) plan may offer a starter plan for employee contributions only, with no employer match.
Such plans would require automatic enrollment with a contribution level between 3% and 15% of compensation. The annual employee deferral limits match IRA limits ($6,000 in deferrals and $1,000 for catchup, as indexed). No exclusions are allowed for employees over age 21 with one year of service. These plans are not subject to top-heavy or discrimination testing and union and non-resident aliens may be excluded. 9 Employers cannot sponsor another qualified plan during the same year as the Starter 401(k). A technical fix is needed as the limits for 2024 are lower than the IRA limit.
More guidance is needed.
Student Loan Payments Treated as Elective Deferrals:
Under a 401(k), 403(b), 457(b) plan, or SIMPLE IRA, employers will be permitted, though not required, to make matching contributions to employees who are paying off their student loans.
The student loan payment will act as a standard deferral. Only current loan payments may be considered, and the student must be at least a half-time student. This does not impact the contingent benefit rule. Employees must self-certify payments made on loans and employers can rely upon the employee’s selfcertification. Matching formulas must be the same for employee deferrals and student loan payments.
For purposes of nondiscrimination testing, the provision permits a plan to test separately the employees who receive matching contributions on student loan repayments. As such, separate ACP testing can be done for those receiving a match on deferrals versus student loans. This is effective for plan years after Dec. 31, 2023.
More guidance is forthcoming regarding impacts on safe harbor plans, 402(g) limits, eligibility, and other considerations.
Top-Heavy Testing Rules Change:
Effective for plan years after Dec. 31, 2023, top-heavy contributions may exclude employees who are under the age of 21 and have less than a year of service.
Safe Harbor Adoption:
Effective for plan years after Dec. 31, 2023, employers may replace a SIMPLE IRA or SIMPLE 401(k) with a safe harbor plan anytime during a plan year. Deferrals will be pro-rated between the two plans.
SIMPLE plan to Safe Harbor Plans Mid-year:
Employers can replace a SIMPLE IRA or SIMPLE 401(k) with a safe harbor plan anytime during a plan year. Effective for plan years after Dec. 31, 2023. Deferrals would be pro-rated between two plans. May happen anytime during the year. A 30-day notice to employees describing how the termination will work is required (previously 11/1). Must notify the SIMPLE IRA’s financial institution and payroll that contributions will be ending. Keep records of all actions. You do not need to notify the IRS of the termination. Deferrals are pro-rated.
How do we pro-rate deferrals? Proration is based on days – 365 days (regardless of leap year).
Here’s an example of a conversion to SIMPLE on 4/1/2024:
Adam contributed $3,000 to SIMPLE IRA. What is 401(k) Limit?
Step 1: Prorate Simple Limit: $16,000 (SIMPLE limit for 2024) x 91 days/365 = $3,989.04
Step 2: Prorate 402(g) Limit: $23,000 X 275/365 = $17,328.77
Add: Step 1 and Step 2 amounts together: $21,317.81 ($17,328.77 + $3,989.04)
Subtract current contribution of $3,000 into SIMPLE from $21,275.97 ($21,317.81-$3,000)
New 402(g) Amount for the conversion year: $18,317.81
Contributions must remain in SIMPLE plan for two years unless rolling amounts over to a 401(k) or 403(b) Plan. Successor rules do not apply – you can have a qualified plan in the same year as the SIMPLE Plan.
Emergency Withdrawals Allowed:
Effective for distributions made after Dec. 31, 2023, a participant may make a withdrawal of up to $1,000 per year from their retirement account for certain personal or family emergencies. These withdrawals are allowed from a 401(k) plan, 403(b) plan, governmental 457(b) plan, or traditional IRA. The withdrawal will be taxable and may be repaid within three years and is not subject to the 10% penalty for early withdrawals.
Only one withdrawal is permitted per three-year repayment period if the first withdrawal has not been repaid as long as the plan permits these distributions, individual received the distribution and the individual is eligible to make a rollover to the plan at the time they wish to repay. The plan administrator may rely on a certification by an employee seeking an emergency withdrawal unless the plan administrator has actual knowledge to the contrary. Additional $1,000 may not be withdrawn until after 3 years, or once repaid, or the employer/ employer contributions equal at least the amount of the withdrawal not repaid.
Emergency Savings Accounts (ESAs):
Employers have the option to offer their non-highly compensated employees (NHCEs) an ESA. Employers may automatically opt employees into these accounts at no more than 3% of their salary, but maximum contributions cannot exceed $2,500, which is indexed for inflation (or lower as set by the employer). Once the cap is reached, the additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one), or stopped until the balance attributable to contributions falls below the cap. Employee contributions are eligible for the match in the 401(k) plan.
Contributions are made on a Roth basis and are treated as elective deferrals for purposes of retirement matching contributions. The first four withdrawals from the account, each plan year, may not be subject to any fees or charges and all other withdrawal fees must be reasonable.
At separation from service, employees may take their emergency savings accounts as cash or roll them into a Roth defined contribution plan or IRA. This is effective for plan years after Dec. 31, 2023, and applies to 401(k), 403(b), and governmental 457(b) plans.
More guidance is needed regarding missed deferrals, fees, and other considerations.
Prior-year Plan Amendments Allowed:
Effective for plan years after Dec. 31, 2023, plan amendments are permitted for the previous year if there is an increase in benefits. Such amendments can be made up to the employer’s tax return due date.
Increased Deferrals for SIMPLE Plans:
For employers with fewer than 26 employees, the annual deferral limit and age 50 catch-up contribution limit is increased by 10%. This increases 2024 limits to $17,600 for deferrals and $3,850 for catch-up contributions. If the employee counts range is between 26 to 100, employees can elect a higher rate, but only if the employer provides either a 3% non-elective contribution or a 4% matching contribution. This is effective for plan years after Dec. 31, 2023.
Domestic Abuse Distributions Allowed:
A distribution shall be treated as an eligible domestic distribution to an individual during the one-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. This applies to distributions made after Dec. 31, 2023.
The term domestic abuse means physical, psychological, sexual, emotional, or economic abuse, including efforts to control, isolate, humiliate, or intimidate the victim, or to undermine the victim’s ability to reason independently, including by means of abuse of the victim’s child or another family member living in the household.
The participant can self-certify that they have experienced domestic abuse and may withdraw the lesser of $10,000, indexed for inflation, or 50% of the vested account. Self certification may be done on the distribution form or in writing to the plan sponsor and must certify that the participant is eligible for the distribution and that they are a victim of domestic abuse within one year of the abuse. The distribution is not subject to the early 10% withdrawal penalty tax. The participant has the opportunity to repay the distribution amount over three years and any income tax paid would be refunded to the participant. The individual is eligible for repayment if they are eligible to make a rollover to the plan. Domestic abuse distributions are allowed from 401(k), 403(b), and 457(b) plans.
Increased Force-Out Rollover Limit:
Employers may transfer a former employee’s retirement account from the employer’s retirement plan into an IRA if their account balance is between $1,000 and $7,000, up from the prior $5,000. This applies to 401(k) and 403(b) plans and is effective for distributions after Dec. 31, 2023.
Automatic Portability:
SECURE 2.0 codifies the auto-portability process so that employers can automatically transfer a participant’s balance to an IRA or a new plan, regardless of assets, unless the participant elects otherwise. This is effective after Jan. 1, 2024.
403(b) Hardship Withdrawals:
Effective for plan years after Dec. 31, 2023, employees can self-certify that a hardship withdrawal is based upon an immediate and heavy financial need. This applies to all sources in a 403(b) plan.
Surviving Spouse Elections:
Surviving spouse elections will be treated as a deceased employee for RMD rules. This applies to 401(k), 403(b), and governmental 457(b) plans and is effective for plan years after Dec. 31, 2023.
No Lifetime RMDs from Roth Plans:
Historically, retirement plans with a Roth provision have been subject to RMDs while Roth IRAs have not been. Roth accounts within 401(k), 403(b), and governmental 457(b) plans will not be subject to RMDs.
Post 2024 mandatory requirements
Mandatory Automatic Enrollment:
All new 401(k) and 403(b) plans that have been adopted on or after the date of enactment (Dec. 29, 2022) will have to offer automatic enrollment and automatic escalation of deferrals with plan years beginning Jan. 1, 2025. The date is the adoption date not the effective date of the plan. Exempt from this mandate include small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than three years), SIMPLE 401(k) plans, church plans, and governmental plans.
The initial automatic enrollment amount must be at least 3% but not more than 10%. Thereafter, the amount is increased by 1% each year until it reaches at least 10%, but not more than 15%.
The plan must permit a participant to make withdrawals no later than 90 days after the date of the first contribution. For safe harbor plans, the cap on permissible auto-escalation is 15%; for non safe harbor plans, the cap on permissible auto-escalation is 10% before 2025; for 2025 and later years, the cap is increased to 15%. This law is effective for new employees after Dec. 31, 2024.
Roth Catch-up Contributions:
Participants, age 50+ with prior year FICA compensation equal to or over $145,000 (as indexed) will have to make all catch-up contributions as Roth contributions only (requiring a plan to have or be amended to include a Roth option). Pre-tax catch-up contributions will not be allowed. Ownership is not a factor, only compensation. The compensation limit of $145,000 applies to FICA wages only. It appears this is not applicate to self-employed and/or partners since FICA does not apply.
Contributions will be made on a Roth basis, and the contributions and associated earnings may be distributed tax-free if certain conditions are met. (This generally requires that the participant be 59 ½ or older and a five-year holding period be satisfied.)
This does not apply to Salary Reduction Simplified Employee Pension Plans (SARSEPs) or Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
Originally, this was effective during 2024. However, the IRS issued IRS Notice 2023-62 which delayed its enforce for two years. The new effective date based on this guidance is Jan. 1, 2026.
Mandatory Automatic Enrollment for MEPs and PEPs:
This requirement depends on the adopting employer and not the establishment of the MEP or PEP. For example:
- If a MEP was established in 2018 but the adopting employer never sponsored a retirement plan previously and joins the MEP during 2023 – they are subject to automatic enrollment for all new employees after Dec. 31, 2024.
- If a MEP was established in 2018 and the adopting employer joined in 2021 – they would not be subject to automatic enrollment because the adopting employer joined before Dec. 29, 2022.
Long-Term, Part-Time Employee Eligibility:
SECURE 2.0 reduces the consecutive three-year service requirement rule to two years for long-term, part-time employees who complete 500 hours of service. In addition, vesting service is only counted from 2021 onwards when an employee worked 500 hours. This provision is also extended to 403(b) plans that are subject to ERISA and not applicable to union plans. This is effective for plan years beginning after Dec. 31, 2024. Guidance has been provided and employers may exclude employees based on current rules as long as the exclusion is not based on hours or service.
New Lost and Found Database:
The legislation directs the Department of Labor (DOL), within two years from Dec. 29, 2022 (by Jan. 1, 2025), to form an online searchable database to gather information to assist participants and beneficiaries with locating their retirement plan benefits.
Annual Notice Required for Participants:
Once a year, an annual reminder notice is required, unless a participant elects otherwise. One paper statement is still required every three years for defined benefit plans. This applies to 401(k) plans, 403(b) plans, and 457(b) plans and is effective for plan years after Dec. 31, 2025.
Defined Benefit Plan Changes:
Defined benefit plan participants must be provided a defined benefit risk mitigation notice. If offering a lump sum option, plan sponsors must also provide participants and retirees with information when considering their best option. Plan sponsors, if offering a lump sum, must provide participants and retirees with information when considering their best option. The DOL will provide regulations no earlier than Dec. 29, 2023, which will not be effective until a year following the regulations.
Post 2024 optional considerations
Saver’s Match:
Currently, there is a credit paid in cash for employees who make contributions to a retirement plan based on their income. The credit is being changed to a tax refund as a federal matching contribution that must be paid into a taxpayer’s IRA, 401(k), 403(b), or 457(b) retirement plan.
The match is 50% of contributions up to $2,000 per individual. For those that file single tax returns, the match phases out when income is between $20,500 and $35,500. If filing jointly, the amount phases out when income is between $41,000 and $71,000. The provision also directs the United States Department of the Treasury (Treasury) to increase public awareness of the Saver’s match among low- and moderate-income taxpayers. The plan can choose not to accept the saver’s match contributions. If the amount is under $100, the participant can take a tax credit. This is effective for plan years after Dec. 31, 2026.
Combined Notices:
Applicable to 401(k) and 403(b) plans, Treasury has up to two years to amend regulations to permit the following plan notices to be combined:
- Automatic enrollment notices (ACA, EACA, QACA).
- QDIA.
- Safe Harbor notices.
A standardized Rollover Form must be completed by Jan. 1, 2025.
Increase in Catch-Up Contribution Limits:
Catch-up contributions for participants between the ages of 60 and 63 in 401(k), 403(b), or governmental 457(b) plans will increase to the greater of $10,000 or 50% more than the regular age 50 catch-up amount in 2025 (as indexed for inflation).
Catch-up contributions for participants between the ages of 60 and 63 in a SIMPLE IRA will increase from $3,000 to the greater of $5,000 or 150% of the regular catch-up amount. This applies to taxable years after Dec. 31, 2024.
Long-Term Care Distributions:
A participant will be able to take a long-term care distribution to make payments for premiums for long-term care insurance contracts up to $2,500 per year (adjusted for inflation beginning in 2025). The payment could be for themselves, their spouse, or certain other family members. Distributions to pay such premiums would be exempt from the 10% tax on early distributions, but generally would still be taxable income. This provision will be effective Dec. 29, 2025 (three years after the date of enactment) and applies to 401(k), 403(b), and governmental 457(b) plans.
Required DOL Reporting:
The law directs the DOL to conduct a Pooled Employer Plan Study within five years of SECURE 2.0 and every five years thereafter.
The Government Accountability Office is required to report on 402(f) distribution notices within 18 months of the enactment of SECURE 2.0.