On December 29, the SECURE 2.0 Act was enacted as Division T of the Consolidated Appropriations Act (CAA), 2023 (H.R. 2617). SECURE 2.0 is the culmination of significant efforts by numerous retirement champions in Congress to assemble a large, bipartisan retirement package that expands upon the changes made by the SECURE Act of 2019. Although stakeholders were confident that a final SECURE 2.0 bill would be completed by the end of 2022, it was less clear that congressional leadership would agree to attach the package to a “must-pass” bill that would provide a path to enactment. It wasn’t until the text of the CAA was released in the early morning hours of December 20 that the retirement industry had confirmation that SECURE 2.0 had been included in the spending bill.
With SECURE 2.0 now enacted, stakeholders are turning their attention to digesting the nearly 100 provisions. This Quarterly Bulletin provides an overview of several of the SECURE 2.0 provisions that will be of greater interest to those sponsoring or working with retirement plans and Individual Retirement Accounts (IRAs). Also discussed below is the Biden administration’s final Environmental, Social and Governance (ESG) rule, which was released in November 2022 and remains an important development not to be overshadowed by SECURE 2.0.
As expected, the SECURE 2.0 Act closely resembles the provisions that made up three key bills: (1) the House-passed Securing a Strong Retirement Act (SSRA) of 2022 (H.R. 2954), (2) the Senate Finance Committee’s Enhancing American Retirement Now (EARN) Act (S. 4808), and (3) the Senate Health, Education, Labor and Pensions (HELP) Committee’s Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act (S. 4353). In some cases, the final provisions in SECURE 2.0 are identical to a provision that was included in the House, Finance, and/or HELP bills. In other cases, generally modest changes were made, or compromises were reached regarding differences among the predecessor bills. Only a handful of provisions that were included in a predecessor bill did not make it into the SECURE 2.0 Act, and only one provision (regarding 529 plans) was newly added to the mix. Below is an overview of several of the key changes SECURE 2.0 made.
Provisions to enhance coverage
- Saver’s Match. Beginning in 2027, the Saver’s Credit will become the Saver’s Match, a government matching contribution of up to $1,000 each taxable year for certain individuals who make qualified retirement savings contributions. The match percentage is 50% for most eligible taxpayers and is available regardless of whether the individual has a tax liability. The match may generally only be received as a pre-tax contribution to a 401(k), 403(b), or governmental 457(b) plan or a traditional IRA that is elected by, and for the benefit of, the individual. A plan may only be elected to receive a Saver’s Match if it accepts such contributions.
- Enhanced start-up tax credit. SECURE 2.0 makes the tax credit that is available to certain employers that start a retirement plan more generous beginning in 2023 by making the credit equal to 100%, instead of 50%, of certain costs paid or incurred in connection with starting a retirement plan (up to the annual cap), for employers with up to 50 employees. SECURE 2.0 also increases the credit by up to $1,000 per employee per year, for up to five years, for certain employer contributions made on behalf of employees to a defined contribution plan. The additional credit is not available with respect to employees who receive more than $100,000 (indexed) in FICA wages from the employer for the taxable year. The full additional credit is limited to employers with 50 or fewer employees and is phased out for employers with 51-100 employees.
- Automatic enrollment requirement for new plans. SECURE 2.0 generally requires most new 401(k) and 403(b) plans that are established on or after December 29, 2022, to automatically enroll a participant at a minimum initial rate of 3% of compensation (maximum 10%), with automatic annual increases of 1% thereafter up to at least 10% (maximum generally 15%). The new requirement applies to plan years beginning after 2024. Exceptions are available for new businesses, small employers, SIMPLE 401(k) plans, and governmental and church plans.
- Starter 401(k) plan. Beginning in 2024, SECURE 2.0 allows an employer to adopt a “starter” 401(k) plan if the employer does not have any other plan in the year of adoption. The starter plan is exempt from nondiscrimination and top-heavy testing but limits regular contributions to $6,000 (indexed). No employer contributions are allowed, and the plan must have automatic enrollment between 3% and 15%.
- Reduced period of service for long-term, part-time employees. Employers maintaining a 401(k) plan generally may not require part-time employees to complete a period of service that extends beyond three consecutive years of service in which the employee completes at least 500 hours of service. SECURE 2.0 reduces that three-year service requirement for long-term, part-time employees to two years, beginning in 2025. SECURE 2.0 also extends this rule to ERISA-governed 403(b) plans.
- 403(b) multiple employer plans (MEPs). SECURE 2.0 clarifies that 403(b) plans (other than church plans) may be maintained on a MEP basis, including as a 403(b) pooled employer plan (PEP) under generally the same rules that apply to 401(k) plans.
Key changes to contribution rules
- Roth requirement for catch-up contributions. Beginning in 2024, SECURE 2.0 requires catch-up contributions for individuals aged 50 or older to a 401(k), 403(b), or governmental 457(b) plan to be made as designated Roth contributions. This requirement only applies, however, to employees earning wages from the employer for the preceding calendar year in excess of $145,000 (indexed). This is probably the provision effective in 2024 that will require the most attention, because it is mandatory and will require significant programing and communication to employees.
- New catch-up contribution limit for those approaching retirement. Currently, participants in a 401(k), 403(b), or governmental 457(b) plan who are age 50 or older may make an additional “catch-up” contribution to their plan ($7,500 in 2023). Beginning in 2025, SECURE 2.0 increases those catch-up contribution limits for participants ages 60-63 to 150% of the regular catch-up contribution limit in 2024 (or, if greater, $10,000).
- Matching contributions based on student loan payments. SECURE 2.0 facilitates employers making matching contributions under a 401(k), 403(b), or governmental 457(b) plan, or a SIMPLE IRA with respect to student loan payments made by an employee, if certain conditions are met. This change is effective in 2024.
- Employer contributions as Roth contributions. SECURE 2.0 newly allows a 401(a), 403(b), or governmental 457(b) plan to permit an employee to designate vested employer matching or non-elective contributions as designated Roth contributions. Previously, employer contributions could only be made on a pre-tax basis.
Required minimum distribution changes
- Increased required minimum distribution (RMD) age. SECURE 2.0 increases the age 72 trigger for taking RMDs to age 73 for individuals who attain age 72 after 2022. Thus, individuals turning age 72 in 2023 will no longer be required to take an RMD for 2023 by April 1, 2024, and will instead be required to take an RMD for 2024 by April 1, 2025. SECURE 2.0 further increases the RMD age to 75 for individuals who attain age 74 after 2032. (Note, there is a glitch making it unclear whether individuals born in 1959 must begin taking RMDs after reaching age 73 or age 75.)
- RMD treatment of in-plan Roth amounts. Presently, Roth IRAs are exempt from the pre-death RMD rules, which generally means that individuals are not required to begin taking distributions from their Roth IRAs at age 73. SECURE 2.0 extends this exemption to in-plan Roth amounts, which means that participants will no longer need to roll over plan assets to an IRA simply to avoid having to take RMDs from Roth amounts at age 73. This change generally applies beginning in 2024.
- Emergency expense withdrawals. SECURE 2.0 provides an exception to the 10% early distribution tax for withdrawals made from a defined contribution plan or from an IRA for “emergency personal expenses,” beginning in 2024. The maximum aggregate amount that may be treated as an emergency personal expense distribution by any individual in any calendar year cannot exceed the lesser of $1,000 or the amount the individual’s account balance exceeds $1,000. Individuals have three years to recontribute the distribution, should they choose to do so, under rules similar to those that apply to qualified birth or adoption distributions (QBADs). Individuals who take an emergency distribution may not take another emergency distribution within three years from the same plan or IRA unless the individual recontributed the distribution or made subsequent contributions to the same plan or IRA in an amount at least equal to the emergency distribution.
- Pension-linked emergency savings account (PLESA). Plan sponsors of defined contribution plans have the option of adding a PLESA to their plan beginning in 2024. A PLESA is basically a special account held within the plan to facilitate emergency savings, which must be invested in a principal protected investment. Contributions to a PLESA are treated as designated Roth contributions and are limited so that no contribution may be accepted to the extent it causes the PLESA to exceed $2,500 (indexed). Automatic enrollment up to 3% is permitted. Although no employer contributions to the PLESA are allowed, if an employer makes matching contributions to the plan, then PLESA contributions must be treated as an elective deferral for purposes of the matching contribution, and the employer must make matching contributions on the PLESA contributions at the same rate to the non-PLESA account under the plan. Amounts in the emergency savings account may generally be withdrawn tax and penalty-free at least once per month.
529 college savings plans
- 529 plan to Roth IRA rollovers. SECURE 2.0 allows for tax-free, trustee-to-trustee transfers from a 529 plan account to a Roth IRA maintained for the 529 account’s designated beneficiary. Such transfers are subject to an aggregate limit of $35,000 with respect to the designated beneficiary. In addition, the 529 account must have been maintained for at least 15 years, and the distribution cannot exceed the aggregate amount contributed to the program (and earnings) before the five-year period ending on the date of the distribution. Although the amount that may be transferred may not exceed either the Roth IRA dollar limit or the amount of compensation the designated beneficiary earned that year, the income limits applicable to Roth IRA contributions are not applicable. This provision applies starting in 2024.
Environmental, social, and governance (ESG) final rule
On November 22, 2022, the Department of Labor (DOL) released its final ESG rule, which is formally titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” The final rule largely follows the proposed regulation that DOL issued in October 2021 (see our Q4 2021 Quarterly Bulletin) in modifying the ESG and proxy voting rules that were issued near the end of the Trump administration (collectively, the “2020 rule”). DOL describes the final rule as clarifying the application of ERISA’s fiduciary duties of prudence and loyalty to selecting investments and investment courses of action, exercising shareholder rights, and the use of written proxy voting policies and guidelines. Nevertheless, the final rule retains the core principle that ERISA requires plan fiduciaries to focus on relevant risk-return factors and to not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan.
Key aspects of the final ESG rule include the following:
- Consideration of ESG factors in risk-return analysis. Although the final rule omits the three ESG-specific examples of risk-return factors that were included in the proposed rule, the final rule incorporates the following language instead: “Risk and return factors may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action. Whether any particular consideration is a risk-return factor depends on the individual facts and circumstances.”
- Elimination of “pecuniary” factor terminology. The final rule rescinds the 2020 rule’s use of the term “pecuniary” and related terminology, opting instead to integrate the concept of risk-return factors directly into the rule.
- Revised tie-breaker test without a special documentation requirement. The final rule eliminates a special documentation requirement from the 2020 rule’s tie-breaker test. The final rule also revises how fiduciaries should think about the tie-breaker test by reframing it in terms of two investments that “equally serve the financial interests of the plan.” Further, a special disclosure requirement for the tie-breaker test that was included in the proposed rule was omitted from the final rule.
- Participant preferences. The final rule includes a statement that a plan fiduciary of a participant-directed individual account plan does not violate the duty of loyalty solely because the fiduciary takes into account participants’ preferences in a manner consistent with the requirements of the duty of prudence.
- Qualified default investment alternative (QDIA) restriction eliminated. The final rule removes the restriction added by the 2020 rule that prohibited an investment fund, product, or model portfolio from being added or retained as, or as a component of, a QDIA if its investment objectives or goals, or its principal investment strategies, “include, consider, or indicate the use of one or more non-pecuniary factors.”
- Simplification of proxy voting rules. The final rule removes a specific monitoring requirement from the 2020 rule that applied when a fiduciary delegated authority to vote proxies to an investment manager or a proxy voting firm. Among other changes, the final rule also removes a special recordkeeping requirement that applied under the 2020 rule in connection with exercising shareholder rights.
- Comparison with reasonably available alternatives. Consistent with the 2020 rule, the final rule retains the requirement that a fiduciary must compare an investment or investment course of action under evaluation with “reasonably available alternatives.”
Effective Date of Final ESG Rule. The final rule is effective and generally applicable in its entirety to all investments made and investment courses of action taken after January 30, 2023. A one-year delay is provided in the applicability date for certain proxy voting provisions.
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