President Biden announced that the COVID-19 Public Health Emergency (PHE) and the National Emergency declared by President Trump in 2020 will end on May 11, 2023.  The PHE relief issued in response to the pandemic affected group health plan coverage requirements related to COVID-19 prevention and treatment.  The National Emergency relief suspended deadlines that normally apply to certain employee benefit plans.  While seemingly simple in concept, the end of the PHE and National Emergency means employers soon will enter a murky transition period requiring special administrative attention. 

Calculating Deadlines After the National Emergency

The U.S. Department of Labor and the Department of the Treasury jointly issued deadline extension relief applicable to ERISA deadlines that normally apply to HIPAA special enrollment events, claims, appeals, COBRA elections, and COBRA premium payments, among others (the “Relief Events”).  The guidance included a transition rule such that once the National Emergency ends, the relief draws to a close. 

Specifically, under the relief, the normal deadlines for the Relief Events are suspended until the earlier of:  (1) one year from the date the individual first qualifies for the relief; or (2) 60 days after the end of the National Emergency – which would be July 10, 2023, if the National Emergency ends on May 11, 2023.  Special rules apply for COBRA elections and premium payments, so employees do not benefit from stacked deadline relief. 

Practically, this means the calculation of normal deadlines will resume on July 10, 2023, for individuals whose Relief Event date was after July 10, 2022.  We estimate this date was selected to follow the week when many take vacations to celebrate the 4th of July. 

Preparing for the End of the PHE and the National Emergency

Employers rely on third-party vendors to administer many of the Relief Events.  Rarely are employers directly involved in administering claims, appeals, or requests for external reviews.  Further, many employers outsource COBRA administration.  In these cases, employers should contact their third-party administrators, insurers, or vendors to confirm they are prepared for the end of the deadline relief and understand what administration during this transition period will entail. 

For employers who administer some or all of the COBRA functions in-house, now is the time to update notices to specify election periods and COBRA premium payment deadlines.  Clearly communicating the applicable election and premium payment deadlines will be key in mitigating COBRA litigation risk and compliance issues. 

Employers would also be well served to review COBRA notices previously issued to determine if an updated notice or communication is merited in light of the impending end of the relief.  With COBRA notice litigation still swirling, time spent to clearly and accurately communicate applicable deadlines for elections and premium payment obligations will mitigate the risk of claims from disgruntled participants (or their lawyers) insisting that coverage should remain in effect.  Depending upon the circumstances, providing an updated notice to individuals informing them of the exact deadline that applies to them may be a worthwhile time and expense-saving measure. 

Employers are also often involved with mid-year election change requests.  The deadline relief does not apply to all qualified status change events specified in Code Section 125 guidance – it only applies to special enrollment events under HIPAA. 

As the relief period draws to a close, employers need to be mindful of the transition period when calculating enrollment deadlines.  It may be helpful to broadly and proactively communicate the end of the deadline relief on benefit websites and portals.  

Communicating Coverage Changes

When the PHE ends on May 11, 2023, the requirement that group health plans provide COVID-19 testing, testing-related services, and vaccinations without cost sharing, among other coverage requirements, will also end.  Employers should contact their insurers and third-party administrators regarding any needed amendments to their group health plans and the plan to communicate these changes to plan participants. 

There are a number of moving targets that require close attention to individual deadlines on a participant-by-participant basis.  Employers should take steps now to discuss compliance strategies, including clear communications and implementing processes, with their vendors.  If you have any questions related to the ending of this relief or any other benefits-related questions, please contact the Jackson Lewis attorney with whom you regularly work.

Welcome to Part 10 (of 10) of our series about the SECURE 2.0 Act of 2022 (SECURE 2.0) (our other articles are on our JL Employee Benefits Blog Page).  Among the many changes within SECURE 2.0, the following allow for increased flexibility for participants to access certain retirement plan accounts when faced with qualifying emergencies, hardships, and disasters.

Sections 312 & 602 — Effective after December 31, 2022, an employer may rely on an employee’s self-certification that they have experienced an event that qualifies as a financial hardship.  Specifically, the new rules allow for self-certifications as to both (i) the fact that they have a hardship; and (ii) that the amount of the distribution is not in excess of the employee’s financial need.  This welcome change is expected to significantly streamline the plan administration of hardship applications.

Section 312 of SECURE 2.0 also allows an employer to rely on an employee’s written certification for participants of a 457(b) plan experiencing an unforeseeable emergency.  The certification is similar to those for the 401(k) and 403(b) plans in that it must state (i) the participant faces an unforeseeable emergency and (ii) the requested amount is not greater than the emergency need. 

Also, effective for plan years beginning after December 31, 2023, the new 403(b) plan hardship rules now align with similar rules for 401(k) plans.  Specifically, Section 602 eliminates the plan loan prerequisite to a hardship distribution for 403(b) plans, which now may also include certain employer contributions.

Section 331— Effective for disasters after December 27, 2020, SECURE 2.0 finally makes the exception to the 10% early withdrawal tax for federally declared disasters permanent.  Under the new rules, eligible distributions are up to $22,000 per disaster.  Individuals receiving eligible distributions are not subject to the early withdrawal penalty of 10% ordinarily applied to hardship withdrawals.  For the distribution to qualify for the exemption, the individual’s principal residence must be in a federally declared disaster area.  Also, there must be a corresponding economic loss to receive such a distribution.  Individuals are also eligible to repay the declared disaster distributions within three years.  While the recipients must pay tax on the distribution, if not repaid, they can spread the taxable income over three tax years.  

Additionally, employers may permit larger loans (up to a maximum of $100,000 or 100% of the vested account balance) as part of the qualified disaster distribution.  Typically plan loans, not for the purchase of a principal residence, may not exceed a five-year payoff.  Qualified individuals may be eligible for a delay of certain repayments for up to one year, which is disregarded when calculating the five-year payoff timeframe.    

Lastly, for qualified individuals who received a qualified distribution for the purchase or construction of a principal residence during a specified timeframe surrounding the declared disaster but could not purchase or construct the principal residence due to the qualified disaster, Section 331 allows them to re-contribute that distribution. 

We are available to help plan administrators understand and implement the requirements of SECURE 2.0.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

The Federal Trade Commission published a proposed rule[1] Jan. 5 that would effectively prohibit noncompete clauses for employees and other workers in all but very limited circumstances.[2]

This article focuses on the impact the proposed rule could have on employee benefit and compensation arrangements, if it becomes effective in its current form.

Golden Parachute Implications

Sections 280G and 4999 of the Internal Revenue Code may impose excise taxes and a loss of deduction on golden parachute compensation and benefit packages paid out to executives upon a change in control of their employer.

However, Section 280G does not apply to any reasonable compensation for services rendered by the employee after the date of a change in control. This includes compensation for refraining from performing services pursuant to a noncompetition provision.

Thus, noncompetes have often been used to mitigate potential Section 280G excise taxes and deduction losses that would otherwise apply to change-in-control payments and benefits. 

The proposed rule would eliminate this strategy.

In such a case, employers that have recently undergone a change in control would also need to consider updating their Section 280G calculations and, potentially, conducting a supplemental Section 280G shareholder vote.

Contractual Implications

Many employment agreements and incentive arrangements provide that post-termination payments will cease — and, in the case of clawback provisions, that previous payments must be repaid — if the worker violates the agreement. This can apply to noncompete provisions. In many cases, post-termination payments exist, in part, to protect the employer from damaging competition following the departure of the worker.

It is not entirely clear if these employee choice provisions — that is, to either comply with the noncompete requirements or forfeit future payments, and perhaps even repay prior ones — would be permitted under the proposed rule. The rule relies on a functional test to assert that provisions that effectively prohibit post-separation employment or business operation are de facto noncompetes.

In the absence of additional clarification, it would be risky to use such provisions.

Awards Subject to Substantial Risk of Forfeiture

Pursuant to Section 83 of the Internal Revenue Code, the fair market value of property, such as certain equity grants, transferred for the performance of services is generally included in the recipient’s income in the year that the right to the property becomes transferable or not subject to a substantial risk of forfeiture, whichever occurs first.

The Treasury regulations promulgated under Section 83 provide that

An enforceable requirement that the property be returned to the employer if the employee accepts a job with a competing firm will not ordinarily be considered to result in a substantial risk of forfeiture unless the particular facts and circumstances indicate to the contrary.[3]

The Treasury regulations provide a list of factors to be used in this analysis. Therefore, even before the proposed rule, how effective noncompete conditions were in deferring taxation of Section 83 property was questionable. But, even if an employer relies on a noncompete condition alone, without requiring continued employment, to defer the taxation on some Section 83 property, that property will become immediately taxable if the proposed rule takes effect in its current form.

The proposed rule would similarly affect the timing of Federal Insurance Contributions Act taxation of amounts deferred under employers’ nonqualified deferred compensation plans pursuant to a special timing rule under Section 3121(v)(2) of the Internal Revenue Code, which generally follows the timing of tax recognition under Section 83.

Accordingly, if an employer relies on a noncompete condition alone, without requiring continued employment, to defer the FICA taxation of amounts deferred under its nonqualified deferred compensation plan, such amounts will become immediately taxable for FICA purposes if the proposed rule becomes effective.

In our experience, most employers rely on continued employment, rather than a noncompete condition, to achieve Section 83 and FICA deferral. Therefore, the proposed rule would likely have limited impact in this area.

Nonqualified Deferred Compensation Plans of Tax-Exempt Entities

The proposed rule provides that employers exempt from coverage under the Federal Trade Commission Act are not subject to the proposed rule.

Thus, it appears that Section 501(c)(3) entities, including large hospital systems and universities, would not be prohibited from using noncompete clauses by these rules. As long as these organizations are not covered by the FTC Act, their Section 457(f) plans that vest contingent on compliance with a noncompetition agreement should not be adversely affected.

However, various questions remain, including whether broad noncompetes that cover the for-profit affiliates of Section 501(c)(3) entities could be subject to the proposed rule.

Key Takeaways for Employers

It is widely expected that the proposed rule will evolve before it becomes effective, if ever. However, to mitigate future risk, employers can consider taking the following proactive actions now.

Take Inventory

Take inventory of existing agreements and arrangements where vesting or payment is tied to compliance with — or a clawback obligation is tied to a breach of — noncompetition provisions. Consider how these agreements would be modified if the proposed rule becomes effective.

Section 280G

In the transactional context, when conducting a Section 280G analysis, consider the economics of the deal and the potential need to model alternative scenarios for a Section 280G shareholder vote if noncompetition provisions can no longer be used to mitigate the adverse tax treatment.

Enforceability

When entering new arrangements, keep in mind that you may not be able to enforce payments that hinge on employees complying with noncompetition provisions. Consider other alternatives, such as linking the compensation amount to how well the enterprise performs, which would indirectly discourage the post-termination employee from behaving in ways that could harm the company.

Alternate Protections

Tie the payment of compensation to compliance with nondisclosure, trade secret protections and narrowly tailored nonsolicit provisions, which the FTC indicates are not prohibited under the proposed rule.

Make sure that such provisions have a tight scope to reduce the risk of their being characterized as de facto noncompete provisions.

New Compensation Strategies 

Develop new compensation designs that would offer creative alternatives to compensating employees for complying with noncompetition provisions.

For example, European-style garden leave may become more popular, along with provisions that, though they don’t affirmatively prohibit competition, offer an incentive to former workers to avoid competitive activity. Still, these would also need to be carefully designed to avoid arguably functioning as noncompetes.

Right to Rescind

Reserve the right in new employment agreements or compensation arrangements to unilaterally rescind — to the extent permitted by law — payments and benefits given in consideration for a worker’s noncompete promise, in the event the noncompete is required to be rescinded.

Conclusion

The proposed rule will face significant pushback and legal challenges before it becomes final and effective — if it ever does — so employers should not rip up their noncompetes just yet. 

Still, prudent employers should start thinking of how their compensation and benefits arrangements might differ in a world without noncompetes.

Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

This article first appeared in Law360. 

[1] https://www.ftc.gov/system/files/ftc_gov/pdf/p201000noncompetenprm.pdf.

[2] Jackson Lewis recently published a detailed overview of this proposed rule

[3] See Treasury Regulation Section 1.83-3(c)(2).

The SECURE 2.0 Act of 2022 (the Act) contains several provisions that liberalize the rules for fixing particular retirement plan administrative mistakes that happen occasionally.  The IRS has a comprehensive program for correcting retirement plan failures, the Employee Plans Compliance Resolution System (EPCRS), including a self-correction program and a voluntary compliance program (VCP).  Most sponsors prefer to self-correct because the VCP filing can be time-consuming and costly, and sponsors must suffer the indignity of admitting their mistakes to the IRS.  Three provisions in the Act provide employers with some relief for fixing retirement plan mistakes. 

  1. Expansion of EPCRS – Eligible Inadvertent Failures.  The Act significantly expands the types of retirement plan failures that can be self-corrected.  Instead of identifying the types of failures that can be self-corrected, the Act provides that a retirement plan can self-correct for an “eligible inadvertent failure” (EIF) unless the IRS discovers the failure before the sponsor has demonstrated a specific commitment to self-correct it.  In other words, once the self-correction has started, it can be self-corrected even if the IRS discovers the failure before the employer completes the correction.  To take advantage of the new rule, the employer must correct the failure within a reasonable period.  Under the current EPCRS, the IRS defines a reasonable period as the last day of the third plan year after the plan year in which the error occurs, but the Act extends the deadline indefinitely unless the IRS discovers the failure before the sponsor begins the self-correction process.  The moral of the story is that if employers want to take advantage of the new liberal self-correction rules, they need to find the failure before the IRS does and start making the correction. 

To qualify for self-correction under the new rule, an employer must also have established practices and procedures reasonably designed to promote and facilitate overall compliance in form and operation with the Internal Revenue Code’s requirements.  In addition, self-correction is not available for egregious failures or failures involving diversion or misuse of plan assets or whose purpose is tax avoidance. 

Self-correction is also available for several specific types of failures. 

  • Participant Loan Failures.  The Act provides that EIFs related to participant loan failures can be self-corrected if the failure is corrected following existing EPCRS procedures for that type of failure.  The failure will also be considered corrected under the DOL’s separate correction procedures, subject to any reporting or procedural requirements the DOL may decide to impose. 
  • IRA Failures.  The Act expands self-correction to include failure where the employer is seeking a waiver of the excise tax associated with certain IRA failures and failures related to non-spouse beneficiaries’ distributions to inherited individual retirement plans as long as the beneficiary had reason to believe the funds could be rolled over without tax liability. 

The Act requires the Treasury Secretary to issue guidance regarding the correction of EIFs, including corrections for specific failures and general correction principles for failures for which there is no specific correction.   The Secretary must also revise EPCRS revenue procedure to reflect the above changes within two years. 

  1. Retroactive Amendments Increasing Benefits.  The Act also extends the deadline for amending plans to increase benefit accruals until the due date of the plan sponsor’s tax return (including extensions).  Under prior law, amendments not required by law to retain the plan’s qualified status had to be made by the last day of the plan year.  Under the new law, an employer could adopt an amendment that retroactively increases benefits to participants under the plan after the plan year is over but before the sponsor must file its tax return.  For a calendar year corporation with a filing extension, the deadline would be September 15th of the subsequent year.  This rule does not apply to matching contributions.  This provision will be helpful only to a small group of plan sponsors who want to increase benefits retroactively after the plan year ends.  This provision is effective for plan years beginning after December 31, 2023.   
  1. Safe Harbor Corrections for Employee Elective Deferral Failures.  The Act provides relief to plans with failures related to automatic enrollment or escalation features and plans that fail to offer an eligible participant an opportunity to make an affirmative deferral election because the plan improperly excluded them.  Under prior law, employers with these types of plan failures did not have to make up for missed employee elective deferrals if they made the corrections within a specified time period.  Still, that rule was set to expire on December 31, 2023.  The Act makes the relief permanent. 

To take advantage of the relief, a plan sponsor must correct the failure by the earlier of:

  • The date of the first payment of compensation to the employee on or after the last day of the nine-and-a-half month-period after the end of the plan year during which the error occurred; or
  • The first compensation payment date on or after the last day of the month following the month in which the employer receives notification of the error.

    The employer still must make up any matching contributions associated with the missed deferrals (plus earnings) but may forego making up for missed elective contributions.

    What Plan Sponsors Should Do.  To take advantage of the new law, plan sponsors should:

    • Identify and correct errors before the IRS discovers them – the race is on
    • Establish practices and procedures designed to promote and facilitate compliance with IRS requirements
    • Before filing a VCP application with the IRS, determine whether the failure qualifies for self-correction under the new law
    • If employers want to increase benefits for the prior year based on better-than-expected financial results, they have until the due date of their tax return to do so

    Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance. 

    Welcome to Part 8 of our series about the SECURE 2.0 Act of 2022 (SECURE 2.0) (our other articles may be found on our JL Employee Benefits Blog Post Page).  Among the many changes within SECURE 2.0 are two provisions that may help employers reduce the number of retirement plan accounts of terminated vested participants: (i) the retirement savings lost and found program and (ii) the increase in the threshold for mandatory plan distributions.  

    RETIREMENT SAVINGS LOST AND FOUND (Section 303)

    Section 303 of SECURE 2.0 requires the Department of Labor (DOL), in consultation with the Department of the Treasury, to create an online searchable lost and found database of retirement plans.  The database will enable plan participants, who might have lost track of their retirement plan, to search for the contact information of their plan administrator.  

    The deadline for the DOL to establish the database is December 29, 2024.  Under yet-to-be-drafted regulations, plan administrators must furnish the DOL with information about the plan and terminated plan participants for plan years beginning after December 31, 2023.

    UPDATING DOLLAR LIMIT FOR MANDATORY DISTRIBUTIONS (Section 304)

    Current law permits a retirement plan, without participant consent, to cash out a participant who had a distributable event if the participant’s account balance is $5,000 or less.  Section 304 of SECURE 2.0 increases to $7,000, the threshold at which plans may automatically cash out a participant, effective for distributions made after December 31, 2023.  This change is optional and may require a plan amendment.

    Before an employer chooses to raise the mandatory distribution limit on its retirement plan, it should consider how it might affect the fees of its service provider.  For example, raising the cash-out threshold may be appropriate if fees increase with an increase in plan assets or the number of plan accounts.  However, an increase in the threshold might not be warranted in certain fee arrangements, such as where the fee rate decreases as plan assets increase. 

    Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

    Additional Tools for Employers to Encourage Retirement Savings

    Matching Contributions on Student Debt Payments

    One of the most eagerly anticipated provisions of the “SECURE 2.0” legislation is the ability for employers to “match” within a defined contribution savings plan employees’ payments of student debt.   This provision is just one of the many changes in SECURE 2.0 aimed at enhancing and encouraging retirement savings opportunities for Americans.

    In 2018, the IRS issued a Private Letter Ruling (PLR) to Abbott Laboratories approving a proposed amendment to its 401(k) plan to allow a matching contribution based on student debt repayments rather than employee deferrals to the plan.  While binding only on the employer receiving it, the favorable ruling piqued interest in other employers looking for ways to recruit, retain and encourage retirement savings for an employee population that may not have otherwise deferred to the plan due to student debt obligations.  Over the past few years, that interest has grown for many employers looking at creative benefits solutions, but a clear, compliant, and universally available path forward was lacking until now.

    Under the new provisions of Internal Revenue Code Section 401(m)(4), any match must be based on student debt repayments for higher education expenses.  Eligibility, match rate, and vesting also must be the same as that for the match on elective deferrals.  The employee must annually certify that the loan payments have been made.  Employers may rely on this self-certification. 

    From an administrative perspective, it is significant to note that the statute anticipates possible issues for nondiscrimination testing of elective contributions.  A plan can test separately those employees who receive matching contributions on student loan repayments from those who receive matching contributions on elective deferrals.  The amount of loan repayments made by the employee count towards the annual limit on elective deferrals under Code Section 402(g) but not as a contribution for the limit on annual additions under Code Section 415(c).  These provisions of the Act have laid the framework to make the inclusion of such a provision less administratively burdensome.

    This is an optional provision that plan sponsors can implement in 401(k), 403(b), Governmental 457(b), and SIMPLE IRA plans for plan years beginning on and after January 1, 2024.  The IRS will issue implementing regulations and a model plan amendment for those plans wishing to adopt.

    But Wait, There’s More!  Financial Incentives

    In the same spirit of encouraging participation in defined contribution savings plans, SECURE 2.0 also allows employers to provide limited financial incentives to encourage participation in a 401(k) or 403(b) plan.  These incentives must be “de minimis,” although the statute does not define the threshold.  This likely means modest-value gift cards and other small incentives to encourage employees to participate, but notably, incentives may not be paid for with plan assets.  This tool is also optional and effective immediately, with no amendment to the plan required.

    If you have any questions about these new plan design opportunities or SECURE 2.0 generally, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

    The SECURE 2.0 Act of 2022 (SECURE 2.0) eliminates the requirement for plan sponsors to provide certain notices to eligible but unenrolled employees in defined contribution plans, changes the delivery method plan sponsors must use to furnish benefit statements to participants in retirement plans, and modifies the language required in annual funding notices under defined benefit plans.  It also requires agencies to perform significant studies on several notices and report their findings to Congress. 

    Before SECURE 2.0, plan sponsors of defined contribution plans were required to furnish eligible but unenrolled employees with all notices and other documents, such as summary plan descriptions (SPDs).  Effective for plan years beginning after December 31, 2022, plan sponsors no longer have to furnish unenrolled, eligible employees with notices as long as they provide the unenrolled, eligible employee an SPD and other notices upon their initial eligibility and then deliver an “annual reminder notice” advising of their eligibility to participate in the plan and any otherwise required document the unenrolled participant may request. 

    Generally, plan sponsors must provide benefit statements to participants in defined contribution plans every quarter and participants in defined benefit plans once every three years.  Effective after December 31, 2025, defined contribution plans must provide at least one benefit statement on paper in written form each year, and defined benefit plans must provide at least one benefit statement on paper in written form every three years.  Participants may elect to opt out of receiving the paper statement. 

    SECURE 2.0 adds another requirement to the 2002 e-delivery safe harbor:  effective for participants first eligible to participate in a retirement plan after December 31, 2025, plan sponsors must now provide a one-time initial paper notice of their right to request all required documents be furnished on paper in written form before the plan sponsor may begin furnishing benefits statements electronically under the safe harbor.  A plan may deliver a duplicate electronic statement in any situation where the plan furnishes a paper benefit statement.

    The annual funding notice, provided annually to defined benefit plan participants, is no longer required to disclose the plan’s “funding target attainment percentage” and will instead need to describe the plan’s “percentage of plan liabilities funded.” This change is effective for plan years beginning after December 31, 2023.

    Congress also demonstrated an interest in improving certain plan-related participant notices and disclosures by assigning these tasks:

    • The Government Accountability Office (GAO) will prepare a report analyzing the effectiveness of Internal Revenue Code §402(g) notices required to be provided by plan administrators of qualified plans to recipients of eligible rollover distributions, describing different distribution options and related tax treatment.  The GAO’s report must analyze the effectiveness of §402(g) notices and make recommendations, if needed, to enhance eligible rollover distribution recipients’ understanding of various distribution options, the tax consequences of each option, and spousal rights.  The GAO has 18 months to complete this task. 
    • The Department of Labor (DOL) must review its fiduciary disclosure requirements for participant-directed individual account plans.  They must explore potential improvements to the disclosure requirements that could enhance participant understanding of defined contribution plan fees and expenses and the impact of such fees and expenses over time.  The DOL will then report to Congress on their findings, including the advisability of potential consumer education around financial literacy concepts applicable to retirement plan fees and any recommended legislative changes needed to address those findings.  The DOL has three years to complete this task.
    • The DOL and Treasury (IRS) will adopt regulations permitting, but not requiring, the consolidation of certain retirement plan participant notices.  The participant notices eligible for consolidation include, among others, the §404(c)(5)(B) notice — concerning default investment arrangements under participant-directed individual account plans and the §514(e)(3) notice — concerning automatic contribution arrangements.  Any combined notice must still satisfy the requirements of all notices and may not obscure or fail to highlight the primary information required by each notice.  The DOL and IRS have two years to complete this task.                   

    If you have questions about SECURE 2.0, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

    Employees, especially those far from retirement, are sometimes hesitant to put money into their employer’s 401(k) plan, knowing that their money won’t be available to them if unexpected expenses arise. Congress and the Biden administration, recognizing the long-term benefit of incentivizing retirement savings, included two new means for plan participants to access emergency funds in the new “SECURE 2.0” legislation, which was signed into law at the end of last year.   We provide overviews of SECURE 2.0 here and here, and below discuss these new emergency distribution and Roth emergency savings account options. 

    Emergency Distributions

    Effective for plan years starting on or after January 1, 2024, 401(k) plans (along with 403(b) plans, 457(b) plans and IRAs) may allow participants to access up to $1,000 of their account balance (including pre-tax contributions) without penalty, in the event of an “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”  This new plan feature is modeled after certain other special in-service distribution options—namely, qualified birth/adoption distributions (QBADs) and the coronavirus-related distributions (CRDs) allowed under the CARES Act. Participants need only self-certify their need for the emergency distribution in order to request it. 

    Emergency distributions may be requested once per calendar year. However, a participant may not take another emergency distribution from the same plan or IRA within three years, unless the participant has already rolled their prior distribution back into the plan or IRA (as described below), or contributed to the same plan or IRA in an amount at least equal to their prior distribution.

    As with QBADs and CRDs, a participant who takes an emergency distribution can also roll the distribution back into the same plan or into an IRA within three years to avoid taxation on the distribution. If the amount is rolled back into a plan/IRA in a later year, however, it will require an amendment of the participant’s tax return for the year of the distribution.

    Roth Emergency Savings Accounts

    Also effective in 2024, plans may allow participants who are non-highly compensated employees (i.e., for 2024, those who earned less than $150,000 in 2023) to contribute up to $2,500 in post-tax deferrals to an emergency savings account under such plan, which will be treated as Roth contributions. Sponsors may even elect to set up automatic enrollment in this plan feature, with contributions of up to 3% of a participant’s pay until the contribution limit is hit, unless a participant affirmative opts out.

    Of note and likely key for both plan administration and investment communications – participants’ emergency savings account contributions must be invested in a manner that preserves capital – e.g., riskier investments that may be available under a plan, such as equity, aren’t allowed.

    Plan sponsors may not themselves contribute amounts to participants’ emergency savings accounts but are required (if their plan provides for matching contributions) to match any emergency savings account contributions by putting the corresponding match into the non-emergency savings account portion of the plan.  

    Participants may withdraw from the emergency savings account on at least a monthly basis, penalty free (though plans may charge a fee after the first four withdrawals per year). The legislation does, however, give plan sponsors some authority to prevent participants from using these accounts in a manner other than that intended by the SECURE 2.0 Act of 2022, by putting money into the emergency savings account, receiving the match, and then immediately withdrawing their own contributions. 

    When a participant with an emergency savings account balance terminates employment, a plan must allow for their balance to be (1) rolled into their plan Roth account (if applicable), (2) rolled into another plan or IRA, or (3) distributed to the participant. Since contributions to the emergency savings accounts are treated like Roth deferrals, any distribution (including earnings) will not be taxable to the participant. 

    ***

    While each of these new features are optional for plans, we do expect they will be implemented by many sponsors, and that they will be popular with potentially hesitant plan participants. 

    If you have questions about emergency distributions and/or savings accounts under SECURE 2.0, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

    The SECURE 2.0 Act of 2022 (SECURE 2.0) provides welcome relief to private sector single employer sponsors of defined benefit pension plans (Pension Plan(s)). Effective for plan years beginning on and after January 1, 2024, SECURE 2.0 caps the variable rate premium paid by Pension Plan sponsors to the Pension Benefit Guaranty Corporation (PBGC) at $52 per $1,000 or 5.2% of a Pension Plan’s unfunded, vested benefit liability. SECURE 2.0 does not change the flat rate premium also paid by Pension Plan sponsors and charged on a per participant basis.

    The purpose of the PBGC is to protect the vested benefit of Pension Plan participants if the Pension Plan in which they participate fails. The PBGC collects premiums from employers that sponsor Pension Plans to fund its responsibility. Because the PBGC is not funded by general tax revenue, it must heavily rely on the premiums paid by Pension Plan sponsors.

    Single employer sponsors of Pension Plans must pay two types of premiums to the PBGC: (i) a per participant flat rate premium ($96 for 2023) and (ii) a variable rate premium based on a percentage of a given Pension Plan’s unfunded, vested benefit liability. In addition, under the Bipartisan Budget Act of 2013, both the flat rate and variable rate premium became subject to inflation indexing tied to increases in wage growth.

    The change to index premiums has been widely criticized because the increased expense further discourages Pension Plan formation and encourages Pension Plan sponsors to terminate, freeze, or “de-risk” their Pension Plans partly to manage such ever increasing costs. In response to these criticisms and likely because the funded status of the single employer PBGC “insurance” fund has improved, Congress seized the opportunity to end the indexing of variable rate premiums. Note, however, Congress may increase the variable rate premium again, but to do so, it must amend SECURE 2.0. 

    We are available to help plan administrators understand and implement the requirements of SECURE 2.0. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.