Search secure 2.0

The SECURE 2.0 Act of 2022 (SECURE 2.0) contains several provisions that allow the federal government to have its cake (more tax dollars) and eat it too (more retirement savings, easing Social Security challenges). With SECURE 2.0, we find more Roth, more catch-up, and catch-up as Roth. 

More Roth

Named after the late Delaware Senator William Roth, Roth IRA first became a savings opportunity in 1998.  Starting January 1, 2006, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) added this design feature to 401(k) plans. Although, for the most part, Roth deferrals are treated like pre-tax elective deferrals for plan purposes, they differ in two material respects: 

  1. Roth deferrals are subject to income taxation when contributed to the plan; and
  2. If all of the applicable requirements are met to comprise a “qualified distribution,” the earnings that accrue with respect to the Roth deferral will avoid taxation when distributed. 

Roth elective deferral opportunities and in-plan Roth conversion and rollover opportunities have become relatively common plan features. They have the potential to create powerful savings tools, especially for those in lower income tax brackets. 

Roth treatment historically has been limited to elective deferrals. That changed with SECURE 2.0.  Effective now (i.e., the date of enactment of SECURE 2.0), Section 402A of the tax code permits 401(k), 403(b), and governmental 457(b) plans to permit employees to elect to have employer matching or nonelective contributions treated as designated Roth contributions.  

This avoids the need for participants to jump through the hoops of electing an in-plan Roth conversion with respect to these employer accounts, if permitted by the plan, to achieve this result. This also has the potential to produce marginal tax savings on the accumulated earnings if Roth treatment is elected at the time of contribution (rather than conversion).  

Although immediately effective, employers interested in this opportunity likely will have to wait until payroll and recordkeeping systems are updated to accommodate this change.   

More Catch-Up

Those among us who are familiar with 457(b) plans and 403(b) plans know there are special catch-up contribution rules permitted in these plans that provide enhanced savings opportunities to those approaching retirement age. The concept is simple – let employees save more as they are preparing for retirement. 

For example, Section 403(b) plans can allow employees who have at least 15 years of service to defer up to a lifetime maximum of $15,000 more into the plans than the customary 402(g) deferral limit of $22,500 in 2023. The annual amount is determined using a formula that takes into account years of service, prior elective deferrals, and prior Roth deferrals. 

Likewise, 457(b) plans can allow special catch-up contributions during the 3 years immediately preceding normal retirement age. This allows eligible participants to double their deferral limit or contribute the annual limit plus the amount they did not contribute during prior years, whichever is less. 

Section 109 of SECURE 2.0 brings this concept to 401(k) plans. Starting in 2025, participants who are age 60, 61, 62, and 63 will be subject to a higher catch-up contribution limit. In lieu of the standard Section 414(v) catch-up contribution limit applicable to those who are age 50 or older ($7,500 for 2023), these eligible participants approaching retirement may defer the greater of $10,000 (indexed) or 50% more than the regular catch up contribution limit. 

For example, if, hypothetically, the regular catch-up contribution limit at the time is $9,000, and the indexed special catch-up contribution limit is $11,500, a 60-year-old participant could contribute $13,500 to the plan (the greater of $9,000 x 1.5 = $13,500 or $11,500). 

Catch-Up as Roth

So, what is the catch? Section 603 of SECURE 2.0 amends the catch-up contribution rules to require certain highly paid workers to contribute all of their catch-up contributions as Roth contributions starting in 2024. In many instances, this means the government will receive greater tax revenues on the same dollar because those who are actively working customarily are in a higher income tax bracket than they will be when drawing upon retirement savings. So, taxation is the cost of stockpiling retirement savings for these participants. 

Who is highly paid for this purpose? We do not use the standard highly compensated employee definition for this purpose, which is $150,000 for 2023. Instead, we need to keep track of another dollar limit. This special rule applies to anyone earning more than $145,000 in FICA wages in the preceding year, which is subject to indexing in $5,000 increments. Highly paid participants who do not receive FICA wages (e.g., partners) are not currently captured by this rule, but this may be an oversight that is subject to change.

So, back to our example, if the 60-year-old participant is earning more than $145,000 (indexed) in FICA wages when the higher catch-up contribution limit is in effect and wants to take advantage of deferring an additional $13,500 into the plan, that $13,500 will need to be a Roth contribution.  However, if this participant was earning $145,000 (indexed) or less, the $13,500 catch-up contribution could be made on a pre-tax basis.

There are many questions about this change, and implementing guidance is needed. For example, are new hires or employees acquired in connection with a business transaction subject to this requirement in their first year of employment? What does the administrator do if the highly paid participant makes a pre-tax deferral election? For example, many plans process single deferral elections.  Once the regular deferral bucket fills, the deferrals are recharacterized as catch-up contributions. This administrative process will need to be revised, given this change in the law.       

Note that offering only pre-tax catch-up contributions is not an option to avoid this complexity.  SECURE 2.0 specifies that if any participant would be subject to this Roth catch-up rule, the plan must offer a Roth catch-up contribution option in order for any participant (even those earning $145,000 or less) to make catch-up contributions to the plan. Congress designed this provision to ensure plans offer this Roth catch-up option.

Participants also will have important financial and distribution planning questions to resolve. For example, if these catch-up contributions are the first Roth deferrals the individual makes, distribution planning will be needed to avoid taxation on the earnings that accumulate.  Distributions from Roth accounts are not treated as qualified distributions if amounts are distributed within a 5-year period of when the first Roth contribution was made to the plan (or another plan in the case of a rollover). 

Participant communication will be key, and amendments are on the horizon. Stay tuned for more in our series on 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.

As expected, the SECURE 2.0 Act of 2022 (SECURE 2.0), an extensive piece of legislation aimed at retirement plan reform, is included in the Consolidated Appropriations Act, 2023 (the Spending Bill).  The 4,000+ page, $1.7 trillion Spending Bill was released early morning on Tuesday, December 20, with a passage deadline of Friday, December 23.  If the deadline is not met, another continuing resolution must be passed to avoid a government shutdown.   

SECURE 2.0 includes over 100 provisions intended to expand coverage, increase retirement savings, and simplify and clarify retirement plan rules.  The retirement package is a consolidation of three bills – the Senate Health, Education, Labor and Pensions Committee’s Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act (the RISE & SHINE Act), the Senate Finance Committee’s Enhance America’s Retirement Now (EARN) Act, and the House Ways and Means Committee’s Securing a Strong Retirement Act (the only included bill without a creative acronym).

SECURE 2.0 is intended to build on the Setting Every Community Up for Retirement Enhancement Act of 2019 (the original SECURE Act).  The SECURE Act is the less expansive predecessor to SECURE 2.0, ushering in quieter revisions to retirement plan rules, such as raising the age of required minimum distributions (RMDs) and eliminating age limits for traditional IRA contributions.  Bolstered by the overwhelming bipartisan support of the SECURE Act, SECURE 2.0 makes even more aggressive changes to retirement plan governance, including key provisions such as:

  • Mandatory automatic enrollment.  Effective for plan years beginning after December 31, 2024, new 401(k) and 403(b) plans would have to automatically enroll participants upon attaining eligibility.  The automatic deferrals would start at between 3% and 10% of compensation, increasing by 1% each year to a maximum of at least 10% but no more than 15% of compensation.
  • Increased age for RMDs.  Participants are generally required to take retirement plan distributions upon attainment of a certain age.  Before the SECURE Act, the age for RMDs was 70.5.  The SECURE Act increased that age to 72.  SECURE 2.0 further increases the age to 73, beginning on January 1, 2023, and again to age 75 beginning on January 1, 2033.  In addition, SECURE 2.0 would reduce, and sometimes, eliminate altogether, the excise tax imposed on failing to take RMDs.
  • Increase the catch-up limit.  The dollar amount that participants can elect to defer each year is capped at a statutory maximum.  Under current law, participants who age 50 or older may defer an additional amount over the statutory maximum, referred to as a “catch-up.”  Beginning in 2025, SECURE 2.0 would increase the catch-up amount by at least 50% for participants who are between the ages of 60 and 63.   
  • Matching of student loan repayments. Effective for plan years beginning after December 31, 2023, employers could match student loan repayments as if the student loan repayments were deferrals.
  • Small financial incentives for participation.  Employers could offer de minimis financial incentives, such as low-dollar gift cards, to boost participation in retirement plans.  The financial incentives cannot be purchased with plan assets.
  • Emergency withdrawals.  SECURE 2.0 would permit penalty-free distributions for “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses” up to $1,000.  Only one distribution would be permitted every three years, or one per year if the distribution is repaid within three years. SECURE 2.0 would also permit penalty-free withdrawals of small amounts for participants who need the funds in cases of domestic abuse or terminal illness.
  • Automatic rollovers.  Under current law, plans can automatically distribute small accounts of less than $5,000 to former participants.  If the distribution is greater than $1,000, the plan must roll the account into an IRA.  Effective 12 months from enactment, SECURE 2.0 would permit the transfer of default IRAs into the participant’s new employer’s plan, unless the participant affirmatively elects to the contrary. SECURE 2.0 would also increase the limit for automatic rollovers from $5,000 to $7,000.
  • Eligibility for long-term, part-time workers.   Under current law, employees with at least 1,000 hours of service in a 12-month period or 500 hours of service in a three-consecutive-year period must be eligible to participate in the employer’s qualified retirement plan.  SECURE 2.0 would reduce that three-year rule to two years, for plan years beginning after December 31, 2024. 
  • Emergency savings accounts.  If provided by the terms of a plan, non-highly compensated employees could defer up to the lesser of 3% of compensation or $2,500 (post-tax) to an emergency savings account under the plan. 
  • Lost and found.  SECURE 2.0 would create a national online searchable database to enable employers to locate “missing” plan participants, and plan participants to locate retirement funds. 
  • Unenrolled employee notices.  SECURE 2.0 would eliminate the requirement to send certain notices to employees who have elected not to enroll in an employer’s retirement plan; provided, that the employees are provided with an annual reminder notice of eligibility to participate.

The Senate is expected to take up the Spending Bill on December 22.  Assuming passage in the Senate, the House will vote on December 23.  Because SECURE 2.0 essentially combines three previously proposed bills with heavy bipartisan support, it is unlikely extensive revisions to SECURE 2.0 will be necessary to pass the Spending Bill.  Whether other provisions of the Spending Bill will survive, however, is much less clear.  Final passage of the Spending Bill in some form or another is anticipated by the December 23 deadline.    

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.

On March 29, 2022, the House of Representatives passed the Securing a Strong Retirement Act of 2022 (SECURE 2.0, HR 2954).  SECURE 2.0 is a comprehensive bill designed to increase access to retirement savings and includes a variety of provisions that would affect employer-provided retirement plans.

On June 14, 2022, the Senate Health, Education, Labor, and Pensions (HELP) Committee unanimously approved its version of SECURE 2.0, the Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg (RISE and SHINE, S. 4354) Act.

RISE and SHINE v. SECURE 2.0

The RISE and SHINE Act builds on SECURE 2.0, with some key differences.  Provisions in the RISE and SHINE Act not in SECURE 2.0 include:

  • Allowing the use of plan assets to pay some incidental plan design expenses;
  • Raising the limit on mandatory cash-out distributions from $5,000 to $7,000; and
  • The inclusion of the Emergency Savings Act of 2022 (the Emergency Savings Act). Under Emergency Savings Act, 401(k) plans could include emergency savings accounts.  Participants could make pre-tax contributions to their emergency savings accounts.  Employers could match those contributions, but the total amount in a participant’s emergency savings account could not exceed $2,500.  Participants could withdraw amounts from their emergency savings accounts generally at any time, without the requirements imposed on hardship withdrawals.

Provisions in SECURE 2.0 not in RISE and SHINE include:

  • Increasing the catch-up contribution limit;
  • Permitting matching contributions on student loan payments; and
  • Raising the required minimum distribution age.

WHAT’S NEXT? 

The Senate Finance Committee anticipates releasing its retirement reform bill by July 4.  The expectation is for the Finance Committee bill and the HELP Committee bill to merge into a final bill, which the Senate will vote on later this year.  The Senate bill will then be reconciled with SECURE 2.0, and both chambers will vote on the combined bill.

We will continue to monitor retirement reform bills as they move through Congress and will have additional updates as information becomes available.  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.

On March 29, 2022, the House of Representatives passed the Securing a Strong Retirement Act of 2022 (“SECURE 2.0”, HR 2954).  The vote was largely supported by both parties (414-5).  The Senate will likely act on the bill later this spring.  While we expect several changes in the Senate version, it is widely anticipated that the legislation will ultimately become law in some form.  Below we highlight a few provisions of the bill we believe are of interest to employers.

Expanding Automatic Enrollment in Retirement Plans

For plan years beginning after December 31, 2023, SECURE 2.0 would mandate automatic enrollment in 401(k) and 403(b) plans at the time of participant eligibility (opt-out would be permitted).  The auto-enrollment rate would be at least 3% and not more than 10%, but the arrangement would need an auto-escalation provision of 1% annually (initially capped at 10%).  Auto-enrolled amounts for which no investment elections are made would be invested following Department of Labor Regulations regarding investments in qualified default investment alternatives.  Plans established before the enactment of the legislation would not be subject to these requirements.  Additional exclusions also apply.

Increase in Age for Required Beginning Date for Mandatory Distributions

For certain retirement plan distributions required to be made after December 31, 2022, for participants who attain age 72 after such date, the required minimum distribution age is raised as follows: in the case of a participant who attains age 72 after December 31, 2022, and age 73 before January 1, 2030, the age increases to 73; in the case of a participant who attains age 73 after December 31, 2029, and age 74 before January 1, 2033, the age increases to 74; and in the case of a participant who attains age 74 after December 31, 2032, the age increases to 75.

Higher Catch-Up Limit for Participants Age 62, 63 and 64

For taxable years beginning after 2023, the catch-up contribution amount for certain retirement plans would increase to $10,000 (currently $6,500 for most plans) for eligible participants who have attained ages 62-64 by the end of the applicable tax year.

Treatment of Student Loan Payments As Elective Deferrals for Purposes of Matching Contributions

For plan years beginning after December 31, 2022, employers may amend their plans to make matching contributions to employees based on an employee’s qualified student loan payments.  Qualified student loan payments are defined in the legislation as amounts in repayment of qualified education loans as defined in Section 221(d)(1) of the Internal Revenue Code (which provides a very broad definition).   This student loan matching concept is not a novel idea – prior proposed legislation included a similar provision, and the IRS has approved student loan repayment matching contributions in a private letter ruling.  Given the difficulty many employers are finding in hiring and retaining employees, this provision of SECURE 2.0 may prove popular if it ultimately becomes law.

Small Immediate Financial Incentives for Contributing to a Plan

Under the “contingent benefit rule,” benefits (other than matching contributions) may not be contingent on the employee’s election to defer (subject to certain exceptions).  Thus, an employer-sponsored 401(k) plan with a cash or deferred arrangement will not be qualified if any other benefit is conditioned (directly or indirectly) on the employee’s deferral election.  SECURE 2.0 would add an exception to this restriction for de minimis financial incentives (such as gift cards), effective as of the date of enactment.

Safe Harbor for Corrections of Employee Deferral Failures

Under current law, employers could be subject to penalties if they do not correctly administer automatic enrollment and escalation features.  SECURE 2.0 encourages employers to implement automatic enrollment and escalation features by waiving penalty fees if, among other requirements, they correct administrative errors within 9 ½ months after the last day of the plan year in which the errors are made.  This provision would be effective as of the date of enactment.

One-Year Reduction in Period of Service Requirement for Long-Term Part-Time Workers

In a provision aimed at increasing retirement plan coverage for part-time employees, the bill would reduce the current requirement to permit certain employee participation following three consecutive years during which the employee attains 500 hours of service to two-consecutive years during which the employee attains 500 hours of service.   The preceding are the maximum service requirements that a plan can impose – employers are free to impose lesser service requirements.

Recovery of Retirement Plan Overpayments

The bill includes several provisions aimed at reducing the claw-back of overpayments from retirement plans to retirees to help ensure that the fixed income of retirees is not diminished.  Plan fiduciaries would have more latitude to decide whether to recoup inadvertent overpayments made to retirees from qualified plans.  Further, plan fiduciaries would be prohibited from recouping overpayments that are at least three years old and made due to the plan fiduciary’s error.  If a fiduciary did attempt to recoup an overpayment, the fiduciary could not seek interest on the overpayment, and the beneficiary could challenge the classification of amounts as “overpayments” under the plan’s claims procedures.  Certain overpayments protected by the new rule would be classified as eligible rollover distributions.

Reduction in Excise Tax on Certain Accumulations

SECURE 2.0 would reduce the penalty for failure to take required minimum distributions from a qualified plan from 50% to 25%.  The reduction in excise tax would be effective for tax years beginning after December 31, 2022.

Although we do not know exactly which provisions of SECURE 2.0 will be reflected in the Senate version, the Retirement Savings and Security Act of 2021 is expected to form the basis of the Senate’s bill.   Between the Senate’s current draft and this SECURE 2.0, significant changes to retirement plans are on the horizon.

We are available to help plan administrators understand the legislation as it progresses through Congress.  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.

Note:  The original version of this article was based on the bill as originally passed in the House on March 29.  On March 30, the bill was sent to the Senate.  The March 30 version of the bill included different effective dates with respect to certain of the provisions of the bill described herein.  Effective as of April 13, 2022, this article has been updated to provide for the March 30 effective dates. 

On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023, a massive omnibus spending bill that will keep the government funded through the end of its September 30, 2023, fiscal year.  Included in Division T of the Act is the bipartisan legislation dubbed the SECURE 2.0 Act of 2022 (SECURE 2.0).  Containing voluminous changes, SECURE 2.0 follows the trend set by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 to reduce barriers and enhance retirement savings opportunities – especially for those with less disposable income. 

During the next several weeks, we will publish a series of articles that will dive deeply into the “need to know” provisions of SECURE 2.0 for our employer clients.  From notice changes to student loan matching opportunities and so much in between, SECURE 2.0 will be a catalyst for both administrative and plan design changes. 

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 Internal Revenue Service recently announced its cost-of-living adjustments applicable to dollar limitations on benefits and contributions for retirement plans generally effective for Tax Year 2024 (see IRS Notice 2023-75). Most notably, the limitation on annual salary deferrals into a 401(k) or 403(b) plan will increase to $23,000, and the dollar threshold for highly compensated employees will increase to $155,000. The more significant dollar limits for 2024 are as follows:

LIMIT20232024
401(k)/403(b) Elective Deferral Limit (IRC § 402(g)) The annual limit on an employee’s elective deferrals to a 401(k) or 403(b) plan made through salary reduction.$22,500$23,000
Government/Tax Exempt Deferral Limit (IRC § 457(e)(15)) The annual limit on an employee’s elective deferrals concerning Section 457 deferred compensation plans of state and local governments and tax-exempt organizations.$22,500$23,000
401(k)/403(b)/457 Catch-up Limit (IRC § 414(v)(2)(B)(i)) In addition to the regular limit on elective deferrals described
above, employees over the age of 50 generally can make an additional “catch-up” contribution not to exceed this limit.		$7,500$7,500
Highly Compensated Employee (“HCEs”)  (SECURE 2.0 Sec. 603 – IRC § 414(v)(7)) Catch-up contributions for HCEs earning above this limit in FICA wages for the preceding year MUST be ROTH contributions.   Not Required for Plan Years beginning in 2024$66,000$69,000
Defined Benefit Plan Limit (IRC § 415(b)) The limitation on the annual benefits from a defined benefit plan.$265,000$275,000
Annual Compensation Limit (IRC § 401(a)(17)) The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing.$330,000 ($490,000 for certain gov’t plans)$345,000 ($505,00 for certain gov’t plans)
Highly Compensated Employee Threshold (IRC § 414(q)) The definition of an HCE includes a compensation threshold for the prior year. A retirement plan’s discrimination testing is based on coverage and benefits for HCEs.$150,000 (for 2024 HCE determination)$155,000 (for 2025 HCE determination)
Highly Compensated Employee (“HCEs”)  (SECURE 2.0 Sec. 603 – IRC § 414(v)(7))    Catch up contributions for HCEs earning above this limit in FICA wages for the preceding year MUST be ROTH contributions.   Not Required for Plan Years beginning in 2024 $145,000
Key Employee Compensation Threshold (IRC § 416) The definition of a key employee includes a compensation threshold. Key employees must be determined for purposes of applying the top-heavy rules. Generally, a plan is top-heavy if the plan benefits of key employees exceed 60% of the aggregate plan benefits of all employees.$215,000$220,000
SEP Minimum Compensation Limit (IRC § 408(k)(2)(C)) The mandatory participation requirements for a simplified
employee pension (SEP) includes this minimum compensation threshold.		$750$750
SIMPLE Employee Contribution (IRC § 408(p)(2)(E)) The limitation on deferrals to a SIMPLE retirement account.$15,500$16,000
SIMPLE Catch-up Limit (IRC § 414(v)(2)(B)(ii))) The maximum amount of catch-up contributions that individuals
age 50 or over may make to a SIMPLE retirement account or SIMPLE 401(k) plan.		$3,500$3,500
Social Security Taxable Wage Base See the 2024 SS Changes Fact Sheet. This threshold is the maximum amount of earned income on which Social Security taxes may be imposed (6.20% paid by the employee and 6.20% paid by the employer).$160,200$168,600

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

When the original SECURE Act was passed in 2019, compliance with its new long-term part-time employee rule seemed far in the future—way out to January 1, 2024. Well, that time is nearly upon us, so sponsors of 401(k) plans should be ready to let these long-term part-time employees start participating in their plans with the start of the New Year.

Under this long-term part-time employee rule, part-time employees who work at least 500 hours during three consecutive 12-month periods must be eligible to participate in the plan for purposes of elective deferrals (subject to any applicable age requirement). The 12-month periods began as of January 1, 2021, so the first time an employee could become eligible under this rule is January 1, 2024.

 Plan sponsors should have started counting and tracking part-time employee hours as of January 1, 2021. Now is the time to look at that data to determine which employees may be required to be eligible to make elective deferrals as of January 1, 2024. Don’t forget that certain employees may be excluded from this new eligibility rule (such as employees subject to a collective bargaining agreement) and that these employees can be excluded from certain nondiscrimination testing.

 While these long-term part-time employees may be newly eligible for elective deferrals, the IRS has clarified that employers generally must include all years of services with the employer to determine the employee’s vesting rights to employer contributions. To be clear, the employees becoming eligible under this new rule are only required to be eligible to make employee deferrals—they are not also required to qualify for employer contributions. Whether to expand eligibility for employer contributions to these employees is up to the plan sponsor. As with eligibility, a year of vesting services for these employees is based on a 500-hour threshold.

 To help with the administrative burden of tracking these periods of 500 hours, plan sponsors should count hours on the date the employee’s employment begins. If the employee does not complete the required hours of service during the initial 12-month period of employment, plan sponsors may then use the first day of the plan year for hours-counting purposes going forward.

 As a reminder, SECURE 2.0 created a variation to the long-term part-time rule set forth in the original SECURE Act, as we wrote about here. Plan sponsors should ensure compliance with both the original SECURE Act rule and the SECURE 2.0 rule.

 If you have questions about the rules for long-term part-time employees under either the original SECURE Act or SECURE 2.0 or if your plan does not let part-time employees save for retirement, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

With a multitude of questions surrounding implementation and administration, late on a summer Friday afternoon, the IRS issued Notice 2023-62 (Notice), providing Plan Sponsors with a transition period until 2026 to implement Roth catch-up contributions.

Catch-up contributions are a defined contribution plan feature many 401(k) and 403(b) Plan Sponsors are familiar with. Since being introduced in 2001 as part of the Economic Growth and Tax Reconciliation Act (EGTRRA), a catch-up contribution feature allows participants who are age 50 or over in a plan year to make elective contributions that exceed an otherwise applicable limit under the Internal Revenue Code, a plan-imposed limit, or the actual deferral percentage (ADP) limit for Highly Compensated Employees. For 2023, the limit on catch-up contributions is $7,500, subject to indexing in future years.

Enter one of the many tax-qualified retirement plan-related changes enacted as part of the SECURE 2.0 Act of 2022 (SECURE 2.0). SECURE 2.0 provides, among many other things, that effective January 1, 2024, catch-up contributions for participants whose wages (for FICA/FUTA purposes) from the employer sponsoring the plan were more than $145,000 in the prior year must be made on a Roth (after-tax) basis. Further, when the plan provides for mandatory Roth catch-up contributions for those earning over $145,000 in the prior year, the plan must also allow Roth catch-up contributions for all eligible participants.

How hard could it be?

Although simple enough in concept, “flipping a switch” to require Roth catch-up contributions for those earning over $145,000 in the prior year has raised several questions and proved administratively tricky for many.

Not insignificantly, wages for determining which participants must be subject to mandatory Roth catch-ups is not something plans already capture. Designing and testing compliance systems requires a complicated and coordinated effort between Plan Sponsors, recordkeepers, and payroll vendors. With only four months until the statutory effective date, Plan Sponsors have expressed consternation over participant communications, sequencing of which dollars are considered catch-up, obligations related to collectively bargained plans, and the need for further guidance on open questions about whether new participant elections would be needed and mid-year amendment implications for safe harbor plans.

These issues and others have led some Plan Sponsors to consider eliminating all catch-up contributions or at least for those earning over $145,000 in the prior year as a route to compliance. Certainly, not an intended consequence of SECURE 2.0. Other Plan Sponsors considered requiring that any catch-up contribution made only be as Roth for all participants, regardless of wage level.

What is next?

The relief provides important breathing room for plans to work towards compliance by explicitly providing that any catch-up contributions made between January 1, 2024, and December 31, 2025, will be treated as meeting the requirements of SECURE 2.0, even if made only as pre-tax contributions.

The Notice also confirmed that for plan years after 2023, those 50 and over will remain eligible to make catch-up contributions. A technical error in the Secure 2.0 legislation inadvertently eliminated the catch-up provision from the Internal Revenue Code.

The Notice clarifies that additional guidance will be forthcoming. The guidance is expected to include (1) guidance stating that the Plan Administrator and Employer are permitted to treat an election by the participant to make catch-up contributions on a pre-tax basis as an election to make catch-up contributions that are designated Roth contributions and (2) guidance stating that in a plan maintained by more than one employer (including a multiemployer plan), wages are not aggregated between participating employers to determine whether a participant reaches the $145,000 threshold.

The IRS specifically invites comments and suggestions on whether a plan that offers Roth catch-up contributions in order to comply, but not the ability to make Roth contributions generally, violates the provisions of the Code requiring that all eligible participants must be allowed to make the same election regarding catch-up contributions, or whether restricting catch-up contributions to only those participants whose prior year earnings do not exceed $145,000 is permissible.

For those plans that are not far along in implementation, and certainly, for those who have never offered a Roth contribution or Roth in-plan conversion approach, Plan Sponsors may choose to proceed with implementing some design features that move towards compliance. Introducing Roth contributions generally, including the acceptance of Roth amounts in rollover contributions and the ability of all participants to designate catch-up as Roth, may be viewed as plan enhancement before the mandate to require only Roth catch-up contributions for high-wage earners.

We will continue to provide updates on all forthcoming IRS guidance on this issue and other changes introduced by SECURE 2.0. 

If you have questions about this subject matter or any other employee-benefits-related question, members of the Jackson Lewis Employee Benefits Practice Group are available to assist. 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.

Natalie's Dog

On July 17, the Internal Revenue Service (IRS) issued an advance version of Notice 2023-54 (the Notice) which will include transition relief for plan administrators in connection with the change in the required beginning date for required minimum distributions (RMDs) under §401(a)(9) of the Internal Revenue Code (Code) under §107 of the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0). Plan administrators welcome this guidance as if it had big brown eyes, floppy ears, and a happily wagging tail.

Waiting For Your Puppy to Grow (Effective Date of Final Regs.  Extended)

The IRS previously issued Notice 2022-53, stating that final RMD regulations would not take effect until the 2023 distribution calendar year. The Notice extends that relief and provides, “Final regulations regarding RMDs under § 401(a)(9) and related provisions will apply for calendar years beginning no earlier than 2024.”

It’s OK to Have Accidents (Mischaracterized RMDs Can Be Rolled Over Until September 30, 2023)

Congress modified the RMD rules with the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) in 2019 and again with SECURE 2.0 in 2022. These two modifications changed the date an individual would need to take an RMD. However, due to the timing of the change in the law, some individuals born in 1951 unnecessarily took an RMD in early 2023, and the Notice provides relief to these individuals. Specifically, the Notice states that if a participant born in 1951 received a distribution in 2023 that was treated as ineligible for rollover because it was believed to be a required RMD, that participant has until September 30, 2023, to roll over that distribution.

Consistent Messaging is the Key to Successful Training (IRS – Take Note)

The IRS’s proposed regulations were misunderstood by some who thought that the 10-year rule would apply as the long-standing 5-year rule always had, so there would be no RMD due until the last year of the 5- or 10-year period following the specified event (the death of the employee, the death of the eligible designated beneficiary, or the attainment of the age of majority for the employee’s child who is an eligible designated beneficiary.)  To be clear, the 10-year rule does not allow for a 10-year delay in all cases; if the beneficiary is not an eligible designated beneficiary, annual RMDs are required throughout the 10-year period if the plan participant died on or after his required beginning date.

Conclusion

Compliance with the new rules will require careful analysis, plan amendment, and updated administration like a new puppy requires housebreaking, crate training, and constant supervision. Ultimately, both will provide the warm fuzzy feeling of a job well done.

If you have any questions, the Jackson Lewis Employee Benefits Practice Group members are available to assist. 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.

As discussed in an earlier blog post, the SECURE 2.0 Act of 2022 (the Act) expanded the Employee Plans Compliance Resolution System (EPCRS), a comprehensive IRS program for correcting common qualified retirement plan failures.  Plan sponsors have three ways to correct mistakes under EPCRS: the self-correction program (SCP), the voluntary correction program (VCP), and the Audit Closing Agreement Program (Audit CAP). 

The Act requires the IRS to update EPCRS consistent with the Act no later than December 29, 2024.  On May 25, 2023, the IRS issued Notice 2023-43 to provide interim guidance on the expansion of EPCRS. 

The Act significantly expands the types of retirement plan failures that can be self-corrected under SCP.  Many plan sponsors prefer SCP over the other programs because it does not involve the IRS or a fee.  Under the expanded program, plan sponsors may self-correct an “eligible inadvertent failure” (EIF) unless the plan or plan sponsor is under examination by the IRS and the plan sponsor has not demonstrated a specific commitment to self-correct it.  However, insignificant failures may be self-corrected even if the plan or plan sponsor is under examination and the plan sponsor has not taken action to correct the failure.  The expanded program is not limited to failures that occurred on or after the Act was adopted; failures that occurred before December 29, 2022, may also be self-corrected under the expanded EPCRS.

Until EPCRS is formally updated, plan sponsors may rely on the Notice and self-correct failures if these conditions are met:

  • The plan sponsor has actively pursued action to self-correct the failure before the plan or plan sponsor is under examination (except for insignificant failures, which may be self-corrected while the plan is under examination).
  • The failure is self-corrected by the last day of the 18th month following the date the failure was identified.  Except for failures related to employer eligibility failures, which must be corrected by the last day of the 6th month following the date the failure was identified.
  • The failure is not egregious, does not directly or indirectly relate to an abusive tax avoidance transaction, and does not relate to the diversion or misuse of plan assets.
  • The self-correction satisfies EPCRS’ provisions for self-correction, except these requirements in the current EPCRS procedure which no longer apply when self-correcting an EIF:
    • The plan must have a favorable determination letter.
    • The prohibition of self-correction for demographic failures and employer eligibility failures.
    • The prohibition of self-correction of certain loan failures.
    • The provisions relating to self-correction of significant failures that have been substantially completed before the plan or plan sponsor is under examination.
    • The requirement that significant failures must be completed or substantially completed by the last day of the third plan year following the plan year in which the failure occurred.

    However, the following are some, but not all, failures that may not be self-corrected until EPCRS is formally updated:

    • A failure to initially adopt a written plan.
    • A failure in an orphan plan.
    • A significant failure in a terminated plan.
    • A demographic failure that is corrected using a method other than a method in Treas. Reg. §1.401(a)(4)-11(g).
    • Plan amendments to conform the terms of the plan to the plan’s past operations if such amendment is less favorable for a participant or beneficiary than the original plan terms.
    • A failure in an ESOP that involves section 409 (other than plan disqualification).

    What Plan Sponsors Should Do:

    • Identify and correct errors before the IRS discovers them.
    • 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 expanded program.
    • Keep adequate records showing when the failure was identified, the participants affected, and how and when the failure was corrected.

    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.