SECURE 2.0 enactment revamps retirement plan landscape


A new package of retirement tax incentives enacted as part of the omnibus spending bill (H.R. 2617) in December has important implications for both individuals and employers.


The package is commonly referred to as “SECURE 2.0” because it builds on the Setting Every Community Up for Retirement Enhancement (SECURE) Act enacted in 2019. The bill provides several favorable new rules that offer individuals increased opportunities to leverage retirement incentives, including:

  • Raising the minimum age for required minimum distributions (RMDs)
  • Increasing catch-up contribution limits for some age groups (may need a technical correction, and catch-up contributions will be limited to Roth contributions for some employees)
  • Increasing and enhancing the “Saver’s Credit”
  • Allowing matching contributions for employees based on student loan repayments
  • Expanding permitted withdrawal rules

Plan administrators should consider amending plans to allow employees to benefit from the new provisions, which can help with attracting and retaining talent. In some cases, employers will be required to amend plans to implement the changes.


There are also important new rules directed at plans themselves. The changes include some favorable rules that will increase flexibility and make it easier to correct errors. There are important provisions expanding access to multiple employer plans (MEPs) and pooled employer plans (PEP) to Section 403(b) plans, while also making MEPs and PEPs easier to administer. There are also several new requirements imposed on plans, including auto-enrollment and escalation for new plans beginning with the 2025 plan year. Many of the changes to the plan rules will require plans to make amendments.


The effective dates for the provisions vary considerably. Employers and plan administrators should carefully assess the impact of the changes and create a timeline for implementing any discretionary or mandatory plan changes. Individuals should evaluate the legislation for the potential to increase savings opportunities. The following includes more details on some of the key provisions.





Required plan changes





The bill requires administrators of Section 401(k) and 403(b) plans to automatically enroll participants when they become eligible, though employees may opt out of coverage. The initial automatic enrollment amount must be at least 3%, but not more than 10%, of compensation. That amount must increase by 1% each year until it reaches at least 10% (but not more than 15%).


The rules will not apply to existing Section 401(k) and 403(b) plans under grandfathering rules. There are also exceptions for small businesses with 10 or fewer employees, businesses less than three years old, church plans, and governmental plans. These amendments are effective for plan years beginning after Dec. 31, 2024.


Grant Thornton Insight:

Many existing qualified plans already have qualifying auto-enrollment provisions, while others can rely on grandfathering rules. The grandfathering rules, however, can be forfeited if the employer adopts a multiple employer plan. 


Part-time workers


The bill lowers the threshold for certain part-time workers to be eligible to participate in a qualified retirement plan from three consecutive years of at least 500 hours of service to two consecutive years (employees still become eligible with 1,000 hours in a single year). The change is effective for plan years beginning after Dec. 31, 2024, and also applies to Section 403(b) plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA).



Permissible withdrawals


The legislation expands the type of withdrawals that are permissible without incurring the 10% early withdrawal penalty, including:

  • Up to $22,000 for individuals affected by federally declared disasters, with the distributions able to be repaid and the income spread over three years, effective for disasters occurring on or after Jan. 26, 2021
  • Up to $1,000 for one emergency distribution per year, with the ability to repay within three years, effective for distributions made in 2024 and later
  • Up to $10,000 (indexed to inflation) or 50% of the account if less for participants who self-certify they experienced domestic abuse, with the opportunity to repay over a three-year period, effective for distributions in 2023 and later
  • Withdrawals by terminally-ill individuals, effective for distributions made after Dec. 29, 2022.

In addition, under certain circumstances, employees will be permitted to self-certify that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal. This provision is effective for plan years beginning after Dec. 29, 2022. Finally, the legislation conforms the Section 403(b) hardship distribution rules to the 401(k) rules so that the entire amount of Section 403(b) accounts will be available for hardship withdrawals rather than merely employee contributions. The change is effective for plan years beginning after Dec. 31, 2023.



Catch-up contributions


The legislation makes many important changes to the catch-up contributions workers aged 50 and over can contribute to qualified plan, which reached $7,500 in 2023. The limit for workers aged 60, 61, 62, or 63 will increase in 2025 to the greater of $10,000 (indexed to inflation) or 150% of the regular catch-up contribution amount. The bill also indexes to inflation the current $1,000 limit on IRA catch-up contributions, effective for tax years beginning after Dec. 31, 2023.


The legislation, however, imposes new restrictions on employees with compensation exceeding $145,000 (indexed for inflation). For tax years beginning after Dec. 31, 2023, these employees can only make catch-up contributions on a Roth basis. 


Grant Thornton Insight:

The increased limit could benefit many taxpayers, but mandating Roth contributions for employees with compensation exceeding $145,000 could be unfavorable for employees who may be in a lower tax bracket in retirement. The revenue raised from this change was used to help pay for the rest of the bill. Even worse, an error in drafting the bill could actually eliminate catch-up contributions altogether beginning in 2024 unless a technical correction is enacted. Lawmakers are aware of the issue and legislation is very possible. The IRS is also evaluating whether the issue could be addressed administratively. 



QLAC limitations


The bill increases the amount of qualifying longevity annuity contracts (QLACs) that can be purchased by plan participants from $145,000 to $200,000, while repealing the limit of 25% of plan funds. The legislation also facilitates the sales of QLACs with spousal-survival rights and clarifies that free-look periods are permitted up to 90 days with respect to contracts purchased or received in an exchange on or after July 2, 2014. These amendments are effective for contracts purchased or received in an exchange on or after Dec. 29, 2022. Treasury is also instructed to update related regulations by June 29, 2024.




New plans and discretionary plan changes



Starter 401(k)s


The bill creates a new “starter” Section 401(k) plan (or safe harbor 403(b) plan) for employers without existing plans. The plans generally require that all employees, by default, be enrolled in the plan at a 3% to 15% of compensation deferral rate. The limit on annual deferrals would be the same as the IRA contribution limit, which for 2022 is $6,000 with an additional $1,000 in catch-up contributions beginning at age 50. These amendments are effective for plan years beginning after Dec. 31, 2023.



Student loan payments as elective deferrals


The legislation permits an employer to make matching contributions under a Section 401(k) plan, Section 403(b), Section 457(b) plan, or SIMPLE IRA based on employee payments for qualified student loans. Plans are allowed to separately test the employees who receive matching contributions on student loan repayments for purposes of nondiscrimination testing. These provisions are effective for contributions made for plan years beginning after Dec. 31, 2023.


Grant Thornton Insight:

Employers could consider amending plans to provide these matching contributions as a potential recruiting tool, particularly for employees that recruit directly out of college.  


Other favorable options


The legislation gives employers significant additional flexibility with retirement plans, including:

  • Giving retirement plan fiduciaries permission not to recoup certain overpayments mistakenly made to retirees, effective Dec. 29, 2022.
  • Allowing employers to offer to non-highly compensated employees pension-linked emergency savings accounts, automatically opting employees in at no more than 3% of their salary capped at $2,500, with contributions made on a Roth-like basis and treated as elective deferrals for purposes of matching contributions
  • Allowing defined contribution plans to provide participants with the option of receiving matching contributions on a Roth basis, effective Dec. 29, 2022
  • Enabling employers to offer de minimis financial incentives not paid for by the plan to boost employee participation, effective for plan years beginning after Dec. 29, 2022



Flexibility for errors


The legislation provides significant new flexibility to forgive or correct failures, including:

  • Providing a grace period of 9½ months after the end of the plan year to correct, without penalty, reasonable errors in administering automatic enrollment and automatic escalation features, effective for errors with permitted correction periods ending after Dec. 31, 2023 (codifying an IRS safe harbor set to expire).
  • Expanding the Employee Plans Compliance Resolution System (EPCRS) to allow more types of errors to be corrected internally through self-correction, apply to inadvertent IRA errors, and exempt certain failures to make RMDs from the otherwise applicable excise tax, effective Dec. 29, 2022. 
Grant Thornton Insight:

Although the expansion of EPCRS was effective immediately upon the date of enactment, the legislation requires the IRS to revise the current EPCRS revenue procedure (Rev. Proc. 2021-30) no later than two years from the date of enactment to reflect the changes. From a practical perspective, given the number of ambiguities in the legislative text, plan sponsors may not be able to utilize the expanded corrections until the updated revenue procedure is issued by the IRS. For example, one of the expanded categories of permitted self-corrections include “eligible inadvertent failures,” which generally must be self-corrected within a “reasonable period.” Until the IRS updates the EPCRS revenue procedure, it is not clear what may constitute a reasonable period for self-correcting.





Amendments to RMDs


The legislation increases the minimum age for starting RMDs, which was recently raised from 70.5 to 72 by the SECURE Act. The changes in the current legislation will be phased in so that RMDs will be required to begin at age:

  • 73 for those turning 73 between 2023 and 2032
  • 75 for those turning 75 in 2033 and after
Grant Thornton Insight:

Delaying the full increase in the age threshold until 2033 was largely to manage the cost of the bill and push the revenue beyond the 10-year budget window for congressional scoring purposes. Taxpayers with birthdays on the wrong side of the effective date will miss an opportunity to delay RMDs an additional two years. Those turning 73 before 2032 will be required to begin contributions by 2032 at the latest, while those turning 73 in 2033 or later won’t hit their beginning age until 2035 at the earliest. 


The legislation made several other notable changes to RMD rules, including:

  • Reducing the excise tax for failing to take an RMD from 50% to 25%, with a 10% rate if corrected in a timely manner
  • Eliminating the pre-death distribution requirement for Roth accounts in employer plans, effective for taxable years beginning after Dec. 31, 2023
  • Allowing a surviving spouse to elect to be treated as the deceased employee for purposes of the RMD rules, effective for calendar years beginning after Dec. 31, 2023
  • Allowing account owners that hold annuities to elect to aggregate distributions from their accounts for purposes of determining RMDs, effective Dec. 29, 2022
  • Amending the three-year statute of limitations for RMD failures so it begins when the taxpayer files a Form 1040 for the year of the violation rather than when the taxpayer files a Form 5329, effective Dec. 29, 2022

The legislation makes a similar change to the statute of limitations for the excise tax on excess contributions, which will run six years from the date the Form 1040 is filed.




Changes to PEPs, MEPs, and ESOPs


The bill makes several important changes to PEPs, MEPs and collective investment trusts, including:

  • Allowing PEPs to designate a named fiduciary other than an employer in the plan to collect contributions to the plan, effective for plan years beginning after Dec. 31, 2022.
  • Expanding access to MEPs and PEPs to Section 403(b) plans and further providing relief from the “one bad apple” rule.
  • Allowing Section 403(b) custodial accounts to participate in collective investment trusts with other tax-preferred savings plans and IRAs. This provision is effective Dec. 29, 2022.

The legislation makes the following changes for employee stock ownership plans (ESOPs):

  • Expanding the gain deferral for reinvesting ESOP stock gain to S corporations, but with a 10% limit on the deferral, effective for sales made after Dec. 31, 2027.
  • Updating certain ESOP rules related to whether a security is a “publicly traded employer security” and “readily tradeable on an established securities market” to allow highly regulated companies with liquid securities that are quoted on non-exchange markets to treat their stock as “public” for ESOP purposes, effective for plan years beginning after Dec. 31, 2027.



Agency directives



Insurance-dedicated exchange-traded funds


The legislation directs Treasury to update its regulations to essentially facilitate the creation of a new type of ETF that is “insurance-dedicated.” This provision is effective for segregated asset account investments made on or after Dec. 29, 2029, and the legislation directs the Treasury secretary to update the relevant regulations by that time.



Retirement savings lost and found


The legislation instructs the Department of Labor to create a national online searchable lost and found database for Americans’ retirement plans by no later than Dec. 29, 2024.




Next steps


Taxpayers that offer retirement plans should assess the impact of the retirement tax provisions carefully, and prepare to amend plan documents and adjust retirement planning opportunities as needed. 



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