Alert: SECURE 2.0 retirement reforms set to become law 

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December 20, 2022

A dizzying array of legislation affecting defined contribution (DC) and defined benefit (DB) plans is expected to become law later this week as part of a fiscal 2023 government spending package heading for final votes in Congress. The retirement provisions in the SECURE 2.0 Act of 2022 are intended to build on changes made by the Setting Every Community up for Retirement Enhancement (SECURE) Act of 2019 (Div. O of Pub. L. No. 116-94). Many provisions come from several widely supported House and Senate bills (HR 2954, S 4353 and S 4808), but delay a number of proposed 2023 effective dates in those bills to 2024 or later. Enactment of SECURE 2.0 will cap several years of congressional effort. Numerous stakeholders, including Mercer, have worked to educate lawmakers about the value of the employer-based retirement system and the need for many policy changes to support it. This GRIST provides a high-level summary of some key provisions in the legislation.

Key provisions affecting DC plans

Provisions aimed at DC plans include:

  • Student loan matching payments. Starting with plan years beginning in 2024, sponsors of 401(k), 403(b), governmental 457(b) and savings incentive match plans for employees (SIMPLE plans) will be able to match employees’ qualifying student loan payments as if those payments were salary-reduction contributions. The change will allow sponsors to treat the contributions as a true match, not a nonelective contribution (which is what the law currently allows).
  • Mandated automatic enrollment and escalation for new plans. New 401(k) and 403(b) plans will have to include an eligible automatic contribution arrangement (EACA) feature beginning in 2025, with some exceptions.
  • Annual paper benefit statement. Beginning in 2026, DC plans will generally have to deliver at least one of the required benefit statements on paper every year (one every three years for DB plans), unless a participant affirmatively requests electronic delivery.
  • Mandated Roth treatment for catch-up contributions. Beginning in 2024, 401(k), 403(b) and governmental 457(b) plan participants ages 50 or older whose prior-year compensation exceeded $145,000 (indexed) can only make catch-up contributions on a Roth (i.e., after-tax) basis.
  • Coverage for part-time workers. Effective for plan years beginning after 2024, sponsors of noncollectively bargained 401(k) and 403(b) plans will have to let part-time workers voluntarily contribute if they have completed at least 500 hours of service in two consecutive years (reduced from three) and have attained age 21.
  • Increased catch-up contribution limits. Beginning in 2025, 401(k), 403(b) and governmental 457(b) plans can allow larger catch-up contributions of up to $10,000 (indexed) for individuals who will be at least age 60 but less than 64 by the end of the tax year.
  • Matching and nonelective contributions permitted on Roth basis. Beginning on the date of the bill’s enactment, employers can let employees elect to have some or all of their matching and nonelective contributions treated as Roth contributions under 401(k), 403(b) or governmental 457(b) plans.
  • Increase in starting age for required minimum distributions (RMDs). Individuals’ RMD starting age will increase from the current 72 to 73 beginning in 2023 and then to 75 beginning in 2033.
  • Increased limit for mandatory cashouts. Starting in 2024, the limit on involuntary cashouts of small benefits will increase from $5,000 to $7,000.
  • Pension-linked emergency savings accounts. Employers can offer nonhighly compensated employees emergency savings accounts linked to their DC plans.
  • Increased access to savings. Participants will be able to withdraw a portion of their vested benefit in case of a personal emergency, domestic abuse or terminal illness.
  • Self-certification of hardship. Plans can allow participants requesting a hardship distribution to self-certify their eligibility.

Provisions specific to 403(b) plans

Several DC provisions relate specifically to 403(b) plans:

  • Investment in group trusts limited. Beginning on the date of the bill’s enactment, the Internal Revenue Code’s list of permitted investments for 403(b) custodial accounts will expand to include collective investment trusts (CITs). However, the legislation doesn’t include the revisions to federal securities laws that CIT providers will likely need before admitting 403(b) plans sponsored by tax-exempt organizations.
  • Multiple-employer plan (MEP) reforms expanded. Starting with plan years beginning after the bill’s enactment, 403(b) plans (except church plans) can join MEPs, including pooled employer plans (PEPs).

Key provisions affecting DB plans

Provisions targeting defined benefit (DB) pension plans include:

  • No indexing of Pension Benefit Guaranty Corp. variable-rate premiums. Variable-rate premiums for single-employer DB plans would be frozen at the 2023 level of $52 per $1,000 of unvested benefits, ending the widely criticized inflationary indexing that has applied since 2015.
  • Increase in starting age for RMDs. The statutory RMD starting age will increase from the current 72 to 73 beginning in 2023 and then to 75 beginning in 2033. (However, many DB plan sponsors might prefer to keep using the pre-SECURE Act RMD starting age of 70-1/2.)
  • Increased limit for mandatory cashouts. Starting in 2024, the limit on involuntary cashouts of small benefits will increase from $5,000 to $7,000.
  • Section 420 transfers. Employers’ current ability to fund retiree health and life insurance benefits with surplus pension assets is extended from the end of 2025 through 2032.
  • Projected interest-crediting rate. To demonstrate compliance with applicable Internal Revenue Code requirements like the Section 415 benefit limitations and the Section 411 accrual rules, statutory hybrid plans that credit interest at a variable rate will be able to use a reasonable projection of the actual interest-crediting rate — not to exceed 6% — rather than the previous year’s rate.

Bill expected to become law by week’s end

Senate Democrats introduced the spending package in the wee hours of Dec. 20 after weeks of intense bipartisan negotiations between leaders of both chambers. With a Dec. 23 deadline to avoid a government shutdown, the Senate is expected to approve the bill within days and send it to the House for likely final passage and President Biden’s signature.

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