Key Points:

• The newly adopted retirement legislation, SECURE 2.0, expands on some concepts included in the 2019 retirement legislation, but includes many new complex changes to employee benefit programs (over 50 major changes), some of which take effect immediately.
• While technical written plan amendments are not required until the 2025 plan year for private sector plans and the 2027 plan year for governmental and collectively-bargained plans, plans must operationally comply with the new rules as soon as they become effective (beginning immediately in some cases).
• Hanson Bridgett will provide sign-ups soon for its annual webinars in February for private sector and public sector employers during which the practical aspects of these changes will be discussed, with an opportunity to submit your questions about the SECURE 2.0 changes.

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On December 29, President Biden signed the year-end omnibus spending bill, the Consolidated Appropriations Act of 2023 ("CAA 23"), that included significant provisions affecting employee benefit plans. The most extensive were retirement changes included in CAA 23 under the SECURE 2.0 Act of 2022 ("SECURE 2.0"). SECURE 2.0 expands on some concepts introduced in the Setting Every Community Up for Retirement Act of 2019 ("SECURE 1.0"), and also adds a number of new benefits provisions (SECURE 2.0 takes up 359 pages of the 4,155 pages of legislation).

While there is an extended period before formal plan amendments need to be adopted to reflect the new changes (i.e. generally the end of the 2025 plan year for private sector plans and the end of the 2027 plan year for certain governmental and collectively-bargained plans), plan sponsors and plan administrators should consider that operational compliance with the changes will be required as soon as they are effective—with some changes becoming effective immediately. Because of the need to comply operationally with all changes, plan sponsors and plan administrators will want to understand all of the changes contained in this massive legislation, and also may want to align plan document language with operations well before the plan amendment deadlines.

Hanson Bridgett will include a detailed discussion of the practical implications of CAA 23, including SECURE 2.0, for private sector and public sector plans in its annual employee benefits update webinars to be presented in early February. Stay tuned for detailed information about our webinars coming out soon—and sign up so you don't miss any important new information!

Set forth below is a short summary of some of the key provisions included in the CAA 23 and SECURE 2.0 based on effective date. As you can see, planning for implementing these changes needs to begin immediately.

Certain Key Provisions of CAA 23 And SECURE 2.0 Act by Effective Date

Changes Effective Immediately:

• Elimination of early withdrawal penalties for distributions to employees who are terminally ill (physician certifies illness or condition reasonably expected to result in death in 84 months or less) and, for distributions up to $22,000, for distributions to certain participants living in federally declared disaster areas.
• Plans may permit participants to elect to have matching contributions (including student loan matching contributions) or non-elective contributions to be treated as after-tax Roth contributions if contributions are fully vested when made.
• 401(a), 403(a), 403(b) and governmental plans (but not including 457(b) plans) will not lose its tax-qualified status because a plan fiduciary fails to recover an "inadvertent benefit overpayment" or amends the plan to permit this increased benefit. There may be fiduciary relief for failing to make the plan whole, subject to certain conditions and restrictions placed on collection efforts from the participant. (Note: There is certain retroactive relief for prior good faith interpretations of existing guidance in this area.)
• Expansion of self-correction under IRS voluntary correction program ("EPCRS") for reasonable administrative errors made in implementing automatic enrollment, automatic escalation features, or by failing to offer an election due to improper exclusion from the plan, so long as the error is corrected within 9 1/2 months of the end of plan year in which the error occurred (applies to an error where 9 1/2 months after the end of plan year when the error occurred is after December 31, 2023).
• Allows certain eligible inadvertent failures to be self-corrected under EPCRS (whether significant or insignificant) at any time, unless the IRS identified the failure before correction began, or the self-correction was not completed within a reasonable time after identified. The IRS is directed to update EPCRS within 2 years after enactment to reflect these changes.
• Allows annual transfers from an over-funded defined benefit pension plan used to pay retiree health or life benefits to continue through the end of 2032, so long as the transfer is no more than 1.75% of plan assets and the plan is at least 110% funded.
• The excise tax on individuals for failure to receive a required minimum distribution is reduced from 50% of the shortfall to 25%, and can be further reduced to 10% if the participant corrects the shortfall during a 2-year correction period.
• Repayment of qualified birth or adoption distributions must be made within 3 years of the distribution in order to qualify as a rollover contribution.
• Governmental plans may distribute funds on a pre-tax basis to pay for health insurance premiums of certain eligible retired public safety officers (up to $3,000), either directly to the insurer or directly to the participant (provided the participant provides a self-certification that such funds did not exceed the amounts paid for premiums paid in the year of the distribution when filing the tax return for the year).
• The age 50 early withdrawal penalty exemption for distributions from governmental plans to public safety employees is extended to cover those who have attained age 50 or 25 years of service, whichever comes first.
• For purposes of the exemption from the early withdrawal penalty for qualified public safety employees, the definition is expanded to include certain corrections officers and forensic security employees.
• Effective for disasters occurring on or after January 26, 2021, permanent special rules governing plan distributions and loans in cases of qualified federally declared disasters, including up to a $22,000 distribution may be made per disaster, distribution is exempt from the 10% early distribution penalty, inclusion in income may be spread over 3 years, amounts may be re-contributed to a plan during a 3-year period following distribution, and special provisions regarding home purchase and maximum loan amounts and repayment periods.

Changes Effective in 2023:

• The safe harbor allowing high deductible health plans to cover telehealth and other remote care services pre-deductible, and allowing stand-alone coverage for telehealth and other remote care services pre-deductible without impacting the ability to contribute to a health savings account is extended to cover plan years prior to January 1, 2025.
• Aligns rule for governmental 457(b) plan participants making deferrals with rule for 401(k) and 403(b) plan participants by allowing change to deferral rates at any time prior to compensation being available to the participant. (For tax-exempt 457(b) plans, participants must enter into a deferral agreement before the beginning of the month to which the deferral will apply.)
• Amends ERISA and IRC requirements for defined contribution plans to provide for only a notice of eligibility to participate for unenrolled participants during the annual enrollment period (unless further documents requested).
• Plan sponsors of 401(k) and 403(b) plans may provide a de minimis financial incentive not paid for with plan assets, such as a gift card, for making contributions to the plan.
• Increased credits for plan start-up costs for small employers, with full amount available for employers with 50 or fewer employees, phasing out for employers with 51 to 100 employees. (Note: exception for employees earning more than $100,000 indexed.)
• A new employer tax credit will be available to eligible small employer sponsors of defined contribution plans that provide favorable benefits to military spouses.
• Increases the age for required minimum distributions to 73 for a person who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, and to age 75 for a person who attains age 74 after December 31, 2032.
• Changes are made to rules affecting pooled employer plans ("PEPs") and extends the ability to operate as multiple employer plans (including as PEPs) to 403(b) plans.
• Allows more flexible payments from commercial annuities issued in connection with an eligible retirement plan without violating the required minimum distribution rules (including certain lump sum payments and annual increases at a rate less than 5%).
• Permits a cash balance plan with variable interest crediting rates to use a projected interest crediting rate that is reasonable but not in excess of 6%.

Changes Effective in 2024:

• Catch-up contributions to 401(k), 403(b) and governmental 457(b) plans by employees earning over $145,000 (indexed) must be made on a Roth (after-tax) basis.
• Matching contributions to 401(k), 403(b) and governmental 457(b) plans may include matching contributions to employees for certain "qualified student loan payments" for higher education costs and to treat those contributions as regular matching contributions for discrimination testing purposes.
• The IRC is amended to specifically allow 403(b) plans with custodial accounts to invest in collective investment trusts. (Note: SECURE 2.0 does not address the securities law issues that may prohibit such investments in most cases.)
• Two new plan designs will be available to employers who do not currently sponsor a retirement plan, including a "starter 401(k) deferral-only arrangement" and a "safe harbor 403(b) plan". These will generally require all employees be enrolled with deferral of 3% to 15% with a limit the same as the IRA limits ($6,000 for 2022 plus catch-up of $1,000).
• Hardship distribution rules for 403(b) plans are made to conform with the rules for 401(k) plans.
• Plan administrators may rely on employee self-certifications for hardship distributions from 401(k) or 403(b) plans. (Note: a similar rule applies for purposes of unforeseeable emergency distributions from governmental 457(b) plans).
• Defined contribution plans may permit domestic abuse victims to withdraw the lesser of $10,000 (indexed) or 50% of the vested account balance without penalty, with allowed repayment within 3 years.
• Changes to family attribution rules for purposes of determining ownership of a business. To the extent this results in changes to the members of a controlled group transition, relief under IRC section 410(b)(6)(C) will apply.
• Sets a new variable rate PBGC premium for underfunded single-employer plans.
• Plans may allow a penalty-free emergency withdrawal of up to $1,000 annually, with a required opportunity to repay within 3 years (limits on withdrawals if amounts not repaid or additional contributions not made within the 3-year period).
• Treasury is directed to update minimum funding regulations to apply a cap on mortality improvement rates for valuation dates occurring on or after 2024.
• Additional information is required to be included in defined benefit plan ERISA-required annual funding notices.
• Pre-death required minimum distributions are not required for Roth amounts held in an employer retirement plan (conforms to Roth IRA rules).
• Conforms qualified retirement plan rules to IRA rules to allow a surviving spouse to elect to be treated as the deceased participant for required minimum distribution rules.
• Defined contribution plans permitted to include a short-term emergency savings account (maximum of $2,500 indexed after 2024 or a lesser amount established by the plan sponsor with no minimum contribution or balance requirements) that may include auto-enrollment up to 3% that allows distributions at least once a month for non-highly compensated employees. Such accounts would be funded with Roth (after-tax) contributions and must be eligible for any matching contributions under the plan.
• Beneficiaries of IRC section 529 qualified tuition accounts in existence for over 15 years may rollover certain amounts to Roth IRAs.
• Mandatory cash-out limit increased from $5,000 to $7,000.
• Discretionary plan amendments to increase benefits (other than matching contributions) may be made until the employer's tax filing deadline (including extensions) for the immediately preceding taxable year in which the amendment is effective.

Changes Effective in 2025:

• Employers who do not offer a retirement plan may offer a new 401(k) plan or 403(b) plan that requires default-enrollment with auto-escalation.
• Catch-up contributions will be increased (to the greater of $10,000 or 150% of what would have been the catch-up contribution amount under current rules for 2024) for employees who reach 60, 61, 62, or 63 during the year.
• Part-time employees who work at least 500 hours in two (rather than three) consecutive years are required to be eligible to elect salary deferral contributions. (Pre-2021 service is disregarded for purposes of vesting and pre-2023 service is disregarded for eligibility and vesting purposes under the new SECURE 2.0 requirements.) Extends the part-time coverage rules to ERISA-covered 403(b) plans.
• Effective three years following the date of enactment, penalty-free distributions may be made annually from retirement plans for payment of long-term care insurance premiums of up to the lowest of (i) the amount paid for long-term care insurance during the year, (ii) 10% of the participant's vested benefits, or (iii) $2,500 (indexed beginning in 2025).

Changes Effective in 2026:

• ERISA benefit statement requirements are modified to generally require that defined contribution plans provide at least one paper statement for each calendar year and that defined benefit plans provide at least one paper statement every three years, with exceptions allowed for plans that allow employees to opt into e-delivery if the plan follows the applicable DOL safe harbor. The DOL is directed to make changes by December 31, 2024 to the e-delivery rules to include participant protections including requiring a one-time initial paper notice informing the participant of the right to receive all required disclosures in paper form.

Changes Effective in 2027:

• Lower-income retirement savers will be eligible to receive a government-funded pre-tax matching contribution to an IRA or a retirement plan in an amount up to 50% of contributions (phased out based on income), capped at $2,000 and reduced by certain distributions taken by the person.
• Service-connected disability pension payments from a 401(a), 403(b), governmental 457(b), or 403(b) plan to first-responders will be treated as non-taxable after reaching retirement age up to an annual limit.

Required Regulatory Action: SECURE 2.0 also requires the DOL, Treasury and the PBGC to take certain actions, including issuing guidance on the new benefit changes. Some important actions directed by Congress include:

• DOL must create an on-line searchable "Lost and Found" database with information on amounts owed to missing, lost or non-responsive participants and beneficiaries in ERISA-covered tax-qualified retirement plans and must assist those individuals in locating the benefits owed to them.
• DOL, Treasury and PBGC must submit a joint report to Congress within 3 years of enactment with recommendations for simplification, consolidation, and standardization of reporting and disclosure requirements.
• DOL to modify regulations within two years of enactment to allow, in the case of designated investment alternative that is a blend of asset classes, plan administrators to use a benchmark for fee disclosures that is a blend of different broad-based securities market indices.
• Treasury to immediately develop and release sample forms to simplify, standardize, facilitate, and expedite rollovers from employer-sponsored plans and certain IRA transfers.
• DOL required to review the DOL's current fiduciary requirements for fee disclosure in participant-directed individual account plans, explore improvements/changes to those requirements through a public request for information, consider potential improvements, and issue a report to Congress within 3 years of enactment.
• DOL and Treasury must adopt regulations within 2 years of enactment that would allow, but not require, plans to consolidate 2 or more of certain mandatory notices under ERISA and the IRC into a single notice.
• Requires DOL within 1 year of enactment to review its Interpretive Bulletin 95-1 regarding pension risk transfers to determine if amendments are needed and to report its findings to Congress.
• By 18 months after enactment, the Government Accountability Office is also directed to issue a report to Congress on the effectiveness of the IRC section 402(f) notices and make recommendations to improve understanding of distribution options and tax consequences.
• Requires DOL and Treasury to issue joint regulations within 1 year of enactment regarding information to be provided to participants electing a lump sum rather than life-time benefits and requires plans to provide data to DOL and PBGC regarding lump sums being offered and use a model notice.
• A new Employee Ownership and Participation Initiative is created at the DOL.

If you have any questions regarding the employee benefits changes in the year-end legislation, please contact a member of the Hanson Bridgett Employee Benefits Group.