PUBLICATIONS

SECURE 2.0 Requires Major Changes to Retirement Plans and EPCRS

Date   Mar 28, 2023

Executive Summary: On December 23, 2022, the Consolidated Appropriations Act of 2023 was passed by Congress, which included the SECURE 2.0 Act of 2022 (“SECURE 2.0” or “the Act”). This legislation greatly impacts retirement savings programs with required and discretionary changes. SECURE 2.0 also expands self-correction under the Employee Plans Compliance Resolution System (EPCRS). Many provisions require a plan amendment by the last day of the calendar year beginning on or after January 1, 2025 (January 1, 2027, for governmental plans and certain collectively bargained plans).

Highlights of Mandatory Provisions for Retirement Plans

  • New 401(k) and 403(b) plans established on or after December 29, 2022, will be required to qualify as automatic enrollment plans with automatic contributions of at least 3 percent and not more than 10 percent during a participant’s first year of participation.
    • Automatic annual increases of 1 percent to 10 percent (not more than 15 percent).
    • Employees can make an affirmative election not to participate or not to auto increase.
  • The age for required minimum distribution (RMD) has increased to:
    • Age 73 for participants who attain age 72 after December 31, 2022 and before January 1, 2033; and
    • Age 75, for participants who attain age 74 after December 31, 2032.
    • Excise tax for failure to timely commence RMD is reduced to 25 percent of the shortfall, 10 percent if the shortfall is corrected during a specified correction window.
    • Effective for calendar years beginning on or after January 1, 2024, surviving spouses may elect to be treated as the employee if the participant dies before attaining RMD age.
    • Roth-designated accounts in 401(k) or 403(b) plans are exempt from the pre-death RMD requirements.
      • Does not affect RMDs relating to years beginning before January 1, 2024, but paid on or after that date.
  • For plan years beginning in 2024, catch-up contributions by participants to 401(k), 403(b) and governmental 457(b) plans must be made with Roth contributions, except for participants whose wages for the preceding calendar year exceeded $145,000.
  • Exception to 10 percent penalty on early distributions for individuals with terminal illness.
  • Many requirements for defined benefit (DB) plans are also included in the Act, such as additional annual funding notice requirements, mortality tables correction, and changes to interest crediting rates for cash balance plans.
  • The Act also included many new discretionary provisions which would also require a plan amendment. Most notably:
    • The maximum number of years an employer may require a part-time employee to serve before becoming eligible to make elective deferral contributions has been decreased to two years.
    • The involuntary cash-out limit is increased to $7,000 from $5,000 for DB and defined contribution (DC) plans.
    • Participants may have the option of receiving employer matching and nonelective contributions, as well as student loan matching contributions, as Roth contributions.

Changes to EPCRS

SECURE 2.0 significantly expands the rules for self-correcting plan errors using the EPCRS self-correction program (SCP). Effective immediately, any “eligible inadvertent failure” to comply with Code section 401(a), 403(a), 403(b), 408(p), or 408(k) that would disqualify the plan may be corrected under the SCP unless:

  • The IRS identifies the error before actions have been taken that show a specific commitment to self-correct, or
  • The self-correction is not completed within a reasonable time after the failure is identified.

An “eligible inadvertent failure” is defined to include any failure that occurs despite compliance practices and procedures that satisfy the standards of EPCRS. This does not, however, include egregious failures or those related to the diversion or misuse of plan assets or to an abusive tax avoidance transaction.

The Act provides that the correction period for significant failures is indefinite and has no last day, provided the correction method conforms with the principals set forth in Revenue Procedure 2021-30 (or any successor guidance). This means that significant failures can now be corrected regardless of when they occurred. Eligibility for the SCP is now determined based on when the error is discovered and not when it occurred. Significant failures can now be corrected if the plan is under IRS exam if the failure is not identified and the sponsor can show commitment to correct. Further, SEP and SIMPLE IRA failures may now be corrected under the SCP.

In addition, SECURE 2.0 provides for additional protections for participant-loan-related errors. For example, both operational and plan document loan errors now can be self-corrected. The Department of Labor (DOL) must treat the self-correction as meeting the requirements of its Voluntary Fiduciary Correction Program (VFCP), as long as it is made in accordance with existing EPCRS guidelines. SECURE 2.0 also provides relief from having to report corrected deemed distributions on Form 1099-R. In instances where a participant loan failure also amounts to a fiduciary breach, SECURE 2.0 directs the DOL to treat self-corrected loan failures as meeting the requirements of the VFCP as long as the loan failure is corrected in accordance with EPCRS.

Although the expansion of the ability to self-correct is welcome news for many plan sponsors, there is still a need for additional clarity and guidance. The changes to EPCRS appear to be effective on the enactment on SECURE 2.0. The IRS will have two years to update Revenue Procedure 2021-30 to reflect the statutory changes and possibly provide additional guidance.

If you have any questions regarding this Alert, please contact the authors, Tiffany Downs, partner in our Atlanta office at tdowns@fordharrison.com, or E. Rena Felton, counsel in our Atlanta office at efelton@fordharrison.com.

Please join FordHarrison's Employee Benefits practice group on April 25, 2023 for a complimentary webinar, SECURE 2.0 and Hot Topics in Employee Benefits. Click here to register for this complimentary webinar.