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SECURE 2.0 included in omnibus budget legislation

On December 20, 2022, a coalition of Democrats and Republicans in Congress released an omnibus spending bill that included a “Division T SECURE 2.0 Act of 2022” (hereafter, “SECURE 2.0), incorporating bipartisan retirement policy legislation combining proposals included in the House of Representatives’ Securing a Strong Retirement Act of 2022, the Senate Health, Education, Labor, and Pensions (HELP) Committee’s Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg Act (the RISE & SHINE Act), and the Senate Finance Committee’s Enhancing American Retirement Now (EARN) Act. The spending bill is expected to pass before the end of this week.

In this article we review key elements of the new proposal.

Easing of rules for 401(k) matching contributions for student loans

Sponsor contributions to a 401(k) plan that “match” student loan repayments would generally be treated as “regular” 401(k) employer matching contributions. This would solve a number of technical issues with respect to 401(k) student loan repayment programs.

For purposes of the matching contribution rules under 401(k) (and 401(m)) testing safe harbors, student loan repayments would be treated as elective deferrals. For instance: a plan qualifies for the “general” safe harbor if the employer matches 100% of elective contributions up to 3% of pay and 50% of elective contributions in excess of 3% up to 5% of pay. The employer “match” for student loan repayments would count as a match for purposes of this rule.

Student loan repayments would not be treated as elective deferrals for any other purpose. In some circumstances, this would make the ADP test more difficult to satisfy. However, under SECURE 2.0, plans would be permitted to perform the ADP test separately for those participants receiving matching contributions on loan repayments. This will ease ADP testing under student loan matching contribution programs for some sponsors.

(We note that a number of potential technical issues would remain with respect to student loan matching contribution programs for sponsors with retirement benefits in addition to 401(k)/401(m).)

Retirement Savings Lost and Found

SECURE 2.0 instructs the Secretary of Labor, in consultation with the Secretary of the Treasury, to, within 2 years of enactment, establish an online searchable database, managed by DOL, known as the “Retirement Savings Lost and Found” (RSLF).

Individuals would be allowed to search the database for plan contact information. DOL could use the database to assist participant searches and is to update the database’s plan contact information for, e.g., plan/corporate mergers.

The bill would also significantly increase required reporting with respect to, e.g., mandatory transfers, supporting the RSLF database.

Saver’s Match

The Saver’s Credit currently provides for a non-refundable tax credit equal to up to 50 percent of the first $2,000 of contributions by certain low-income individuals to a 401(k) plan, IRA, or certain other retirement programs. SECURE 2.0 would make the credit (in effect) refundable and require that, instead of being credited directly to the taxpayer, provide that it be paid to the taxpayer’s plan or IRA.

Effective for tax years beginning in 2027.

Emergency savings accounts

SECURE 2.0 would allow a defined contribution plan sponsor to establish a “pension-linked emergency savings account,” under which non-highly compensated employees could make contributions to, or be auto-enrolled (at a rate of up to 3% pay) in, an emergency savings account “linked” to a DC plan. These contributions would go in on a “Roth” basis. The employer could make matching contributions (to the “linked” DC plan) with respect to participant contributions to the emergency savings account. Participants would be allowed to withdraw amounts in the account at least once a month. The maximum amount that could be held in an emergency savings account would be $2,500.

An emergency savings account could not have a minimum contribution or balance requirement. Amounts in the account must be held (as selected by the sponsor) as cash, in an interest-bearing deposit account, or in an investment product designed to “preserve principal and provide a reasonable rate of return” that is “offered by a State- or federally-regulated financial institution.” For purposes of ERISA’s fiduciary rules, participants would be deemed to have exercised control over the assets in their accounts if the assets are so invested.

Up to the first four withdrawals in a year could not be subject to any withdrawal fee; subsequent withdrawal fees must be reasonable.

Specific notice and disclosure requirements would apply to the account, and DOL is authorized to provide “simplified reporting procedures or requirements” for pension-linked emergency savings accounts.

401(k) plans adopted after the date of enactment must include automatic contribution/escalation and default investment to QDIA

New (post-date-of-enactment) 401(k) plans would have to default participants into the plan at a contribution rate of at least 3% of pay, escalating each year by 1% up to at least 10%. Contributions for which the participant has not made an investment election must be defaulted into a qualified default investment alternative (QDIA) (generally, a target date or balanced fund or a managed account).

The new rule would not apply to plans adopted before the date of enactment, for the first 3 years of a new employer’s existence, or to employers of 10 or fewer employees.

Effective for plan years beginning after December 31, 2023.

Starter 401(k) plans

SECURE 2.0 would allow employers that do not have a retirement plan to establish a “starter 401(k) plan.” Under such a plan, employees would be auto-enrolled at a rate of 3%-15% of compensation; the limit on participant contributions would be the same as those on IRA contributions (for 2022, $6,000 plus $1,000 catch-up beginning at age 50).

At least one paper statement rule

SECURE 2.0 would require that participants be given a paper statement at least annually (for DC plans) or every three years (for DB plans) unless the participant has elected otherwise.

Lump sum window disclosure

Plans offering a “lump sum window” (e.g., a limited-time offer of a lump sum as an alternative to current or future annuity payments) would be required to provide notices to participants and to DOL and the PBGC as follows.

Notice to participants: Not later than 90 days prior to the first day of the window election period, the plan’s administrator would have to provide participants a notice including a description of:

The available benefit options, including: for terminated vested participants, an estimated normal retirement age benefit; any subsidized early retirement or qualified joint and survivor annuity option; the monthly benefit amount of immediate annuity payments and the lump sum amount.

The applicable interest rate and mortality assumptions used to calculate the lump sum and whether additional benefits (e.g., an early retirement subsidy) were included.

For terminated vested participants, the “relative value” (under applicable regulations) of the single life annuity/qualified joint and survivor annuity.

A statement that “a commercial annuity comparable to the annuity available from the plan may cost more than the amount of the lump sum amount, and [that] it may be advisable to consult an advisor regarding this point if the participant or beneficiary is considering purchasing a commercial annuity.”

Other “potential ramifications” of taking the lump sum, including longevity risks, loss of PBGC protections, loss of protection from creditors and of spousal protections, “and other protections under [ERISA] that would be lost.”

Applicable tax rules.

The mechanics of accepting/rejecting the offer.

Contact information.

DOL would be required to issue a model notice for this purpose.

Notices to DOL and PBGC: Two filings would be required to be provided to DOL and PBGC:

Pre-offer notice. Not later than 30 days prior to the first day of the window election period, a notice including: the number of participants eligible for the lump sum offer; the length of the window period; the applicable interest rate and mortality assumptions used to calculate the lump sum and whether additional benefits (e.g., an early retirement subsidy) were included; and a sample of the participant notice.

Post-offer report. Within 90 days of the end window offer period, the plan sponsor would have to submit a report to DOL and PBGC including “the number of participants and beneficiaries who accepted the lump sum offer and such other information as [DOL] may require.”

These two filings with DOL/PBGC would be made publicly available.

DOL “must issue regulations implementing this provision not earlier 1 year after enactment. Such regulations must be applicable not earlier than the issuance of a final rule and not later than 1 year after issuance of a final rule.”

Limit IRS mortality improvement assumption to 0.78%

SECURE 2.0 instructs IRS to, within 18 months of enactment, amend its regulation relating to “Mortality Tables for Determining Present Value Under Defined Benefit Pension Plans” to provide that “for valuation dates occurring during or after 2024, [applicable] mortality improvement rates shall not assume for years beyond the valuation date future mortality improvements at any age which are greater than .78 percent.” The IRS may modify that .78 percent figure “as necessary to reflect material changes in the overall rate of improvement projected by the Social Security Administration.”

Projected interest crediting rate accrual under variable-rate cash balance plans

SECURE 2.0 would clarify that, for purposes of the Internal Revenue Code’s anti-backloading rules, the projected interest crediting rate for a cash balance plan that uses a variable interest crediting rate (e.g., a market return cash balance plan), shall be “a reasonable projection of such variable interest crediting rate, not to exceed 6 percent.”

Changes related to RMD rules

With respect to the Internal Revenue Code’s required minimum distribution (RMD) rules, SECURE 2.0 would:

Increase the mandatory commencement age from (currently) 72 as follows: for individuals reaching age 72 after December 31, 2022 and reaching age 73 before January 1, 2033, increase to age 73; for individuals reaching age 74 after December 31, 2032, increase to75.

Eliminate the (current) limitation on qualified longevity annuity contracts (QLACs) to 25 percent of an individual’s account balance, increase the dollar limit on QLACs to $200,000, and clarify that survivor benefits may be paid in the case of divorce.

Allow more flexible annuity terms (e.g., allowing certain post commencement lump sum payments) and the coordination (for RMD purposes) of annuity payments and account-based distributions.

Reduce the excise tax on failure to make an RMD from 50% to 25% (and in certain cases, 10%).

Provide that the RMD rules would not apply before death to qualified plan Roth accounts.

Allow a surviving spouse to elect treatment as the deceased employee under RMD rules.

Changes to catch-up contribution rules: limited to Roth only, COLA increase, increase limit to $10,000 for ages 60-63

SECURE 2.0 would increase the catch-up contribution limit for participants ages 60 and 63 from the current limit of $6,500 to $10,000 (adjusted for inflation). Beginning in 2024, catch-up contributions could only be made on a “Roth” basis.

Other provisions

SECURE 2.0 would also:

Revise the DB plan annual funding notice to “identify issues more clearly.”

Expand the Employee Plans Compliance Resolution System (EPCRS).

Increase the cap on involuntary distributions from $5,000 to $7,000.

Provide new rules for the recovery (or non-recovery) and rollover of overpayments.

Allow investment of 403(b) plans in collective trusts.

Increase the startup credit for certain small employers.

Reduce the allowable minimum service requirement for “long-term part-time employees” (working more than 500 but less than 1,000 hours per year) from 3 to 2 consecutive years.

Waive the 10% early distribution tax for (1) certain emergency distributions, (2) certain “eligible distributions to domestic abuse victims,” (3) distributions to terminally ill individuals, and (4) distributions of up to $2,500 per year for premiums on certain long term care insurance contracts.

Require DOL in consultation with Treasury to prepare, within 90 days of enactment, a study and report on “the impact of inflation on retirement savings.”

Allow the employer to rely on an employee hardship certification for 401(k) hardship withdrawals.

Allow prior-year (retroactive) benefit increases until the tax return due date (with extensions).

Instruct DOL to produce regulations allowing benchmarking of funds (e.g., for required participant disclosure) that include multiple asset classes (e.g., balanced funds and target date funds) based on a benchmark that is a blend of different broad-based securities market indices.

Instruct DOL, Treasury, and the PBGC, after consultation with “a balanced group of participant and employer representatives,” to (within three years) recommend ways to “consolidate, simplify, standardize, and improve” reporting and disclosure requirements.

Allow for simplified annual disclosure for “unenrolled” DC participants.

Instruct DOL to review, in consultation with the ERISA Advisory Council, its Interpretive Bulletin on annuity settlements (aka “risk transfers”) and report to Congress its findings, “including an assessment of any risk to participants.”

Instruct the Secretary of the Treasury to “simplify, standardize, facilitate, and expedite the completion of rollovers to eligible retirement plans … and trustee-to-trustee transfers from individual retirement plans,” including by providing sample forms.

Allow a plan to make distributions for “certified long-term care insurance for the employee or the employee’s spouse (or other family member of the employee as provided by the Secretary [of the Treasury] by regulation),” subject to a limit of the lesser of 10% of the participant’s benefit or $2,500.

Instruct DOL to study fee disclosure regulations and “report to the [Senate HELP and House Education and Labor Committees] on … beneficial education for consumers on financial literacy concepts as related to retirement plan fees and recommendations for legislative changes needed to address such findings.”

Provide additional time to correct automatic enrollment and automatic escalation errors.

Instruct DOL and IRS to adopt regulations allowing plans to consolidate certain required notices into a single notice under certain circumstances.

*     *     *

As of this writing this legislation is expected to pass before the end of the week.

What to Read Next

SECURE 2.0 – the Securing a Strong Retirement Act

On October 27, 2020, House Ways and Means Committee Chairman Neal (D-MA) and Ranking Member Brady (R-TX) released the Securing a Strong Retirement Act – a set of retirement savings policy changes with bi-partisan support. The bill builds on changes made by 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act and may provide a template for further improvement of our current retirement savings system.