IRS guidance on SECURE 2.0 provisions—helpful but not everything we hoped for

Section 101 requires a 401(k) plan and 403(b) plan established after December 29, 2022, to enroll employees automatically no later than 2025. Such plans must automatically enroll eligible participants (who don't opt out) using a 3% minimum default rate and a 10% maximum contribution rate. In addition, the plans must provide for an automatic escalation feature that increases employee contributions by 1% per year up to at least 10% but capped at 15% of compensation.

The plan must permit a participant to make withdrawals no later than 90 days after the date of the first contribution. For safe harbor plans, the cap on permissible auto-escalation is 15%; for non-safe harbor plans, the cap on permissible auto-escalation is 10% prior to 2025; but for 2025 and later years, the cap is increased to 15%.

The Section 101 guidance states that:

• A 401(k) plan is considered established on the date when the 401(k) feature is initially adopted, even if the effective date of the 401(k) feature is later.
• If a plan subject to the automatic enrollment mandate is merged with a 401(k) plan established prior to the enactment of SECURE 2.0, the surviving plan will generally be subject to the automatic enrollment mandate unless the merger meets specific requirements, such as a merger within the Section 410(b)(6)(C) transition period.
• If a pre-enactment 401(k) plan executes a spin-off, the new plan will continue to be treated as a pre-enactment 401(k) plan, and not be subject to the automatic enrollment mandate.
• Section 403(b) plans are excepted from the automatic enrollment requirement if the plan was established before December 29, 2022, regardless of when the deferral feature is added.
• The automatic enrollment mandate applies to starter 401(k) plans and safe harbor 403(b) plans.

Section 102 enhanced and added tax credits for new small business retirement plans. The “startup cost credit” for employers with between 1 and 50 employees increases from 50% to 100%, up to $5,000. Note: For employers with between 51 and 100 employees, the credit remains at 50%.

An additional credit—the “employer contributions credit”—is provided for employer contributions (except in the case of defined benefit plans) equal to 100% in the year in which the plan is established. This credit excludes contributions made for employees earning $100,000 or more in wages. The amount of the additional credit generally will be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000.

The Section 102 guidance states that:

• The employer contributions credit is treated as a separate credit in addition to the start-up costs credit, so an eligible employer may be eligible for both types of credit.
• For the employer contributions credit, an employer plan eligible for the credit is considered established on the date the plan becomes effective for the eligible employer.
• Eligibility for the tax credits requires the employer to be eligible in the year of plan adoption and the year for which the credit is taken. Therefore, a reduction in the number of employees can't make an employer eligible for credits if it was ineligible in its first year.
• An employer eligible for credits before December 31, 2022, can still be eligible for the increased start-up costs credit and/or the employer contributions credit for taxable years beginning after December 31, 2022. The credit, however, is only available for any remaining time in the applicable three-year credit period (for the start-up credit) or five-year credit period (for the employer contributions credit).
• Individuals with earned income instead of wages—e.g., sole proprietors—can be considered for the employer contributions credit, even if he or she has earned income or remuneration in excess of the wage limitation.
• Employer contributions are taken into account for the employer contributions credit in the taxable year when a deduction under Section 404(a) would apply.

Section 112 provided an additional tax credit for certain employers that provide retirement benefits for military spouses. The tax credit, which has a $500 limit, applies for three years with respect to each military spouse—and doesn't apply to highly compensated employees.

The Section 112 guidance states that:

• The employer can claim the tax credit only for taxable years within the three-year credit period during which the employer meets the eligibility requirements.
• The credit can be claimed before the plan is amended to become an eligible defined contribution plan; the employer is eligible beginning with the taxable year that includes the effective date of the plan amendment.
• An eligible small employer can claim the tax credit for a military spouse whose three-year credit period began during a taxable year beginning on or before December 29, 2022; the employer remains eligible for the credit for any taxable year beginning after December 29, 2022, falling within the military spouse's three-year credit period.

Section 113 allows de minimis financial incentives, not paid for with plan assets, for participation in a 401(k) plan.

The Section 113 guidance states that:

• A de minimis financial incentive is defined as $250. This means any amount above the $250 threshold won't be permitted.
• Incentives can only be offered to employees who don't have a deferral election in place.
• Incentives could be provided in installments contingent on the participant continuing to defer.
• Any incentive would be considered “wages,” unless an exclusion applies.

Section 117 increased the deferral limits for SIMPLE IRAs and SIMPLE 401(k) plans in certain instances. 

The Section 117 guidance states that:

• The increased limits apply only if the employer hadn't established or maintained a qualified plan, Section 403(a) annuity plan, or Section 403(b) plan for substantially the same employees in the three-year period before maintaining the SIMPLE plan.
• The increased limits apply automatically for eligible employers with up to 25 employees who received at least $5,000 of compensation in the preceding calendar year, and eligible employers with more than 25 such employees can choose to apply the increased limits by making an election.
• The rules from IRS Notice 98-4 apply for determining the number of employees who received at least $5,000 in compensation—i.e., all employees and self-employed individuals are counted (regardless of eligibility).  A two-year grace period is generally allowed for an employer that increases its employee count beyond 25.
• Employers making an election to apply increased limits must take formal written action and update plan terms accordingly. Employees must be notified of the increased limits.
• An employer's election to apply increased limits must be made before providing the annual notice to employees. The election remains effective until formally revoked.

Section 326 provides an exception for the 10% penalty on early distributions for terminally ill participants—defined as an individual who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification.

The Section 326 guidance states that:

• This is an optional provision for plan sponsors.
• To be eligible for the penalty exception, an individual must already be eligible for an in-service distribution, such as a disability or hardship distribution.
• Certain content must be included in the physician’s certification for a terminally ill patient.
  • A statement that the individual’s illness or physical condition can be reasonably expected to result in death in 84 months or less after the date of certification
  • A narrative description of the evidence that was used to support the statement of illness or physical condition
  • The name and contact information of the physician making the statement
  • The date the physician examined the individual or reviewed the evidence provided by the individual, and the date that the certification is signed by the physician
  • The signature of the physician making the statement, and an attestation from the physician that, by signing the form, the physician confirms that the physician composed the narrative description based on the physician’s examination of the individual or the physician’s review of the evidence provided by the individual
• The plan administrator may not rely on an employee's self-certification.

Section 332 provided employers with an option to terminate a SIMPLE plan mid-year if a safe harbor 401(k) plan is adopted to replace the plan.

The Section 332 guidance states that:

• An employer may terminate a SIMPLE IRA plan by formal written action specifying the termination date.
  • No salary reduction contributions are allowed for the compensation paid after the termination date.
  • The employer must still make matching contributions based on compensation through the termination date.
• The employer must notify employees at least 30 days before termination, specifying the end of salary reduction contributions.
• Distributions may be rolled over to a 401(k) or 403(b) plan, even for those individuals within the first two years of participation.
• Establishing a safe harbor plan is an exception to the rule prohibiting both a SIMPLE IRA plan and another plan in the same calendar year as long they're not both active at the same time.
• If a SIMPLE IRA plan is replaced by a safe harbor 401(k) plan midyear, the total elective contributions must not exceed the weighted average of limits for each plan during the transition year.
• The safe harbor notice required for the transition year must describe the weighted contribution limit.

Section 348 allows a cash balance plan with variable interest crediting rates to use a projected interest crediting rate that’s “reasonable” but not more than 6%.

The Section 348 guidance states that:

• A cash balance plan with a variable interest crediting rate providing pay credits that increase with a participant’s age or service no longer run the risk of a potential anti-backloading issue if that interest crediting rate falls below a certain point.
• A timely prospective amendment making certain changes to the interest crediting rate won't violate anti-cutback rules.
• A plan can't reduce a participant's accumulated benefit determined as of the end of the interest crediting period that includes the amendment date.
• Only changes to the plan’s interest crediting rate may be made pursuant to Section 348.

Section 350 provides special correction relief to 401(k) plans with automatic enrollment features. Specifically, it provided a statutory safe harbor for the correction of a reasonable administrative error involving an automatic contribution or automatic escalation. Prior to the Act, the IRS’ EPCRS contained a temporary safe harbor correction method for missed elective deferrals in a 401(k) or 403(b) plan that has an automatic contribution feature. SECURE 2.0 codifies and expands the safe harbor correction method available under EPCRS.

The Section 350 guidance states that:

• The provision is effective for errors where the date by which correct deferrals must be implemented is after December 31, 2023.
• Correct deferrals must begin by the earlier of the date of the first payment of compensation after (1) the 9½-month period following the plan year with the error or, (2) if the employee reports the error, the second month after the month of notification.
• Eligible implementation errors can be corrected using the safe harbor correction method in IRS Rev. Proc. 2021-30, Appendix A.
• The correction may be made even if the IRS has identified the error, or the participant has terminated employment.
• A corrective allocation of matching contributions, adjusted for earnings, must be made within a reasonable period after the correct deferrals begin.
  • The last day of the sixth month following the month when correct deferrals begin, or
  • The end of the third plan year after the error occurred for automatic contribution errors before December 31, 2023.

Section 501 provided the plan amendment deadlines for required and discretionary amendments for the CARES Act, SECURE Act, and SECURE 2.0 Act.

The Section 501 guidance states that:

• Plan amendment deadlines are extended by one year.
• The new deadline for non-governmental 401(a) plans, 401(k) plans, and 403(b) plans is December 31, 2026.
• Collectively bargained plans must be amended by December 31, 2028, and governmental plans must be amended by December 31, 2029.
• Note: The amendment deadlines for 457(b) plans sponsored by a non-governmental employer weren't extended under the Notice. Thus, absent IRS future IRS guidance, the deadline for amending such a plan remains the last day of the 2025 plan year.

Section 601 permits an employee who participates in a SIMPLE IRA plan or simplified employee pension (SEP) arrangement to designate a Roth IRA as the IRA to which contributions under the plan or arrangement are made. Prior to SECURE 2.0, SIMPLE and SEP IRAs weren’t permitted to be designated as Roth IRAs.

The Section 601 guidance states that:

• Employers aren't required to offer employees a Roth contribution election.
• Elections for SIMPLE IRA plans must be offered with the same effective opportunity as salary reduction agreements.
• Elections for salary reduction SEPs (SARSEPs) must follow the salary reduction agreement.
• For SEPs without a SARSEP, an effective opportunity to make the election must be provided.
• Roth IRA contributions must be elected before the contribution is made.
• Employers can't contribute to a Roth IRA without an employee first making the Roth contribution election.
• Salary reduction contributions are included in the taxable year that would've included regular salary. Employer matching or nonelective contributions are included in the employee’s taxes in the year of contribution (which is usually not the year to which the contribution relates).
• Salary reduction contributions are subject to income-tax withholding, FICA, and FUTA.
• Employer matching or nonelective contributions are excluded from wages for tax withholding purposes, FICA, and FUTA.

Section 604 allows a participant to designate that employer matching contribution or nonelective contribution made to the plan on his/her behalf on a Roth basis.

A participant making such an election will owe income tax on the contributions but will avoid tax on qualified distributions of both principal and income.

A qualified distribution is one made after age 59½, on death, or due to a disability but only after the participant has had—or is deemed to have had—a Roth account in the plan for at least five years.

The Section 604 guidance states that: 

• The plan may adopt any aspect of a Roth 401(k) feature without adopting the other. For example, an employee may be permitted to designate an elective contribution as a Roth contribution without being permitted to designate a matching contribution or nonelective contribution as a Roth contribution.
• The rules in place for designated Roth elective contributions apply to designated Roth matching and nonelective contributions.
• Participants must make irrevocable designations, and separate accounting rules apply.
• Participants must have an effective opportunity to make or change their designations at least once each plan year.
• Participants cannot designate a matching or nonelective contribution as Roth if not fully vested in that type of contribution when allocated. The plan won't be considered to fail section 401(a)(4) because it allows designated Roth contributions only to participants who are fully vested.
• Designated Roth contributions are included in an individual's gross income for the year in which they are allocated to the account, which is usually not the year to which the contribution relates.
• Designated Roth matching and nonelective contributions are excluded from wages for federal income-tax withholding, FICA, and FUTA purposes; however, for governmental 457(b) plans, the contributions may be subject to FICA unless the participants are covered by a Social Security replacement plan.
• Designated Roth employer contributions will be reported in the same manner as an in-plan Roth conversion—i.e., IRS Form 1099-R.
• Designated Roth contributions aren't included in the 415 safe harbor definition of compensation.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.

This viewpoint is intended for a Plan Sponsor audience.

MGTS-PS 552612-GE   1/24   552612                                                             

MGR0122243340279