SECURE 2.0 Act: Essential Guidance and Updates

The SECURE 2.0 Act, enacted in 2022, significantly enhances the original Setting Every Community Up for Retirement Enhancement Act. To improve retirement savings opportunities across the United States, it introduces over 90 provisions designed to expand access, improve flexibility, and encourage participation in employer-sponsored retirement plans.

In light of this legislation, the IRS has released new guidance (Notice 2024-2) that targets critical facets of the legislation. This guidance is crucial for plan sponsors, ensuring they can both comply with the new regulations and optimize their retirement plan offerings. As the IRS is expected to issue more updates, plan sponsors must stay informed and prepared to adapt to these changes ahead.

Key Updates for Plan Sponsors

The IRS is progressively issuing guidance on the SECURE 2.0 Act, with several provisions scheduled to roll out in the next two years. It’s important for plan sponsors to note that the updates shared here represent a key section from the recent guidance:

Section 101 – Automatic Enrollment and Escalation

The SECURE 2.0 Act mandates new 401(k) and 403(b) plans to feature automatic enrollment at a 3% contribution rate, escalating annually to a preset cap. This requirement applies to plans established after December 29, 2022, and aims to leverage inertia to boost savings rates.

Recent guidance clarifies critical aspects of this requirement, defining a plan’s establishment date as the date its first adopted by an employer, not the date it is first effective. Additionally, the guidance addresses scenarios involving plan mergers or spin-offs, ensuring that the automatic enrollment and escalation features are maintained appropriately across different plan structures.

Section 113 – Small Immediate Financial Incentives

Section 113 of the SECURE 2.0 Act introduces an innovative approach to encourage employee participation in retirement savings plans. Employers can now offer small, immediate financial incentives, such as gift cards, to employees as a reward for enrolling in 401(k) or 403(b) plans. These incentives must not exceed $250 in value.

The IRS’s subsequent clarifications provide a framework for implementing these incentives, stipulating that they must be de minimis (not substantial enough to influence investment decisions) and cannot be provided to employees who have already elected to defer to the plan. Moreover, these incentives are considered taxable income to the recipient, requiring careful consideration by employers in terms of tax reporting and withholding.

Section 326 – Penalty-Free Early Distributions for Terminal Illness

Acknowledging the financial strain that can accompany a terminal illness diagnosis, SECURE 2.0 permits penalty-free early distributions from 401(k), 403(b), and other eligible retirement plans for individuals diagnosed with a terminal illness. This option allows access to retirement funds without the standard 10% penalty typically applied to early distributions.

The Notice requires that a licensed physician certify the individual’s illness is expected to result in death within 84 months. Plan sponsors have the discretion to adopt this provision. For plans not participating in this provision, affected individuals can still claim the exemption on their tax returns using Form 5329, highlighting the need for clear communication from sponsors regarding the availability of this option.

Section 350 – Correction of Automatic Enrollment Errors

Section 350 of the SECURE 2.0 Act codifies specific safe harbor correction methods to address errors in automatic enrollment and escalation features within retirement plans. The Notice clarifies that corrections must be made by the earliest of two dates: either the first payroll after nine and a half months following the end of the plan year in which the error occurred or promptly after an employee notifies the employer of the error.

The guidance also mandates that plan sponsors notify individuals who terminated employment before the start of corrected deferrals about the corrections, ensuring former employees are aware of their rights and any actions they may need to take. This provision is meant to bolster the integrity of automatic enrollment features and make it easier for employers to rectify errors.

Section 601 – SEP and SIMPLE IRA Plans

Expanding the flexibility for retirement savings, Section 601 of the SECURE 2.0 Act allows employers the option to offer employees the choice of making contributions to Roth accounts within SEP and SIMPLE IRA plans. This permits contributions to be made on an after-tax basis, offering the potential for tax-free growth and withdrawals.

For plan sponsors, this means adapting payroll systems to handle the different tax treatment of Roth contributions and ensuring that employees understand the tax implications of their choice. The IRS recently provided detailed guidance on the reporting requirements for these contributions, including modifications to Forms W-2 and 1099-R.

Section 604 – Roth Employer Contributions

Section 604 of the SECURE 2.0 Act introduces an option for employers to enhance retirement savings by allowing employees to elect for matching and nonelective contributions to be treated as Roth contributions. This change, which applies to contributions made after December 29, 2022, allows participants the potential for tax-free growth and withdrawals under certain conditions. A critical stipulation is that these Roth contributions must be fully vested, guaranteeing participants immediate and complete ownership.

The Notice reassure employers that complying with the full vesting requirement for Roth contributions won’t jeopardize their plans’ compliance with nondiscrimination tests. Additionally, it details that the choice to classify contributions as Roth needs to be finalized no later than when those contributions are credited to the participant’s account. Once made, this election is binding for the contribution year, although employees retain the flexibility to alter their election for subsequent contributions annually. For tax reporting, guidance stipulates that Roth-designated donations are to be documented on Form 1099-R in the tax year they are allocated to the participant’s account.

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The recently issued guidance provides essential information for plan sponsors attempting to comply with the various SECURE Act 2.0 provisions properly. The details can be complicated, so it’s crucial to consult with a qualified advisor to guide you through the process. If you have questions about the information outlined above or need assistance with your next benefit plan audit, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.