Broad bipartisan pension legislation enacted

January 2023

In brief

On December 29, 2022, the SECURE 2.0 Act of 2022 (Secure Act 2.0) was enacted as part of the Consolidated Appropriations Act, 2023, completing a more than one-year process of developing pension reform legislation. The legislation combines provisions from three bills: (i) Securing a Strong Retirement Act of 2022 (H.R. 2954), (ii) Enhancing American Retirement Now (EARN) Act (S. 4808), and (iii) the Retirement Improvement and Savings Enhancement to Supplement Health Investments for the Nest Egg (RISE & SHINE) Act (S. 4353).

Action Item: Secure Act 2.0 makes wide-ranging changes to qualified plans, with most changes applying to all plans but some rules applying only to new plans. The provisions have various effective dates. Employers need to consider which rules are mandatory, which are elective, and the specific effective dates, to determine how the legislation will impact their plans. 

In detail

Required changes under the legislation

Under Secure Act 2.0, the following changes are required:

  • Any new single employer 401(k) or 403(b) plans established after the date of enactment must automatically enroll participants once initial eligibility requirements are met, at a rate of at least 3%, but not more than 10%, and increasing by one percentage point each year to at least 10%, but not more than 15%. Employees may opt out of coverage or change their deferral percentages. The requirements apply to plans years beginning after December 31, 2024. Auto-enrollment provisions would continue to be optional for plans that had been established prior to the date Secure Act 2.0 was enacted.
  • Currently, catch-up contributions can be made on a pre-tax or a Roth basis (if allowed by the plan). Under Secure Act 2.0, all catch-up contributions are subject to Roth tax treatment, beginning in 2024. There is an exception for employees with compensation of $145,000 or less (indexed).
  • The limit on catch-up contributions to 401(k), 403(b) and 457(b) plans, which currently is $6,500 for employees age 50 or older, is increased beginning in 2025 to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for employees ages 60 - 63 during a plan year. The $10,000 limit will be indexed with inflation.
  • The original Secure Act increased the required minimum distribution date to age 72. Secure Act 2.0 further increases the required minimum distribution starting date first to 73 beginning on January 1, 2023 and later to age 75 starting on January 1, 2033.
  • The original Secure Act provision required employers to allow part-time employees to participate in a 401(k) plan if they had completed 500 hours of service for three consecutive years. Secure Act 2.0 reduces the three-year rule to two years, effective for plan years beginning after December 31, 2024.
  • For plan years beginning after December 31, 2025, paper benefit statements must be provided to defined contribution (e.g., 401(k)) plan participants at least once annually and to defined benefit (e.g., pension) plan participants at least once every three years, unless a participant elects otherwise.

Optional changes under the legislation

Under Secure Act 2.0, the following changes are permissible options for employers:

  • Employers can provide matching contributions in a 401(k) plan with respect to “qualified student loan payments.”  The amount of qualified student loan payments is limited to the annual deferral limit ($22,500 for 2023) less the actual deferrals made by the employee for the year. In addition, under this provision, plans could test matching contributions on student loan repayments separately from matching contributions on elective deferrals for nondiscrimination compliance. This provision is effective for plan years beginning after December 31, 2023.
  • Currently, matching contributions in defined contribution plans must be on a pre-tax basis only. Under Secure Act 2.0, employers can provide participants with an option of receiving matching contributions on a Roth basis. This change is effective on the date of enactment.
  • Currently, if the value of a retirement benefit is between $1,000 and $5,000, plans may choose to restrict the form of payment to only a lump sum and may distribute the benefit without consent of the plan participant by establishing an IRA on behalf of the participant and transferring the account. The threshold is increased from $5,000 to $7,000, effective in 2024. The $7,000 limit is not automatically indexed.
  • For plan years beginning after the date of enactment, employers could provide de minimis financial incentives, such as low-dollar gift cards, as an incentive for participation in the 401(k) plan.
  • Defined contribution plans and IRAs may offer life annuities that provide for guaranteed annual increases of less than 5% per year, return of premium death benefits, and certain dividends and lump-sum payments, effective for calendar years beginning after the date of enactment.
  • Beginning in 2024, retirement plans can provide that a participant who self-certifies that they experienced domestic abuse can withdraw the lesser of $10,000 or 50% of the participant’s account and the withdrawal will not be subject to the 10% tax on early distributions. The participant can, but is not required to, repay the withdrawal over three years. The participant can receive a refund of the federal income taxes paid on the amount repaid within the three-year period. 

Other provisions intended to help simplify administration

  • Employers can rely on employee self-certifying that deemed hardship distribution conditions are met, effective for plan years beginning after the date of enactment.
  • Secure Act 2.0 provides greater latitude to plan sponsors in situations where inadvertent benefit overpayments are made to plan participants, including an allowance for plan fiduciaries to opt to not recoup overpayments, provided safeguards to protect other participants are met. If repayment is sought, the plan fiduciary cannot collect interest, collection fees or other fees on overpaid amounts. If repayment is made by reducing future benefits, the amount recouped each year cannot exceed 10% of the total overpayment, and future benefit payments cannot be reduced below 90% of the normal payment amount. These provisions are effective on the date of enactment.
  • Secure Act 2.0 expands the Employee Plans Compliance Resolution System (EPCRS) to allow more types of plan administration errors to be corrected internally through self-correction, rather than a formal correction procedure through the IRS. This provision is effective on the date of enactment, and guidance must be issued within two years.
  • Under current law, plan amendments to an existing plan to increase benefits generally must be adopted by the last day of the plan year in which the amendment is effective. For plan years beginning after December 31, 2023, Secure Act 2.0 allows retroactive amendments to increase benefits for the preceding year (other than increasing matching contributions) if the amendment is adopted by the due date of the employer’s tax return.
  • Certain notices, such as notices regarding investment options available under a plan, no longer must be sent to employees who are eligible to participate in a plan, but who have not elected to participate (unenrolled participants), effective for plan years beginning after December 31, 2022. The new law also directs Treasury and the Department of Labor (DOL) to issue regulations within two years under which certain required notices to defined contribution plan participants could be consolidated into a single notice.
  • The DOL is to create a national online lost-and-found database for qualified plans to allow retirees to search for plan administrator contact information. The database will be created no later than two years after the date of enactment.

Observations:  Many provisions of Secure Act 2.0 will impact the administration of qualified retirement plans, so employers should consider discussing the implementation of these changes with their benefit plan administrator. For example, under the new law PBGC Variable Rate Premium rates will no longer be indexed for inflation, which may be a significantly welcome change for underfunded defined benefit plans. Plan sponsors also may want to re-evaluate their retirement plan benefits in addressing their organization’s key business objectives when considering the new options that now will be available.

Numerous other provisions of Secure Act 2.0 impact certain specific situations (e.g., multiple employer 403(b) plans, small employers, ESOPs, and distributions to firefighters or certain first responder benefit payments), so a comprehensive review of the applicable provisions of the law should be performed on a case-by-case basis.  

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Ed Geils

Ed Geils

Global and US Tax Knowledge Management Leader, PwC US

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