As widely reported, the president recently signed into law the Consolidated Appropriations Act of 2023 (CAA 2023), a $1.7 trillion omnibus spending bill, which contains significant provisions affecting employer-sponsored retirement and welfare benefit plans. The provisions impacting retirement plans are included in a separate section of CAA 2023 referred to as the SECURE 2.0 Act of 2022 (SECURE 2.0 or the Act), which in many ways builds upon the first SECURE Act passed in 2019 (SECURE 1.0). The following items highlight what we believe are the most important changes affecting employer-sponsored retirement and welfare benefit plans and also provide practical advice for plan sponsors.
SECURE 2.0’s Key Retirement Plan Provisions
- Expanding Auto-Enrollment: Currently, plan sponsors are permitted, but not required, to implement automatic enrollment and automatic escalation in 401(k) and 403(b) plans. Under SECURE 2.0, beginning on January 1, 2025, plans that were established after December 29, 2022 (i.e., newly-created plans) will be required to automatically: (1) enroll participants with an initial contribution rate between 3% and 10% of compensation; and (2) escalate participants’ deferral rate each year by 1% up to a maximum of at least 10% (but not more than 15%). Small businesses (with ten or fewer employees) and employers that have existed for less than three years are exempt from these new provisions.
- Insight: While increasing participation and participation rates among employees is generally seen as a positive, this does come at a cost to plan sponsors, both financial (e.g., increased TPA fees and employer contribution amounts) and administrative complexity (likely increase in small account balances and participants ceasing participation).
- Expansion of the IRS’s Employee Plans Compliance Resolution System (EPCRS): Currently under EPCRS, retirement plan sponsors may only self-correct certain plan document errors, insignificant operational errors, and significant operational failure (provided the significant failure is corrected within a limited time). SECURE 2.0 expands EPCRS to generally permit self-correction of any “inadvertent failure” (whether significant or insignificant), provided the correction is made within a “reasonable period” after the failure is identified, subject to a few exceptions. The Act does not define what constitutes an “inadvertent failure” or a “reasonable period,” so many questions remain. The Act directs the Department of the Treasury to make corresponding updates to EPCRS within two years.
- Insight: The result of the EPCRS expansion means that the vast majority of operational and qualification errors should be eligible for self-correction, whereas in many cases, these errors would have previously been corrected through a Voluntary Correction Program filing with the IRS. This should materially decrease the cost of correcting plan errors.
- Expanded Coverage for Part-Time Workers: Under SECURE 1.0, 401(k) plans are required to permit participation by employees who work at least 500 hours (but less than 1,000 hours) per year for three consecutive years. For plan years beginning after December 31, 2024, SECURE 2.0 reduces the number of consecutive years that such employees must meet the 500-hour requirement from three to two years. This expanded participation requirement applies only to elective deferrals, meaning that employees who meet these part-time eligibility rules do not have to be made eligible for employer contributions, such as employer matching and nonelective contributions.
- Insight: Plans should already be monitoring hours for part-time employees to ensure compliance with SECURE 1.0, so this change should not increase the administrative burden of tracking hours but will result in an increase in the number of plan participants.
- Automatic Cash-Out Amount Increased: Current law allows retirement plans to immediately distribute a participant’s account without their consent (commonly referred to as a cash-out) provided the balance in the participant’s account does not exceed $5,000. Under SECURE 2.0, the cash-out threshold is raised to $7,000, effective for distributions made after December 31, 2023.
- Insight: This change will be much welcomed by plan sponsors, who often pay administrative and recordkeeping fees based on the number of plan participants. A higher cash-out limit will allow plan sponsors to reduce the number of inactive plan participants.
- Changes to Catch-Up Contributions – Increased Amount and Tax Treatment: SECURE 2.0 changes the maximum catch-up contribution limit and the tax nature of catch-ups. Currently, the maximum amount of catch-up contributions that can be made by a catch-up eligible participant annually is $6,500 ($3,000 for SIMPLE plans). For tax years beginning after December 31, 2024, the cap for catch-up contributions will be raised for individuals aged 60-63 to the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the regular catch-up amount in 2024 (2025 for SIMPLE plans). The statutory dollar amounts are indexed for inflation beginning in 2026. Currently, catch-up contributions can be made on a pre-tax or a Roth basis. Starting January 1, 2024, catch-up contributions must be made on a Roth basis (i.e., taxable), except for participants whose prior year wages do not exceed $145,000 (indexed for inflation).
- Insight: This revenue-generating change will force plans that did not previously allow for Roth contributions to begin administering their plans with Roth provisions to the extent that they wish to continue allowing catch-up contributions.
- Reducing Retirement Plan Disclosures to Unenrolled Participants: Before SECURE 2.0, employees who did not participate in their employer-sponsored retirement plans were still required to receive extensive participant disclosures from the retirement plans in which they were eligible to participate. Effective for plan years beginning after December 31, 2022, the disclosures that must be made to unenrolled participants from defined contribution plan sponsors is limited to the annual reminder notice of eligibility and documents that such participants are entitled to receive upon request.
- Insight: For plan sponsors that still distribute paper copies of required disclosures or have difficulty meeting the electronic disclosure rules for portions of their population, this change will be much welcome.
- Treatment of Employer Contributions as Roth Contributions: Prior to SECURE 2.0, employer matching contributions and nonelective contributions could not be made on a Roth basis. Effective on the date of enactment, SECURE 2.0 provides that 401(a), 403(b), and governmental 457(b) plans may permit participants to designate some or all employer matching contributions and nonelective contributions as designated Roth contributions when received, but only to the extent that a participant is fully vested in these contributions. For plans that add this option, it should reduce the need for in-plan Roth conversions of employer contributions amounts for participants who desire this alternative tax treatment.
- Insight: Although this change may appear limited in application (as most employer contributions are not 100% vested when made), it should apply with respect to participants who have already satisfied their plan’s vesting conditions, after which all employer contributions are fully vested.
- Increased Age for Required Minimum Distributions: Building off of SECURE 1.0’s extension of the age at which required minimum distributions (RMDs) must be made, SECURE 2.0 increases the RMD age from 72 to: (1) age 73 starting on January 1, 2023 (for individuals who attain age 72 after December 31, 2022, and for individuals who attain age 73 before January 1, 2033); and (2) age 75 starting on January 1, 2033 (for individuals who attain age 74 after December 31, 2032).
- Insight: A reminder that the RMD age is the maximum age at which plans must require distributions. Plans are permitted to force out distributions at lower ages, but in practice few plans do so.
- Matching Contributions for Student Loan Payments: Currently, employer matching contributions are not permitted to be based on anything other than participant elective deferrals or other elective contributions. Effective for plan years beginning after December 31, 2023, SECURE 2.0 permits employer matching contributions to be made based on an employee’s qualified student loan payments (up to the Code Section 402(g) annual deferral limit) for 401(k), 403(b), SIMPLE IRAs and 457(b) plans.
- Insight: This change, if adopted by plans, should alleviate the dilemma for participants faced with the decision of either paying down their student loans or participating in their employer-sponsored retirement plan, both of which are supported by policymakers.
Extension of Relief for Telehealth, Remote Care Services and HSA Eligibility
CAA-2023 extends relief provisions involving telehealth, remote care services and health savings account (HSA) eligibility. As background, the CARES Act amended the HSA rules to permit high-deductible health plans (HDHP) to provide coverage for telehealth and other remote care services without first meeting the plan’s minimum deductible (sometimes referred to as first-dollar coverage). Without this rule, access to telehealth and other remote-care services before satisfying the HDHP’s deductible could lead participants to be ineligible to contribute to HSAs. Under the CARES Act relief, however, a health plan was treated as an HDHP even if it did not have a deductible for telehealth or other remote care services for plan years beginning on or before December 31, 2021. Thus, an individual covered under a health plan that provided first-dollar coverage of telehealth and other remote care services was still eligible to contribute to an HSA. This relief was later extended from April 1, 2022, to December 31, 2022 (notably leaving a gap in relief at the beginning of 2022), after which it was set to expire.
CAA-2023 further extends this relief for plan years beginning after December 31, 2022, and before January 1, 2025. This means that calendar year plans may offer telehealth and other remote care services on a first-dollar basis for all of 2023 and 2024 without disrupting participant HSA-eligibility.
Insight: Plan sponsors increasingly offer telehealth and remote care services to their eligible employees and have been interested in more flexibility regarding paying for these benefits, so this relief is welcome. Neither CAA-2023 nor the prior relief provisions define “remote care,” so the scope of remote care services that can be provided under this relief without disrupting HSA eligibility could be viewed as expansive. Notably, however, CAA-2023 did not extend another piece of COVID-19 relief: the temporary exemption from certain Affordable Care Act requirements for large employers who offer telehealth and other remote care services to their non benefits-eligible employees. Further relief in this regard would be welcome.
Deadlines for Plan Amendments
The deadline for plan amendments made pursuant to SECURE 2.0, or any IRS or Department of Labor regulations interpreting SECURE 2.0’s requirements, is the end of the first plan year beginning on or after January 1, 2025 (or 2027 for governmental and collectively bargained plans). SECURE 2.0 also extended the amendment deadlines under SECURE 1.0, the CARES Act, and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 until the end of the first plan year beginning on or after January 1, 2025 (instead of the previous deadline of 2022).
If you have any questions about SECURE 2.0’s impact on your retirement plans or the implications of CAA-2023’s extension of relief for telehealth, remote care services and HSA-eligibility, please contact a member of our Employee Benefits Practice Group.