SECURE 2.0 Optional Provisions
1
Optional Treatment of Employer Matching or Non-Elective Contributions as Roth Contributions (SECURE 2.0 Sec. 604)
Further guidance from the IRS is expected on the application of this provision. This election applies to 401(k), 403(b) and Governmental 457(b) plans that currently allow matching or other types of employer contributions. This provision would allow employees to elect to have their matching and/or non-elective employer contributions such as profit sharing or non-elective safe harbor, contributed as designated Roth contributions. The employee will pay tax on those contributions, but they will not be subject to FICA (Social Security or Medicare Tax) except for a governmental 457(b) plan and, even then, only if the employer is subject to FICA. This option is limited to vested employer contribution amounts. Unlike regular Roth contributions, designated Roth non-elective and matching contributions must be reported on Form 1099-R for the year in which they’re allocated to an individual’s account. They’re reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7.
ABG Default: The Plan does not permit Participants to designate Employer Matching or Non-Elective Contributions to be made as Employer Roth Contributions.
2
Military Spouse Retirement Plan Eligibility Credit For Small Employers (SECURE 2.0 Sec. 112)
This provision provides small employers (i.e., 100 employees or less) a tax credit with respect to their defined contribution plans if they: – make military spouses immediately eligible for plan participation within two months of hire; – upon meeting plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been otherwise eligible for if they have been credited with 2 years of service; and – make the military spouse 100% immediately vested in all matching and nonelective employer contributions.
ABG Default: The Plan’s provisions regarding eligibility, entry, and vesting remain unchanged with regard to Military Spouses.
3
Treatment of Student Loans payments as elective deferrals for purposes of matching contributions (SECURE 2.0 Sec. 110)
Further guidance from the IRS is expected on the definition of qualified student loan payments. This election will allow employers to make matching contributions to their retirement plan(s) based on student loan payments (qualified student loan payments). The rate of matching contributions on salary deferrals must be the same as qualified student loan payments. The participant must be otherwise eligible to receive matching contributions on salary deferrals in order to receive employer match on qualified student loan payments.
ABG Default: Matching contributions (if any) will not be made on behalf of Participant’s who make Qualified Student Loan Payments.
4
Withdrawal for Certain Emergency Expenses (SECURE 2.0 Sec. 115)
Emergency personal expense distributions allow employees to withdraw one distribution per year from the plan, up to a maximum of $1,000 for emergency expenses. Emergency expenses are amounts needed for unforeseeable or immediate financial needs relating to personal or family emergency expenses. No 10% early withdrawal penalty. Can be repaid in 3 years. No additional emergency withdrawals from the plan for next 3 years unless prior emergency withdrawal was repaid or participant has made contributions that equal or exceed prior emergency withdrawal.
ABG Default: The Plan will not permit Emergency Personal Expense Distributions or Recontributions.
5
Automatic Portability (SECURE 2.0 Sec. 120)
This provision allows for the automatic transfer/rollover of a participant’s IRA attributable to a prior distribution from an employer-sponsored plan to another employer-sponsored plan in which the individual now participates. A Portability provider (ex. Retirement Clearing House RCH) would facilitate the auto portability between the IRA account and rollover to employer-sponsored plan.
ABG Default: The Plan will not permit receipt of rollovers or allow rollover distributions from auto-portability providers.
6
Updating Dollar Limit for Mandatory Distributions (SECURE 2.0 Sec. 304)
Employers may force-out terminated participants with vested accounts that are less than $5,000 and directly rollover into an IRA. The maximum force-out threshold of $5,000 has increased to $7,000. This increases the opportunity to limit the number of missing participants under the plan and to reduce recordkeeping fees.
ABG Default: Effective 1/01/2024. the Plan’s maximum vested account balance subject to involuntary force-out limit (i.e., distributions that may be made without the consent of the Participant or Beneficiary) increases to $7,000.
7
Application of Top Heavy Rules to Defined Contribution Plans covering excludable employees (SECURE 2.0 Sec. 310)
Under this provision, if a top-heavy defined contribution plan covers employees who do not meet the minimum age and service requirements under the Code, Code §410(a)(1) (e.g., age 21 and one year of service) (i.e., otherwise excludable employees) and the plan satisfies the top-heavy minimum contribution requirement separately with respect to such employees, such employees may be excluded from consideration in determining whether any plan of the employer satisfies the top-heavy minimum contribution requirement. Purpose is to remove a source of surprise expenses for small businesses and paving the way for employers to allow workers to begin deferral contributions earlier.
ABG Default: For the top-heavy provisions of the Plan (insofar as a top-heavy minimum contribution may be required) participants who do not meet the age or service requirements under Code section 410(a)(1) (e.g. age 21 and one year of service) (“Otherwise Excludable Employees”) for a given Plan Year shall not be entitled to a top-heavy minimum contribution otherwise provided for under the terms of the Plan. In any Plan Year on or after the effective date (of this provision) in which the Plan is top-heavy and for which top-heavy minimum contributions would otherwise be allocated to Otherwise Excludable Employees but for the prior sentence, the Employer may, in its sole discretion, elect to provide a non-elective contribution to any Otherwise Excludable Employee who remains employed as of the last day of the Plan Year. The amount of such non-elective contribution shall not exceed the top-heavy minimum contribution to which the Otherwise Excludable Employee would have otherwise been entitled (but for the application of SECURE 2.0 Section 310 and the first sentence of this Section). Such non-elective contributions shall be subject to the same vesting schedule as would apply to top heavy minimum contributions under the terms of the Plan. (This reduces the top heavy minimum plan sponsors would be required to contribute)
8
Penalty-Free Withdrawal from Retirement plans for Individual in case of Domestic Abuse (SECURE 2.0 Sec. 314)
A distribution may be made to a participant that self-certifies that they are a victim of domestic abuse. A “domestic abuse victim distribution” is defined as any distribution from an applicable eligible retirement plan to a domestic abuse victim if made during the 1-year period beginning on any date on which the individual is a victim of domestic abuse by a spouse or domestic partner. Such distributions are permitted as follows: – Maximum distribution for a participant is the lesser of a) $10,000 (as indexed) or b) 50% of the participant’s vested account balance. Note that it is unclear at this time whether this is “per event” or a lifetime limit with respect to the plan. The limit is across all plans of all related employers. The IRS has indicated that an individual may, at any time during the 3-year period beginning on the day after the date on which the distribution was received, repay any portion of a domestic abuse victim distribution (up to the entire amount of the domestic abuse victim distribution) to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made.
ABG Default: The Plan does not provide for distributions or recontributions on account of Domestic Abuse as outlined in Code sec. 72(t)(2)(K).
9
Exception to Penalty on Early Distribution from Qualified Plans for Individuals with a terminal illness (SECURE 2.0 Sec. 326)
This provision provides an exception to the 10% additional tax in the case of a distribution to a terminally ill individual. For purposes of this provision, in order to be considered a terminally ill employee, a physician must certify such individual has a terminal illness which can reasonably be expected to result in death in 7 years or less. Such employee must furnish sufficient evidence to the plan administrator that the employee qualifies under this provision (i.e., no self-certification). Amounts paid under this exception may be repaid within 3 years of the distribution date(s). This provision does not create a new distribution event.
ABG Default: The Plan does not provide for distributions on account of Terminal Illness.
10
Special Rules for use of Retirement Funds in Connection with Qualified Federally Declared Disasters (SECURE 2.0 Sec. 331)
This provision provides permanent rules relating to the use of retirement funds in the case of a federally declared disaster. Withdrawal request must be made within 180 days of the later of (1) the enactment date, (2) the first day of the incident period, or (3) the date of the disaster declaration. The permanent rules allow up to $22,000 to be distributed from employer retirement plans or IRAs for affected individuals per disaster. Such distributions are not subject to the 10 percent early distribution penalty tax and are taken into account as gross income over 3 years. Distributions can be repaid to an eligible retirement plan or IRA within 3 years of the distribution date. There is currently concern that if qualified disaster distributions are made available for any/all disasters, then unlike the exception for hardship distributions, the provision may be treated as a protected benefit. Until further guidance is provided, it is suggested that employers specify which disasters the plan will cover. Plan loan terms can be modified to increase the maximum loan amount up to $100,000 and use fully vested account balance as collateral. Loan payments may be suspended up to 1 Year.
ABG Default: The Plan does not apply different limits or repayment schedules to Qualified Disaster Loans. The Plan does not allow recontribution of Participant distributions on account of a Qualified Disaster Distribution.
11
Improving Coverage for Part-Time Workers (SECURE 2.0 Sec. 125)
Under the SECURE Act, 401(k) plans generally must permit an employee to contribute to a plan if the employee worked at least 500 hours per year with the employer for at least 3 consecutive years and has met the minimum age requirement (age 21) by the end of the 3-consecutive-year period. This provision under SECURE 2.0 reduces the 3-year eligibility rule for long-term part-time employees in a 401(k) plan to 2 years, effective for plan years beginning after December 31, 2024. The provision also provides that pre-2021 service is disregarded for vesting purposes, in the same way that such service is disregarded for eligibility purposes as provided under the SECURE Act. * Effective date clarification: employees who have at least 500 hours in 2021, 2022 and 2023 (three consecutive years), would become a participant under the original SECURE Act provision in 2024. After that, an employee only needs 2 consecutive years with at least 500 hours to become eligible.
ABG Default: Effective 1/1/2025, the Plan only allows LTPT Participants to make pre-tax Elective Deferrals that are not Catch-up Contributions and does not allow LTPT to participate in other provisions allowed under the plan.
12
Emergency Savings Accounts Linked to Individual Account Plans (SECURE 2.0 Sec. 127)
This provision provides employers the option to offer to their non-highly compensated employees “pension linked emergency savings accounts” (PLESAs). Highly compensated employees may not participate. Employers may automatically enroll employees into these accounts at no more than 3% of their salary. Only Roth contributions may be made to this savings account. Account balance is limited to $2,500 (subject to cost-of-living increases). Once the account balance reaches $2,500 no additional contributions can be made to the savings account. Must be invested in interest bearing cash or investment that preserves principal (ex. Stable Value or Guaranteed Investment Contract). Withdrawals allowed per month with no fees for the first four withdrawals each plan year. Participants must self-certify emergency withdrawal need. Deferrals made to PLESA count towards deferral contribution limits and are included in compliance testing.
ABG Default: The Plan will not permit Pension-Linked Emergency Savings Accounts (“PLESA”).
13
Higher Catch-Up Limit to apply at age 60,61,62, and 63 (SECURE 2.0 Sec. 109)
This provision allows plans that currently allow age 50 catch-up contributions to increase the catch-ups in any year in which the employee is age 60, 61, 62 or 63. Note that this catch-up is also subject to the age 50 catch-up rules for high earners effective January 1, 2026 (required as Roth contributions). Increases the limit on catch-up contributions for individuals age 60-63 to the greater of $10,000 or 50% more of the regular catch-up amount (as indexed) in 2025. Increased amounts are indexed for inflation after 2025.
ABG Default: Effective 1/1/2025, the Plan will increase the limit on catch-up contributions for individuals aged 60-63 to the greater of $10,000 or 50% more of the regular catch-up amount (as indexed) in 2025. Increased amounts are indexed for inflation after 2025.Note that this catch-up is also subject to the age 50 catch-up rules for high earners effective January 1, 2026 (required as Roth contributions).
14
Long-Term Care Contracts Purchased with Retirement Plan Distributions (SECURE 2.0 Sec. 334)
This provision allows employees to take in-service distributions from the plan to pay for qualified long-term care insurance. Permit plans to distribute up to $2,500 per year for the payment of premiums for certain specified long-term care (LTC) insurance contracts. For any tax year, cannot exceed the lesser of the amount paid to or assessed by the insurance provider, 10% of a participant’s vested account balance, or $2,500 (indexed). No 10% early withdrawal penalty tax.
ABG Default: Effective 1/1/2025, the Plan will not permit Long-Term Care Contracts purchased with retirement plan distributions.
15
Employee Certification For Hardship Distributions (SECURE 2.0 Sec. 312)
This election applies to plans that currently allow for hardship distribution reasons that are one of the seven deemed safe harbor definitions found in the 401(k) Treasury Regulations. If elected, this provision will allow an employee to self-certify that their distribution request qualifies as a hardship distribution and that the distribution is in compliance with most applicable rules and requirements. The employee must maintain all documentation related to the distribution. The employer (or designee) may not have knowledge to the contrary that the participant does not qualify for a hardship withdrawal.
ABG Default: Effective 1/1/2024, the Plan will permit an employee to self-certify that their distribution request qualifies as a hardship.
16
Elective Deferrals Generally Limited to Regular Contribution Limit (SECURE 2.0 Sec. 603)
This provision requires that all catch-up contributions made on behalf of high earners must be made as Roth deferral contributions. High earners are employees with FICA wages of more than $145,000 (as indexed starting in 2025).
ABG Default: Effective 1/1/2026 (This provision was originally effective 1/1/2024 however an additional 2 year transition period was added), this provision requires that all catch-up contributions made on behalf of high earners must be made as Roth deferral contributions. High earners are employees with FICA wages of more than $145,000 (indexed starting in 2025). If the plan does not already allow for Roth deferrals or catch-up, then the plan will add Roth deferrals or catch-up contributions to comply with this mandatory provision.