By Anne Tyler Hall, Eric Schillinger, and Allison Richter* Hall Benefits Law
Atlanta, GA
*Anne Tyler Hall is the founding attorney of Hall Benefits Law, and her team counsels clients on fiduciary matters, healthcare reform, executive compensation, health and welfare benefits, and retirement plan legal issues.
Eric Schillinger is Lead ERISA Counsel at HBL and concentrates his practice in the areas of qualified, health and welfare, and nonqualified employee benefit plans, including pension, defined contribution, deferred compensation, health care, life insurance, disability, fringe, and other employer-provided benefits.
Allison Richter is Hall Benefit Law’s 2021 summer intern, entering her final year at George Washington University Law School. In her role with the Firm, Allison assisted the team on projects spanning a variety of topics, including health and welfare benefits, retirement plans, and executive compensation.
The Securing a Strong Retirement Act of 2021 (SECURE Act 2.0)1 was unanimously approved by the House Ways and Means Committee on May 5, 2021. The legislation is commonly referred to as SECURE Act 2.0 because, like the previously enacted Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act),2 it would make significant changes to federal laws governing employee-sponsored retirement plans. If SECURE Act 2.0 be- comes law, it will modify provisions of the SECURE Act and other retirement rules, as well as create new rules for retirement plan administration. SECURE Act.
2.0 has garnered bipartisan support. Its proponents believe that by urging workers to begin planning for retirement earlier in life, encouraging employers to offer workplace retirement plans, and improving pathways for employees to save for retirement, the bill has the potential to improve upon the changes brought about by the SECURE Act to boost financial security for millions of Americans.
Analysts expect that a version of SECURE Act 2.0 will be signed into law this year; therefore, plan administrators should pay close attention to if and when SECURE Act 2.0 is enacted in order to take necessary steps to ensure that their plans do not violate its pro- visions. Retirement plans are primarily governed by federal rules, including the Employee Retirement Income Security Act of 1974, as amended (ERISA) and the I.R.C. (Code) both of which would be altered by SECURE Act 2.0. When a retirement plan fails to comply with ERISA or the I.R.C., the employer may be subject to costly penalties and lawsuits, and the plan may risk disqualification (i.e., loss of the plan’s tax-exempt status).
This article provides a summary of certain key pro- visions of SECURE Act 2.0 and how these provisions would impact retirement plans, employers, and other parties involved in plan administration.
BACKGROUND
Minimum standards for retirement plans in the United States are determined by the Code, which governs federal tax aspects of retirement plans, such as tax disqualification and penalties, and ERISA, which governs other, non-tax aspects of retirement plans. The IRS and Department of Labor (DOL) regulate plans to ensure that they meet the standards set by the Code and by ERISA. Congress can make changes to the I.R.C. and to ERISA by passing bills such as SECURE Act 2.0, and the DOL and the Treasury are re- responsible for enforcing the changes.
The SECURE Act, which focused on increasing participation in tax-qualified retirement plans, made the most significant changes to rules governing employer-sponsored retirement plans since the Pension Protection Act of 2006. The changes introduced by SECURE Act 2.0, such as the expansion of automatic enrollment and the simplification of retirement plan rules, will transform the retirement-planning landscape in a number of important ways.
EXPANDING AUTOMATIC ENROLLMENT IN RETIREMENT PLANS
Background
Automatic enrollment is a feature of some retirement plans that allows an employer to automatically deduct retirement account contributions from an employee’s wages, so long as the employee does not elect to contribute a different amount to the plan or not contribute at all. Automatic enrollment is used by employers to increase the number of employees who save for retirement, because plans with this feature do not require employees to take the step of opting into the plan. While inclusion of an automatic enrollment feature is permissive and has been on the rise in re- cent years, it has never been mandatory.
Explanation of the SECURE Act 2.0 Proposed Change
SECURE Act 2.0 would change the permissive quality of automatic enrollment by requiring 401(k) and 403(b) plans to automatically enroll participants with at least a 3% contribution rate upon eligibility. The plan must then increase the 3% contribution rate by 1% each year until it reaches at least 10% but not more than 15%. Small businesses with fewer than 10 employees, new businesses that are less than three years old, churches, governments, and SIMPLE 401(k) plans would be exempt from the automatic enrollment requirement.
HBL Comments
Even though employees are entitled to a period of at least 90 days to decide if they will opt out of the plan, analysts project a dramatic increase – up to 40 million more Americans – in employer-sponsored retirement plan enrollment if Congress adopts the mandatory automatic enrollment provision as part of SECURE Act 2.0.3
NEW REQUIRED BEGINNING DATES FOR RMDS
Background
Required Minimum Distributions (RMDs) are withdrawals that the IRS requires retired plan participants to make after a certain age. The IRS enforces RMDs because the distributions give the Treasury the opportunity to collect tax revenue from participants’ tax-deferred savings. Prior to the SECURE Act, plan participants had to begin taking their RMDs upon reaching age 701⁄2. Upon the SECURE Act being adopted, participants who reached age 701⁄2 in 2020 or later generally must take their first RMD by April 1 of the year after they reach age 72 (instead of age 70 1⁄2). The Coronavirus Aid, Relief, and Economic Security Act (‘‘CARES’’ Act)4 waived RMDs during 2020 for retirement plans and IRAs.
Explanation of SECURE Act 2.0 Proposed Change
As a continuation of the RMD age increase implemented by the SECURE Act, SECURE Act 2.0 would introduce a staggered series of increases to the RMD age requirements: to age 73 beginning on January 1, 2022, to age 74 beginning on January 1, 2029, and to age 75 on January 1, 2032.
HBL Comments
The proposed RMD age increase means that participants would have more time for their savings to grow tax-free and that there will be more money available once withdrawals are required; however, if a participant avails himself or herself of the later RMD start date, he or she may need to make larger withdrawals in the future.
STUDENT LOAN MATCHING PROGRAM
Background
The authors of SECURE Act 2.0 recognize that employees can find themselves overwhelmed with student debt and therefore miss out on the employer’s retirement plan matching contributions. The IRS issued PLR 201833012 indirectly permitting an employer to adopt a student loan matching program as part of its 401(k) plan. Congress, through SECURE Act 2.0, would formalize a solution to the student loan repayment and retirement plan savings crisis, allowing employers to treat student loan payments as elective deferrals for purposes of employer matching contributions.
Explanation of SECURE Act 2.0 Proposed Change
Pursuant to the student loan matching program outlined in SECURE Act 2.0, an employer would be per- mitted to make matching contributions under a 401(k) plan, a 403(b) plan, or a SIMPLE IRA while the employee makes student loan payments. This matching contribution provision goes into effect in the 2022 plan year. Matching contributions are often voluntary, so it would be up to the plan administrator as to whether its plan would adopt a student loan repayment feature.
HBL Comments
With student loan debt soaring over the past de- cade, the proposed student loan matching program should act as an attraction and retention tool for employers looking to hire recent graduates and millennials. A student loan matching program is a benefit that is likely to positively impact many recent graduates and millennials who cannot afford to make student loan repayments and the minimum elective deferrals necessary to receive a matching contribution from the company-sponsored retirement plan.
PROVISIONS RELATING TO PLAN AMENDMENTS
Background
In an effort to ease administrative burdens for retirement plan administrators, SECURE Act 2.0 includes provisions that allow plan administrators more time to adopt plan amendments. The current law usually requires the adoption of a plan amendment to reflect a change in the law no later than the tax filing deadline, including extensions, of the taxable year in which the change in the law occurs.
Explanation of SECURE Act 2.0 Proposed Change
SECURE Act 2.0 would adjust the typical amendment deadline to give employers more time to adopt retirement plan amendments, including certain changes made pursuant to the SECURE Act, SECURE Act 2.0, and the CARES Act. SECURE Act 2.0
permits employers to amend the plan up until the end of the 2023 plan year, as long as the plan operates in accordance with the amendment’s requirements, from the date that the amendment’s requirements become effective. For governmental plans, SECURE Act 2.0 would extend the amendment deadline to 2025. The plan amendment deadline relief becomes effective im- mediately upon enactment of SECURE Act 2.0, if passed.
HBL Comments
Extension of the plan amendment adoption deadline allows employers more time to decide if and how they can make their retirement plans more advantageous to employees under the SECURE Act, SECURE Act 2.0, and the CARES Act. These extended deadlines may contribute to more thoughtful plan administration and increased participation by employees in retirement plans, while also alleviating some ad- ministrative, timing-related burdens for plan administrators.
OTHER HIGHLIGHTS OF SECURE ACT 2.0
Safe Harbor for Correction of Employee Elective Deferral Failures
The current version of SECURE Act 2.0 creates a new safe harbor that would allow plan administrators to correct certain reasonable errors without penalties, as long as the error is corrected within 91⁄2 months after the end of the plan year in which the error occurs. The correction would be favorable and nondiscriminatory for plan participants.
The new safe harbor would cover reasonable errors made while administering automatic enrollment and automatic escalation features in an eligible automatic contribution arrangement (EACA), and the Treasury would decide precisely how each error must be corrected.
One-Year Reduction in Period of Service Requirement for Long-Term, Part-Time Workers
The SECURE Act would require that employers al- low part-time workers who have worked at least 500 hours per year for three consecutive years to be eligible 401(k) plan participants. This provision is currently effective for plan years beginning on or after January 1, 2021. Any 12-month period of service ending on or before December 31, 2020, are not taken into account for purposes of part-time worker retirement plan eligibility. A quick calculation demonstrates that the first plan year in which part-time workers are retirement plan eligible is the 2024 plan year.
SECURE Act 2.0 would expand the number of long-term, part-time employees who are eligible 401(k) plan participants by changing the eligibility requirement from three consecutive years to only two consecutive years. If this change is adopted, part-time workers may be eligible for retirement plan participation as early as January 1, 2023.
Expansion of Employee Plans Compliance Resolution System (EPCRS)
SECURE Act 2.0 would expand the Employee Plans Compliance Resolution System (EPCRS) by (i) allowing for more types of errors to be addressed through self-correction (e.g., certain loan errors), (ii) expanding EPCRS to apply to inadvertent Individual Retirement Account (IRA) errors, and (iii) waiving the excise tax for RMDs when an IRA owner self-corrects the error within a designated period of time.
Employers May Rely on Employee Self-Certification That Deemed Hardship Distribution Conditions Are Met
SECURE Act 2.0 would allow employees to self-certify that they experienced one of the safe harbor events that qualifies for the purposes of taking a hardship withdrawal from a 401(k) plan or a 403(b) plan. The employee may also self-certify that the distribution does not exceed the amount necessary to address the financial need.
Repayment of Qualified Birth or Adoption Distributions Limited to Three Years
The SECURE Act expanded distributions to allow for a penalty-free retirement plan withdrawal for a qualified birth or adoption (QBA). The SECURE Act
generally provided for, but did not stipulate, a discrete time period for repayment.
SECURE Act 2.0 would require QBA distributions to be recontributed within three years of the distribution in order to qualify as a rollover contribution.
Increase in Catch-Up Contribution Limits for Employees Age 62 and Older
Currently, employees who have reached age 50 can make catch-up contributions to a 401(k) or 403(b) plan equal to $6,500 (for 2021, indexed for inflation). SECURE Act 2.0 would allow for catch-up contributions equal to $10,000 (indexed for inflation in future years) for those who have attained age 62, 63, or 64 (but not above age 64) by the end of the same tax year, for those who participate in employer-sponsored 401(k) and 403(b) plans.
‘‘Rothification’’ of Catch-Up Contributions
While SECURE Act 2.0 proposes an increase to the catch-up contribution limit for those aged 62 to 64, it also would require that all catch-up contributions be designated only as Roth contributions.
CONCLUSION
With the passage of the SECURE Act and the CARES Act, the last two years have ushered in the most significant changes to retirement plans since the Pension Protection Act of 2006. SECURE Act 2.0, if adopted, will make additional, significant changes that impact employer plan sponsors and participants alike. For example, those with a significant part-time employee demographic may be required to allow those workers to participate in the company 401(k) plan as early as January 1, 2023. Considering the likely passage of SECURE Act 2.0, plan sponsors should work with ERISA counsel and service providers to prepare for immediate compliance with the Act’s requirements and avoid penalties associated with IRS and DOL scrutiny.
1 H.R. 2954, 117th Cong. (introduced May 4, 2021).
2 Pub. L. No. 116-94.
3 Lauren Mullins, 40 Million More Americans Could Save for Retirement by 2040 with National Universal Access to Retirement Savings Options, Georgetown Univ. Center for Retirement Savings (Dec. 15, 2020).
4 Pub. L. No. 116-136.
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