Unlocking SECURE 2.0: Essentials at a Glance

SECURE 2.0 Act became law in December 2022. This new legislation introduced numerous changes to retirement savings programs, impacting employers who establish these programs and the employees who participate in them. Its 90+ provisions aim to achieve four primary goals: 1. Lessen the hurdles of starting a retirement plan, 2. Make it easier to operate a retirement plan 3. Help employees get on a path to a more secure retirement, and 4. Reduce hurdles to accessing retirement savings when faced with the unexpected.

As expected with any legislation as monumental as SECURE 2.0, there are gray areas, inconsistencies, and even unintended consequences stemming from the language of the law as passed; more questions will likely arise as provisions are reviewed for application. We anticipate that some of it will be clarified in future guidance from the Internal Revenue Service (IRS) and Department of Labor (DOL) and technical corrections.

Many of the SECURE 2.0 changes came into effect immediately following its enactment, with the remainder set to roll out throughout 2023 and subsequent years. Some of the changes are required, and others are optional. Service providers, including investment and technology platforms, have much work ahead of them to conform plan documents, operations, and service offerings and implement the required changes.

The plan amendment deadline for all required SECURE 2.0 modifications is generally December 31, 2026. 1

Please note: this resource highlights some of the key aspects of this law and is not intended to be comprehensive. In many instances, because of the lack of formal guidance, it reflects our best efforts in the interpretation and application of its provisions. Thus, it may be subject to change as the IRS and DOL guidance becomes available. Please bookmark this page for ongoing updates, posts, and resources.

The content of this page is for general information only. While it is believed to be accurate and reliable as of the posting date, it may be subject to change as additional guidance becomes available. It is not intended to provide investment, tax, or legal advice. For advice regarding your specific circumstances, please seek services of an appropriate independent legal, tax, or investment professional.

photo by Katie Moum @ Unsplash

SECURE 2.0 – Timeline of Selected Key Provisions

M = Mandatory | O = Optional

Effective immediately
  • M Automatic enrollment required for plans implemented post  December 28, 2022; exceptions available (must implement by 2025)
  • M 10% penalty is eliminated for excess IRA contributions and earnings when timely withdrawn
  • O Retirement plans may allow participants to designate employer match or non-elective contributions as Roth
  • O More self-correction options for plan errors available under Employee Plans Compliance Resolution System (EPCRS)
  • O Expanded, favorable terms for retirement account withdrawals in the event of a federally declared disaster
  • O Terminal illness exception to the 10% early distribution penalty available
Effective in 2023
  • M Required Minimum Distribution (RMD) age is increased from 72 to 73
  • M Penalty for failed RMDs reduced to 25% or 10% when corrected timely
  • O Employers may give small financial incentives to employees to encourage retirement plan engagement
  • O Reduced retirement plan disclosure requirements for eligible but unenrolled employees
  • O Employee self-certification for hardship distributions is permissible
  • O New and increased small employer retirement plan start-up tax credits
  • O Retroactive first plan year elective deferrals for sole proprietors without employees permitted (new plans only)
Effective in 2024
  • M Long-term, part-time employee eligibility rules apply to 401(k) plans
  • M Catch-up contributions must be made on Roth basis for employees earning more than $145,000 in the prior year (IRS Notice 2023-62, published on Aug 25, 2023, delayed the effective date to 2026).
  • M Family attribution rules updated: community property and attribution of ownership between parents and minors
  • M Required Minimum Distributions from Roth 401(k) /Roth 403(b) align with Roth IRA RMD rules
  • M Surviving spouse may make an election to be treated as a deceased employee for RMD purposes
  • M IRA catch-up contribution limit is subject to inflation adjustment
  • O Employers may provide an in-plan matching contribution for student loan repayments
  • O Certain unintentional enrollment errors may be self-corrected up to 9 ½ months after plan year end
  • O Small-balance force-out amount for terminated employees increased to $7,000
  • O 10% penalty-free withdrawals of up to $10,000 for domestic abuse survivors available
  • O In-plan Emergency Savings Accounts (ESA) are available
  • O New, 10% penalty-free emergency withdrawals up to $1,000, with an option to repay, are available
  • O Hardship withdrawal rules for 403(b) plans harmonized with 401(k) plan hardship rules
  • O Discretionary amendments to increase employee benefits may be made up to the due date of employer’s tax return
  • O No mandatory top-heavy contributions for employees who do not meet maximum eligibility requirements allowed by law
  • O Starter 401(k) / 403(b) plans are available
  • O A Safe Harbor 401(k) may replace a SIMPLE IRA mid-year
Effective in 2025 and later
  • M Long-term, part-time employee eligibility requirement reduced from 3 to 2 years
  • M Long-term, part-time employee eligibility rules apply to 403(b) plans
  • M Automatic enrollment mandate in effect for plans implemented post December 28, 2022, with certain exceptions
  • M Employer-sponsored retirement plan catch-up contribution limit increased for employees aged 60, 61, 62, 63
  • M Defined Benefit Plans: the PBGC variable rate premium is locked and no longer subject to inflation adjustment
  • M Amendment deadline for provisions under SECURE 2019, CARES Act, Taxpayer Certainty and Disaster Relief Act of 2020, and SECURE 2.0
  • O New, 10% penalty-free qualified long-term care distributions allowed
  • O 2026: Updated e-delivery rules in effect for defined contribution and defined benefit plan participant statements
  • M 2027: Government-funded Saver’s Match replaces current Saver’s Tax Credit
  • M 2033: RMD age is increased from 73 to 75

SECURE 2.0 – Key Provisions in Brief

+ = Mandatory | + = Optional

Automatic Enrollment is Required for Most New Plans

Before SECURE 2.0: Automatic enrollment and automatic escalation were optional 401(k) and 403(b) plan features

After SECURE 2.0:

  • 401(k) and 403(b) plans established post-December 28, 2022, will be required to automatically enroll eligible employees at the minimum savings rate of 3% up to 10%. Employees may modify their contribution rates or opt out of the plan within 90 days.
  • Starting with the second year, employers will be required to increase the initial savings rate by 1% until the savings rate reaches at least 10% but no more than 15%. Employees have an opportunity to change their contribution rates at any point.
  • Excluded from this requirement:  plans set up before December 29, 2022; employers with 10 or fewer employees; employers in business less than 3 years; SIMPLE plans, church and governmental plans.

Effective date: Plan years beginning after December 31, 2024

Pinnacle’s Take: Automatic enrollment has proven effective in bolstering participation and improving retirement readiness. It is a requirement for new plans with a few exceptions noted above and voluntary for others. To ensure success and avoid costly missteps, it is critical for employers to coordinate implementation with their retirement plan consultants, payroll service providers, investment platforms, and train their responsible staff. While this provision seems farther down the road, it may be better not to delay its implementation; doing so will allow employers to prepare their responsible staff and assess the impact of automatic enrollment on plan operation, compliance testing, and employer contributions. Read more

Reference: Sec. 101. Expanding automatic enrollment in retirement plans

New Plans Get a 100% Set-up Tax Credit; New Employer Contribution Tax Credit

Before SECURE 2.0: Small employers with up to 100 employees were eligible for a three-year start-up credit up to 50% of administrative costs with a minimum of $500 and a maximum of $5,000 per year.

After SECURE 2.0:

  • For employers with up to 50 employees, the 3-year tax credit increased to 100% of administrative costs, up to $5,000 per year. No change for employers with 51-100 employees, i.e. pre-SECURE 2.0 rules continue to apply.
  • A new, additional credit for employer contributions is available for five years. Its amount is based on a percentage of employer contributions to employee retirement plan accounts, with a $1,000 per-employee cap. The percentage of contribution eligible for this credit declines from 100% after year 2 and is phased out entirely after year 5.
  • Contributions to employees earning more than $100,000 per year (inflation-adjusted) are not eligible for this credit. Defined benefit/cash balance plans are excluded.
  • Employers with 50 or fewer employees are eligible for the full amount of this new credit; the credit is gradually phased out, for businesses with between 51-100 employees

Effective date:
Tax years beginning after December 31, 2022.

Pinnacle’s Take: These new provisions for small businesses level the competitive field and diminish obstacles to starting new retirement savings programs by potentially covering up to $15,000 in plan fees and subsidizing a portion of employer contributions to employee accounts during the plan’s initial five years. In today’s competitive job market, many employees prioritize companies that provide retirement benefits over those that don’t. As businesses vie for top talent, a retirement plan is crucial in achieving that goal. In communities subject to a state-sponsored retirement plan mandate, for many companies, these new and expanded tax credits open a clear path to a private market alternative with a more robust option to save for retirement. Read more

Reference: Sec. 102. Modification of credit for small employer pension plan start-up costs

Employers Now Can Use Small Financial Incentives to Drive Employee Participation

Before SECURE 2.0: The only way companies could use financial incentives to encourage employees to save for retirement was by offering a matching contribution.

After SECURE 2.0:

  • In response to behavioral finance research showing the benefits of gamification to drive enrollment, employers are now allowed to offer small (‘de minimis’) financial incentives, e.g., gift cards, for enrolling and contributing into a 401(k) or a 403(b) plan
  • This provision does not require a plan amendment.

Effective date: Plan years beginning after 12/29/2022.

Pinnacle’s Take: These small financial incentives could be another tool for employers to encourage unenrolled employees to participate in a retirement plan. IRS Notice 2024-2 clarifies that financial incentives must total (cumulatively) $250 or less to qualify, and only apply to employees who are not currently deferring.  Incentives are subject to typical tax, withholding, and reporting requirements (e.g., the value of a gift card is income for the recipient, subject to income and employment taxes). It is worth noting that some small tangible rewards may not need to be reported as compensation if their value and frequency make it unreasonable or challenging to track.

Reference: Sec. 113. Small immediate financial incentives for contributing to a plan

Shorter Eligibility Rules for Long-Term Part-time Employees and Clarification for Vesting Rules

Before SECURE 2.0: Under SECURE Act of 2019, 401(k) plans were required to allow part-time employees aged 21 or older who completed three consecutive 12-month service periods (with at least 500 hours in each period) to contribute to the plan. Employer contributions were not required for these employees. 403(b) plans were not subject to this rule.

After SECURE 2.0:

  • The maximum eligibility requirement has been reduced from three consecutive years to two consecutive years
  • Years of employment completed before 2021 may be disregarded when calculating both eligibility and vested balances
  • The same rule is extended to 403(b) plans subject to ERISA effective
  • Employer contributions are not required for long-term part-time employees but may be made. If those contributions are subject to vesting, then a year of vested Service is determined on the basis of 500-hours, not the 1,000 hours applicable to employees who are not full-time.

Effective date: Plan years beginning after 12/31/2024 (Note: SECURE 1.0 LTPT rules are in effect for plan years beginning after 12/31/2023, so operationally, employers need to be ready to implement changes in 2024).

Pinnacle’s Take: Reducing the eligibility period from three years to two is a win for savers, but it brought new complexities. Changing the required minimum employment period will first require looking at whether someone meets the three-year rule, then, as the updated rules come into effect for plan years beginning after 12/31/2024, the two-year rule will need to be applied. Companies with employees in the LTPT category must decide whether to redesign their plans to provide more liberal eligibility requirements to avoid the LTPT rule’s effects or abide by the new rules. NOTE: For 401(k) plans, this decision must be made and implemented before plan years beginning after 12/31/2023 when the LTPT rules under SECURE 1.0 take effect. 403(b) plans get an extra year, as for them the LTPT rules are effective for plan years beginning after 12/31/2024. Alternatively, these employers will need to adjust their systems and plan operations to keep track of two populations for purposes of eligibility and vesting. To identify part-time employees and to properly track rehires, it will be more important than ever to maintain complete payroll records. A silver lining is that, for purposes of the LTPT rule, employers do not have to worry about the hours worked prior to plan years beginning prior to 1/1/2021 for 401(k) plans and 1/1/2023 for 403(b) plans. Read more about changes to 401(k) plans and 403(b) distinctives.

Reference: Sec. 125. One-year reduction in period of service requirement for long-term, part-time workers

A Super-Charged Catch-up Opportunity for Employees Age 60-63

Before SECURE 2.0: For plans with a catch-up feature, participants aged 50 or older can make an additional contribution beyond the standard limits. These amounts, usually adjusted for inflation, are $7,500 for 401(k), 403(b), and governmental 457(b) Plans and $3,500 for SIMPLE plans in 2023. Annual IRA catch-up contributions are a flat $1,000 and don’t get adjusted for increases in the cost of living.

After SECURE 2.0:

  • Participants aged 60-63 will be allowed to contribute an additional 50% more than the regular catch-up limit
  • For retirement plans other than SIMPLE IRA, this super catch-up will be greater of (i) $10,000 or (ii) 150% of the regular catch-up amount, adjusted for inflation.
  • For SIMPLE plans, it will be greater of (i) $5,000 or (ii) 150% of the regular catch-up amount, adjusted for inflation.
  • IRA catch-up contributions will be increased in $100 increments

Effective date: Tax years beginning after 12/31/2024 for 401(k), 403(b), and governmental 457(b) Plan catch-ups; Tax years beginning after 12/31/2023 for IRA catch-ups.

Pinnacle’s Take: It’s important to note this is not an additional catch-up contribution, but simply a higher limit available for retirement savers for four years. Companies that offer matching contributions for catch-up amounts should assess whether continuing to offer this feature would create additional funding obligations. Read more

Reference: Sec. 109. Higher catch-up limit to apply at age 60, 61, 62 and 63 ; Sec. 108. Indexing IRA catch-up limit

Roth-only Catch-up Option for High Earners

Before SECURE 2.0: Catch-up contributions by participants aged 50 or older to 401(k), 403(b), and governmental 457(b) plans may be made on either a traditional, pre-tax or Roth basis, after-tax.

After SECURE 2.0:

  • Catch-up contribution amounts to 401(k), 403(b), and governmental 457 plans may be made on Roth-basis only, i.e., after-tax. This includes the new catch-up provision for those aged 60-63.
  • Exception is granted to employees with FICA wages of $145,000 or less, subject to adjustment for inflation. These employees may continue to make pre-tax catch-up contributions if the plan continues the pre-tax catch-up option. NOTE: currently, those with self-employed earnings (sole-proprietorships and partnerships), appear to be excluded from this limitation since they don’t have FICA wages.

Effective date: Tax years beginning after 12/31/2025 (original 12/31/2023 deadline effectively extended by IRS in Notice 2023-62).

Pinnacle’s Take: This provision is required for all plans that currently include a catch-up contribution option or wish to offer it in the future. Employers will need to consider whether they want to continue to provide the catch-up feature, and if so, ensure that the retirement plan also has a Roth 401(K) component to accommodate the new requirement for high earners. Those with a highly-paid workforce whose compensation fluctuates with bonuses and commissions should exercise extra care when choosing a path forward. Plan documents, investment platform providers, payroll services, and personnel assisting in operating the plan will need to be appropriately aligned to communicate this change to employees and operate under this new rule. More guidance is expected from the IRS to clarify the many practical challenges this rule created. Read more

Reference: Sec. 603. Elective deferrals generally limited to regular contribution limit

Employees May be Given an Option to Treat Employer Contributions to Their Account as Roth (after-tax)

Before SECURE 2.0: Employer contributions, such as matching, profit sharing and other non-elective contributions, may be made on a pre-tax basis only.

After SECURE 2.0:

  • 401(k), 403(b), and governmental 457(b) plans may allow employees to designate employer contributions as Roth contributions. 
  • Employer contributions must be 100% vested to qualify for Roth treatment. Employers will continue to receive a deduction for plan contributions.
  • Employer amount designated by an employee as Roth will be includable in the employee’s taxable income in the year it is allocated to their account (regardless of the year to which it relates). The income will be reported on Form 1099-R.
  • This is an optional provision, and its implementation is entirely subject to the employer’s discretion.

Effective date: Contributions made after 12/29/2022

Pinnacle’s Take: This provision became available immediately as a tax revenue raiser. While intended to simplify conversions to Roth, its practical application prevented most from immediate implementation. In December 2023, the IRS issued Notice 2024-2 providing some needed guidance regarding tax reporting and withholding requirements, practical aspects of making and changing an employee election, and clarification for practitioners on other technical aspects. With this guidance, service providers can begin to update appropriate systems and notices to accommodate this new option.  In the meantime, it is possible to achieve the same or similar results via features currently available for retirement savers in plan documents and most investment platforms – an in-plan Roth conversion or rollover.

Reference: Sec. 604. Optional treatment of employer matching or nonelective contributions as Roth contributions

Student Loan Repayments Eligible to Receive a Match, Just Like Deferrals

Before SECURE 2.0: Employers could not offer matching contributions tied to student loan repayment by their employees. The IRS ruled in one case that an employer could make a special retirement plan contribution (not a match) based on student loan repayments by its employees without breaking existing rules.

After SECURE 2.0:

  • Employers may now make matching contributions, including safe harbor match, for “qualified student loan payments,” if the match is available to all participants eligible for matching contributions on elective deferrals at the same rate and with the same vesting schedule. Basically, the law allows employers to look at these loan payments as salary deferrals and make matching contributions on those amounts, subject to the limits applicable to deferrals.
  • As a perk for employers, employees who receive match based on “qualified student loan payments” may be tested separately for purposes of elective deferrals compliance test (ADP test).

Effective date: Plan years beginning after 12/31/2023.

Pinnacle’s Take: This optional provision is a welcome development, but many questions remain, including the required plan document language, technical details of compliance testing and test corrections, timing of deposit of match for loan repayments when employer match is made more frequently than on an annual basis, and other issues. Additionally, investment platform providers, payroll systems, and compliance testing systems must be programmed to accommodate tracking of loan repayments for match purposes. We suggest closely monitoring this development, including emerging service providers who will assist with tracking of loan repayments. Read more

Reference: Sec. 110. Treatment of student loan payments as elective deferrals for purposes of matching contributions

Positive Changes Impacting Minimum Withdrawal Rules – Required Minimum Distributions (RMD)

Before SECURE 2.0: SECURE Act of 2019, pushed the RMD age from 70.5 to 72 beginning on January 1, 2020. Inequality existed between Roth IRA and Roth 401(k) accounts: while no pre-death RMDs were required from Roth IRA accounts, Roth 401(k) accounts were subject to the minimum withdrawal rules just like a pre-tax 401(k) or IRA. A 50% penalty tax applied for missed RMD amounts. While a surviving spouse could elect to treat a deceased IRA owner’s IRA as their own for purposes of RMD rules, the same rule wasn’t available for workplace savings plans.

After SECURE 2.0:

  • RMD age is adjusted over a 10-year period: 73 – for those born in 1951 through 1959, and 75 for those born in 1960 or later.
  • Pre-death RMD requirement for Roth 401(k) / Roth 403(b) is eliminated for distributions required after January 1, 2024, putting them on par with Roth IRAs.
  • Excise tax for failure to meet the RMD requirement is reduced from 50% to 25%, with a decrease to 10% available for mistakes fixed during a two-year correction window. This is available beginning with 2023 tax years.
  • Spousal beneficiaries may elect to be treated as the deceased employee for RMD purposes for distributions required after January 1, 2024, expanding planning options.

Effective date: See ‘After SECURE 2.0’ (Above)

Pinnacle’s Take: Raising the RMD age pushes back the date when withdrawals must begin, allowing the funds in a retirement account to grow for an extended time, potentially enhancing the financial prospects for retirees. Equalization of RMD rules for Roth 401(k) / Roth 403(b) plans will open additional planning options for employees and their families. The new options for surviving spouses may help by extending the distribution period and lowering the required minimum disbursement amounts. Reduction of penalty tax will help soften the blow when inadvertent mistakes happen without having to resort to complex, expensive mechanisms to seek relief. These required plan changes will entail operational adjustments, updates to employee communications, and forms. Read more

Reference: Sec. 107. Increase in age for required beginning date for mandatory distributions, Sec. 325. Roth plan distribution rules, Sec. 302. Reduction in excise tax on certain accumulations in qualified retirement plans, Sec. 327. Surviving spouse election to be treated as employee.

Withdrawals When Unexpected Happens: Natural Disasters and Life Emergencies

Before SECURE 2.0: With limited exceptions, current law imposes a 10% penalty on early withdrawals from workplace retirement accounts. On a case-by-case basis, legislators have eased plan distribution and loan rules in cases of federally-declared disasters.

After SECURE 2.0:

  • Life emergencies: when allowed by the plan, employees may make a single, 10% penalty-free withdrawal of up to $1,000 annually for unexpected or urgent personal or family emergency expenses. This amount is subject to income tax and can be repaid within three years. Only one withdrawal is allowed every three years, if the initial withdrawal hasn’t been paid back directly or via salary deferrals.
  • Natural disasters: If the President declares a significant federal disaster, residents of the affected area who experience financial setbacks may withdraw up to $22,000 from their retirement account, provided the plan allows for such withdrawals. This payment can be spread out as income over three years to lower the tax burden; will avoid the extra 10% income tax, and can be paid back to the retirement account within three years. Also, special loan rules permit employers to raise loan amounts for impacted employees to the lesser of $100,000 or up to the full amount of their vested account balance, and extend the loan repayment timeframe by up to a year.

Effective date: Distributions made after 12/31/2023 for emergency withdrawals; retroactive for disasters occurring on or after 1/26/2021 for withdrawals and loans due to natural disasters.

Pinnacle’s Take: This emergency provision is well-intended and makes savings more accessible. Yet, it is important to acknowledge that self-certification may open doors for abuse and will present new administrative challenges that can’t be ignored. At present, investment platform providers and payroll systems may not be able to readily accommodate emergency distribution requests, follow the necessary recordkeeping requirements to prevent an improper distribution, and adequately handle required communications. The IRS guidance on the topic is still absent. Until specific guidance is available, we recommend considering alternative distribution options.

The optional disaster-related provisions follow the playbook successfully used over the last few years allowing employees to tap into their vested accounts faster during trying times. Still, these options introduce a new layer of complexity to managing the plan. We recommend proceeding cautiously, carefully weighing the benefits of offering one or both provisions before implementation. Read more

Reference: Sec. 115. Withdrawals for certain emergency expenses, Sec. 331. Special rules for the use of retirement funds in connection with qualified federally declared disasters.

Support for Domestic Abuse Survivors: A New Penalty-free Withdrawal Option with Self-certification

Before SECURE 2.0: No special provisions available for victims of domestic abuse. Spousal consent requirements often make it challenging to access retirement account funds in case of need.

After SECURE 2.0: Domestic abuse survivors can withdraw up to the lesser of $10,000 or 50% of their vested account balance from certain defined contribution plans, free of the 10% early withdrawal penalty tax and 20% mandatory federal tax withholding. The received amount may be spread out as income over three years to reduce the income tax bite. Further, this amount, or any portion, can be repaid back to the plan account or an IRA within a three-year span.

Effective date: Distributions made after 12/31/2023.

Pinnacle’s Take: Proceed with caution as the IRS guidance is yet to come. This new withdrawal option might serve as crucial support for those urgently needing funds. It may allow affected employees to regain stability, and, over time, possibly pay the amount back to their plan account. Employers may benefit from seeking legal advice regarding associated privacy regulations. Read more

Reference: Sec. 314. Penalty-free withdrawal from retirement plans for individual in case of domestic abuse

A New 10% Early Withdrawal Penalty Exception for Individual with Terminal Illness

Before SECURE 2.0: A 10% penalty tax applies for premature distributions from retirement accounts unless certain exceptions apply.

After SECURE 2.0: There’s a new exception to the 10% early withdrawal penalty designed for individuals with an illness or physical condition likely to lead to death within 84 months or less. To qualify for this exception, a certification from a physician is mandatory; a self-certification is not acceptable.

Effective date: Distributions made after 12/29/2022.

Pinnacle’s Take: This is another helpful provision to enable access to funds at a time of need. While this rule does not allow access to funds in a 401(k) or a 403(b) plan while actively employed (unless the plan otherwise permits in-service withdrawals), it may help by alleviating penalty tax on early withdrawal at the termination of employment. In December 2023, the IRS issued Notice 2024-2, providing needed guidance regarding the specifics of the physician’s certification and other clarification, including options for employees to treat withdrawals as qualifying terminally ill individual distributions on their personal tax returns (even if the retirement plan or IRA issuing the distribution does not process the distribution as such) and to recontribute amounts distributed. Given the privacy concerns inherent in these situations, allowing individuals to take advantage of this option even if their distribution is not processed as a qualifying terminally ill distribution will allow for broader relief. Read more

Reference: Sec. 326. Exception to penalty on early distributions from qualified plans for individuals with a terminal illness

Mandatory Pay-out Limit Increased to $7,000

Before SECURE 2.0: Subject to a set of specific requirements, employers can immediately, without consent, payout and move into an IRA former employees’ account balances of $5,000 or less.

After SECURE 2.0: Employers may amend their plans to increase this cash-out limit to $7,000, making it possible to pay out a more significant number of former employees; this amount remains unadjusted for inflation.

Effective date: Distributions after 12/31/2023.

Pinnacle’s Take: This optional provision could lower risks and direct costs of plan administration by decreasing the number of former employee balances in the plan. Employers must collaborate closely with service providers to ensure they’re ready to process distributions to participants impacted by this change. Implementation will require a plan amendment. Read more

Reference: Sec. 304. Updating dollar limit for mandatory distributions

A New Side-car Emergency Savings Account (ESA)

Before SECURE 2.0: No specific provisions for in-plan emergency savings are available. Some employers offered emergency savings accounts both inside and outside qualified plans. Still, there was a lack of clarity around some of the tax and ERISA issues.

After SECURE 2.0:

  • Employers can introduce emergency savings accounts inside the retirement plan to their non-highly compensated employees. Those who become highly-compensated later may not continue contributing but can withdraw from their account. ESA amounts must be kept in an investment product designed to preserve principal.
  • Employees can choose to contribute, or employers can auto-enroll them, contributing up to three percent of their salary. These contributions are made on a Roth (after-tax) basis, with a $2,500 inflation-adjusted cap for employee contributions. Any contributions beyond this threshold go into the participant’s regular Roth account.
  • If employers match contributions in the plan, they must match the savings account contributions at the same rate as regular deferrals. However, this match goes into the standard match account.
  • Withdrawals are free of income tax or early withdrawal penalties; they must be allowed at least monthly, with the initial four withdrawals processed free of charge.
  • Plans can set reasonable rules to prevent employees from merely contributing to the savings account to gain the match and then immediately withdrawing.

Effective date: Plan years beginning after 12/31/2023.

Pinnacle’s Take: This optional provision aims to help the many Americans who struggle with financial emergencies. While well-intended, without IRS guidance, its implementation presently faces significant hurdles. Employers must collaborate with their investment platform providers and payroll teams to see if these optional savings accounts are manageable and decide who will handle their operation. For example, the $2,500 account limit differs from the annual limits that compliance systems historically monitor; the process for handling excess contributions creates new complexities only compounded by the impact of potential changes in employee highly compensated status from year-to-year as compensation and limits change. At this point, we suggest monitoring this provision for IRS guidance and allowing investment platforms and payroll service providers time to consider all practical aspects of ESA implementation, including their economics.

Reference: Sec. 127. Emergency savings accounts linked to individual account plans

Fewer, Simpler Notices to Plan Participants; Electronic Statements Permitted

Before SECURE 2.0:

  • Current law requires annual statements for retirement plans without employee investment direction and quarterly statements when employees direct investments in their accounts.
  • The Tax code and DOL rules aimed to protect employee rights require many individual notices to be distributed, whether employees actively participate in the plan or not

After SECURE 2.0:

  • Defined contribution plans will be required to issue at least one paper benefit statement per year; remaining statements may be on paper or electronic.
  • Retirement plan participants can forego receipt of paper statements altogether by opting out. Electronic statements are also allowed for retirement plans that follow the 2002 DOL safe harbor rule for electronic delivery.
  • The IRS and the DOL are directed to provide additional ways employers may simplify and consolidate the required plan notices (annual safe harbor, automatic enrollment, and QDIA notices)
  • Annual notices are no longer required to be given to unenrolled participants who have not elected to participate in a workplace retirement plan, if (1) they received a summary plan description and other eligibility notices when first eligible to participate, (2) they continue to receive an annual reminder of their eligibility to participate in the plan, and (3) are given plan-related documents upon request. New rules simplify certain defined benefit plan notices.

Effective date: Plan years beginning after 12/31/2022 for simplified notices for unenrolled employees; plan years beginning after 12/31/2025 for electronic delivery.

Pinnacle’s Take: We applaud this development. Preparation of required notices is already a costly and time-consuming endeavor. Allowing electronic delivery and reducing the number of required paper statements will help ease some operational costs, complexities, and internal demands, and even improve deliverability in some instances. Eliminating unnecessary plan notices for unenrolled participants doesn’t leave them behind since they will now receive an annual reminder of their eligibility to participate in the plan with a description of employer contributions, vesting schedules, and election deadlines. While the consolidation of the annual notices is optional, it may simplify the distribution process for employers, and might make it more likely that participants will review them. We anticipate further guidance about the content of the annual reminder notice and look forward to future updates from the Agencies to simplify the process of providing plan-related information. Read more about notices and updated e-delivery rules.

Reference: Sec. 320. Eliminating unnecessary plan requirements related to unenrolled participants, Sec. 338. Requirement to provide paper statements in certain cases, Sec. 341. Consolidation of defined contribution plan notices, Sec. 336. Report to Congress on Section 402(f) notices, Sec. 342. Information Needed for Financial Options Risk Mitigation (INFORM) Act], Sec. 343. Defined benefit annual funding notices

Relaxed Hardship Documentation Requirements – Employees May Self-Certify Eligibility

Before SECURE 2.0: Administration of hardship provisions involved collection of supplemental documents, review and approval of documents that prove the immediate and heavy financial need before funds could be disbursed. A 2019 change in the IRS rules allowed employees to self-certify that they had no other means to cover the expenses, but they still had to prove that the hardship event occurred.

After SECURE 2.0: This provision is not mandatory. If the plan document adheres to the IRS safe harbor criteria for hardship-eligible withdrawals, employers may trust employee self-certification that: (1) the request meets one of the hardship reasons, (2) doesn’t exceed the necessary amount, and (3) there are no other reasonable alternatives to raise the funds.

Effective date: Plan years beginning after 12/29/2022.

Pinnacle’s Take: This optional provision, available for 401(k)/403(b) and governmental 457 plans requires caution until additional IRS guidance is available. While it broadens self-certification options, reducing the burden of administering these withdrawals on employers, and delivering the funds to employees sooner, there is a possibility that the IRS could limit its use if employers have actual knowledge to the contrary. It is also important to acknowledge that self-certification may open doors for abuse and will present new administrative challenges that can’t be ignored. Employers should still advise participants to keep records of the hardship event and their financial situation, as the IRS might request these documents during a plan audit.

Reference: Sec. 312. Employer may rely on employee certifying that deemed hardship distribution conditions are met

Family Attribution Rules Updated – Attribution of Ownership in Community Property States and Between Minor Children and Parents

Before SECURE 2.0: When applying various retirement plan rules, including plan features and annual compliance, the Tax Code requires that certain businesses owned by spouses, either directly or by attribution of ownership, be viewed as a single employer unless a non-involvement exception was satisfied. The non-involvement exception doesn’t apply in community property states and when the spouses had a minor child; the latter continues to be true even when the parents divorce.

After SECURE 2.0:

  • A new rule disregards community property laws to determine ownership of a business
  • Another rule removes attribution between parents with separate and unrelated business who have minor children
  • As a result, otherwise unrelated businesses may no longer be deemed to be under common control and may no longer be treated as a single employer for retirement plan purposes

Effective date: Plan years beginning after 12/31/2023.

Pinnacle’s Take: Overall, this is a welcome development because the reform of the family attribution rule was long-overdue and often prevented small businesses from starting or continuing a retirement savings program. Employers sponsoring a joint plan under the pre-SECURE 2.0 rules will need to closely examine the impact of these changes with their legal counsel and retirement consultants. Those with separate plans which had to be jointly considered for compliance testing may no longer have to contend with that requirement. In some cases, when related businesses maintain a single plan, the change in family attribution rules will require pro-active planning and action before 2024 to avoid the unnecessary complications. Read more

Reference: Sec. 315. Reform of family attribution rule

DIY – An Easier Path to Self-correct Plan Mistakes

Before SECURE 2.0: .

  • For many years, the IRS compliance program, called Employer Plans Compliance Resolution System (EPCRS), allowed for self-correction of insignificant operational failures at any time. However, the correction of significant errors not addressed within the three years had to be pre-approved by the IRS, making that process long, complex, expensive, and often lacking appeal. 
  • The IRS provided a time-limited safe harbor rule for the correction of errors in plans that automatically enrolled employees or didn’t follow employee enrollment wishes
  • Plan overpayment mistakes and participant loan violation corrections were complex, expensive, and offered little flexibility to employers.

After SECURE 2.0:

  • More plan errors are eligible for self-correction: such errors can’t be egregious, can’t involve misuse of plan assets, or be in any way connected to tax avoidance.
  • The safe harbor for auto-enrollment mistakes is now permanent. Employers now have a grace period for penalty-free corrections of enrollment mistakes. Errors must be rectified within 9 ½ months following the end of the plan year in which they occurred.
  • Now, certain overpayment errors made by the plan may be corrected without creating hardship for participants and also without exposing plan fiduciaries to liability.
  • Similarly, participant loan failures may be self-corrected if they are not egregious.

Effective date: 12/29/2022 for overpayment mistakes and expanded self-correction options; errors occurring after 12/31/2023 for failures to timely enroll employees.

Pinnacle’s Take: By making the self-correction for enrollment mistakes an option written in the Tax Code, the lawmakers built a permanent safety net for those leery of implementing auto-features for fear of potentially costly mistakes. It is an important consideration for new retirement plans that will be required to use auto-enrollment effective 1/1/2025. Further expansion of self-correction options is welcome news eliminating some complexity and costs of addressing plan mistakes. The new law gave the IRS until the end of 2024 to update its correction program. Since the enactment, the Service has issued limited guidance on self-correction approaches saying that employers may rely immediately on the expanded correction options within a set of guardrails, including documentation requirements, articulated in Notice 2023-43. Additionally, Notice 2024-2 provided additional clarification for certain automatic enrollment errors being corrected after 2023. As much guidance is still outstanding, employers should continue working with their legal counsel to chart a proper correction path. Read more

Reference: Sec. 301. Recovery of retirement plan overpayments, Sec. 305. Expansion of Employee Plans Compliance Resolution System (“EPCRS”), Sec. 350. Safe harbor for correction of employee elective deferral failures

Minimum Contribution Rules Changed for Top-Heavy Plans

Before SECURE 2.0:

  • In addition to nondiscrimination testing, qualified retirement plans are subject to a top-heavy test that checks if the account balances of the company’s ‘key employees’ (like owners and top executives) make up more than 60% of the total plan investments.
  • Plans that are deemed top-heavy are required to provide a minimum contribution (typically up to 3% of pay) and accelerated vesting to employees in the plan.

After SECURE 2.0:

  • Compliance testing requirements remain, but the new rules will allow a top-heavy plan to ignore employees who do not satisfy the maximum age and service eligibility requirements (age 21 and one year of service) in determining whether the plan meets the top-heavy minimum contribution requirements.
  • This rule is similar to rules already available for coverage and nondiscrimination tests.

Effective date: Plan years beginning after 12/31/2023.

Pinnacle’s Take: Because small business retirement plans are typically top-heavy or likely to become heavy, the top-heavy minimum contribution requirement often prevents small businesses from offering a retirement savings plan to new hires sooner and may lead to exclusion of part-time employees. This provision will open the opportunities for newly hired and part-time employees to save in workplace retirement plans without an obligation of additional required top-heavy contribution expenses by small businesses. Read more

Reference: Sec. 310. Application of top-heavy rules to defined contribution plans covering excludable employees

Updated Hardship Withdrawal Rules for 403(b)

Before SECURE 2.0: While the 401(k) hardship rules were updated in 2018 expanding the money types available for hardship withdrawal and eliminating the requirement for participants to take a plan loan first, the 403(b) pans were still subject to those restrictions.

After SECURE 2.0: 403(b) plans may follow similar hardship withdrawal rules as 401(k) plans permitting withdrawals from a subset of employer nonelective, matching contributions, and accumulated earnings, including those associated with contributions made by employees from their pay. Now, a requirement to take a loan before a hardship withdrawal may also be optional.

Effective date: Plan years beginning after 12/31/2023.

Pinnacle’s Take: This optional provision will allow employers of non-profit employers to provide similar 403(b) withdrawal features as now long available in 401(k) plans putting them on par. Read more

Reference: Sec. 602. Hardship withdrawal rules for 403(b) plans

  1. Deadlines for adopting both required and discretionary amendments to retain anti-cutback relief set forth in IRS Notice 2024-2. ↩︎
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