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

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. For those looking to implement this new provision, some caution is advised: while SECURE 2.0 is clear that employers can’t use plan assets to pay for such financial incentives, it does not clarify at what level such gifts are no longer considered de minimis. Further, the value of gift cards is income for the recipients, subject to income and employment taxes. It’s 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. We anticipate that the IRS will offer guidance on this matter.

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

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

Before SECURE 2.0: Employer matching or nonelective contributions, such as profit -sharing, may be made on pre-tax basis only.

After SECURE 2.0:

• 401(k), 403(b), and governmental 457(b) plans may allow employees to designate employer contributions made on a pre-tax basis (e.g. match, including student loan matching, safe harbor contributions, or profit-sharing) as Roth contributions, i.e. after-tax
• Such contributions must be 100% vested to be eligible for Roth treatment. Employers will continue to receive a deduction for plan contributions. Any employer amount designated by an employee as Roth will be includable in that employee’s taxable income.
• 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 conversion to Roth by side-stepping the need to make separate elections to convert later, its practical application prevented most from immediate implementation. IRS guidance regarding the election forms’ language, practical aspects of making and revoking an election, and tax reporting is needed. Those interested in this provision may benefit from waiting for IRS guidance. 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

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

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.

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

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 doesn’t 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. Many questions remain. The IRS will need to outline details for the physician’s certification and issue guidelines for appropriate tax reporting. We suggest using caution until formal guidance is available. Read more

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

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

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, and at least one monthly distribution is mandatory, 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

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

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

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. 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

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

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