SECURE 2.0 Requires Major Changes To Retirement Plans And EPCRS – Retirement, Superannuation & Pensions

Executive Summary: On December 23,
2022, the Consolidated Appropriations Act of 2023 was passed by
Congress, which included the SECURE 2.0 Act of 2022 (“SECURE
2.0” or “the Act”). This legislation greatly impacts
retirement savings programs with required and discretionary
changes. SECURE 2.0 also expands self-correction under the Employee
Plans Compliance Resolution System (EPCRS). Many provisions require
a plan amendment by the last day of the calendar year beginning on
or after January 1, 2025 (January 1, 2027, for governmental plans
and certain collectively bargained plans).

Highlights of Mandatory Provisions for Retirement Plans

• New 401(k) and 403(b) plans established on or after December
  29, 2022, will be required to qualify as automatic enrollment plans
  with automatic contributions of at least 3 percent and not more
  than 10 percent during a participant’s first year of
  participation.
  

  • Automatic annual increases of 1 percent to 10 percent (not more
    than 15 percent).

  
  

  • Employees can make an affirmative election not to participate
    or not to auto increase.




• The age for required minimum distribution (RMD) has increased
  to:
  

  • Age 73 for participants who attain age 72 after December 31,
    2022 and before January 1, 2033; and

  
  

  • Age 75, for participants who attain age 74 after December 31,
    2032.

  
  

  • Excise tax for failure to timely commence RMD is reduced to 25
    percent of the shortfall, 10 percent if the shortfall is corrected
    during a specified correction window.

  
  

  • Effective for calendar years beginning on or after January 1,
    2024, surviving spouses may elect to be treated as the employee if
    the participant dies before attaining RMD age.

  
  

  • Roth-designated accounts in 401(k) or 403(b) plans are exempt
    from the pre-death RMD requirements.
    

    • Does not affect RMDs relating to years beginning before January
      1, 2024, but paid on or after that date.

• For plan years beginning in 2024, catch-up contributions by
  participants to 401(k), 403(b) and governmental 457(b) plans must
  be made with Roth contributions, except for participants whose
  wages for the preceding calendar year exceeded $145,000.




• Exception to 10 percent penalty on early distributions for
  individuals with terminal illness.




• Many requirements for defined benefit (DB) plans are also
  included in the Act, such as additional annual funding notice
  requirements, mortality tables correction, and changes to interest
  crediting rates for cash balance plans.




• The Act also included many new discretionary provisions which
  would also require a plan amendment. Most notably:
  

  • The maximum number of years an employer may require a part-time
    employee to serve before becoming eligible to make elective
    deferral contributions has been decreased to two years.

  
  

  • The involuntary cash-out limit is increased to $7,000 from
    $5,000 for DB and defined contribution (DC) plans.

  
  

  • Participants may have the option of receiving employer matching
    and nonelective contributions, as well as student loan matching
    contributions, as Roth contributions.

Changes to EPCRS

SECURE 2.0 significantly expands the rules for self-correcting
plan errors using the EPCRS self-correction program (SCP).
Effective immediately, any “eligible inadvertent failure”
to comply with Code section 401(a), 403(a), 403(b), 408(p), or
408(k) that would disqualify the plan may be corrected under the
SCP unless:

• The IRS identifies the error before actions have been taken
  that show a specific commitment to self-correct, or




• The self-correction is not completed within a reasonable time
  after the failure is identified.

An “eligible inadvertent failure” is defined to
include any failure that occurs despite compliance practices and
procedures that satisfy the standards of EPCRS. This does not,
however, include egregious failures or those related to the
diversion or misuse of plan assets or to an abusive tax avoidance
transaction.

The Act provides that the correction period for significant
failures is indefinite and has no last day, provided the correction
method conforms with the principals set forth in Revenue Procedure
2021-30 (or any successor guidance). This means that significant
failures can now be corrected regardless of when they occurred.
Eligibility for the SCP is now determined based on when the error
is discovered and not when it occurred. Significant failures can
now be corrected if the plan is under IRS exam if the failure is
not identified and the sponsor can show commitment to correct.
Further, SEP and SIMPLE IRA failures may now be corrected under the
SCP.

In addition, SECURE 2.0 provides for additional protections for
participant-loan-related errors. For example, both operational and
plan document loan errors now can be self-corrected. The Department
of Labor (DOL) must treat the self-correction as meeting the
requirements of its Voluntary Fiduciary Correction Program (VFCP),
as long as it is made in accordance with existing EPCRS guidelines.
SECURE 2.0 also provides relief from having to report corrected
deemed distributions on Form 1099-R. In instances where a
participant loan failure also amounts to a fiduciary breach, SECURE
2.0 directs the DOL to treat self-corrected loan failures as
meeting the requirements of the VFCP as long as the loan failure is
corrected in accordance with EPCRS.

Although the expansion of the ability to self-correct is welcome
news for many plan sponsors, there is still a need for additional
clarity and guidance. The changes to EPCRS appear to be effective
on the enactment on SECURE 2.0. The IRS will have two years to
update Revenue Procedure 2021-30 to reflect the statutory changes
and possibly provide additional guidance.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.