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IRS guidance on SECURE 2.0 provisions

By Gary Chase , Stephen Douglas and William “Bill” Kalten | February 1, 2024

The IRS answers questions on key provisions of SECURE 2.0 and plan amendment deadlines to help retirement plan sponsors implement required changes.
Health and Benefits|Retirement

The IRS recently released Notice 2024-2, the long-awaited “grab bag” notice that provides Q&A guidance on various Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act provisions, including:

Automatic enrollment mandate

Under SECURE 2.0, unless an exception applies, cash or deferred arrangements (CODAs) under 401(k) plans and salary reduction agreements under 403(b) plans must include an automatic enrollment feature beginning with the 2025 plan year. A plan that was established before December 29, 2022, is generally grandfathered from this requirement. The notice provides the following guidance on the grandfathering provision:

  • Date of establishment. A CODA is established on the date plan terms providing for the CODA are adopted, even if the effective date is later. A 403(b) plan is grandfathered if it was established before December 29, 2022, regardless of the date plan terms that provide for salary reduction agreements were adopted.
  • Plan mergers. The merger of two plans with grandfathered CODAs will not cause them to lose grandfathered status. If a plan with a CODA that is not grandfathered is merged into a plan with a CODA that is grandfathered, the ongoing plan will not be grandfathered — unless the plan with the grandfathered CODA is designated as the ongoing plan and the merger takes place during a limited transition period following certain M&A transactions.
  • Spinoffs. If a plan is spun off from one that includes a grandfathered CODA, the CODA in the spun-off plan generally remains grandfathered.

De minimis financial incentives

SECURE 2.0 establishes an exception to the contingent benefit rule, which allows an employer to provide employees with small financial incentives for making elective deferrals to a 401(k) or 403(b) plan when certain requirements are met. The provision is effective for plan years beginning after December 29, 2022. The notice provides the following guidance on these incentives:

  • Incentive limit and frequency. An incentive is de minimis if the total amount is no more than $250; it may be provided in installments.
  • Restrictions and requirements:
    • A financial incentive may only be provided to an employee who does not have an election to defer in place when the financial incentive is announced. This is to prevent participants from ceasing to make deferrals just to receive the incentive.
    • The financial incentive may not be contributed as a matching contribution. As a result, an employer may only provide financial incentives outside the plan. Thus, a de minimis financial incentive is not subject to the tax code rules that apply to a plan contribution, including qualification requirements and the deductibility timing rules.
    • A financial incentive is generally treated as wages and must be both included in gross income and subject to employment tax withholding and reporting requirements — unless it qualifies as an exception under the tax code (for example, as a de minimis fringe benefit).

The IRS requested comments on de minimis financial incentives provided by parties other than the employer.

Terminal illness distributions

SECURE 2.0 provides a new exception to the 10% early withdrawal tax for distributions made to “employees who [are] terminally ill individuals,” effective for distributions made after December 29, 2022. Notice 2024-2 answers a number of interpretive questions on these terminal illness distributions:

  • Eligible plans. A terminally ill individual distribution may be made from a section 401(a) qualified plan (including a defined benefit plan), section 403(a) annuity plan or section 403(b) annuity contract. However, a governmental 457(b) plan is not eligible to permit a terminally ill individual distribution, because it is not a qualified retirement plan under the tax code.
  • Optional provision. A plan is not required to recognize terminally ill individual distributions.
  • Benefit available to participant even if plan does not recognize terminal illness distributions. If a qualified plan does not permit terminally ill individual distributions, the employee is permitted to treat an otherwise permissible distribution as a terminally ill individual distribution on the employee’s federal income tax return (via Form 5329). If the employee decides to recontribute the amount to a qualified retirement plan, he or she may recontribute the amount to an IRA.
  • Not a new distribution trigger. The provision does not create a new distribution trigger; thus, a terminally ill individual cannot receive a distribution solely because of the terminal illness. The individual must otherwise be eligible for a plan distribution. Note: A SECURE 2.0 technical corrections bill includes a provision to make this a distributable event.
  • Self-certification not permitted. An employee must provide sufficient evidence of the terminal illness to the plan administrator from a physician.
  • No limit on amount. Generally, there is no limit on the amount an employee may receive as a terminally ill individual distribution.
  • Recontribution permitted. Employees may recontribute any portion of a terminally ill individual distribution to a qualified retirement plan, subject to rules similar to qualified birth or adoption distributions.

Self-correction for automatic enrollment arrangements

Before SECURE 2.0 was enacted, the Employee Plans Compliance Resolution System (EPCRS) included a temporary safe harbor that allowed a sponsor of a plan with an automatic contribution feature to correct a failure to automatically enroll an employee or to implement the employee’s affirmative election, without having to make a contribution based on the amount of missed deferrals, if the sponsor:

  • Implements the correct deferral amount by the earlier of (1) the first payment of wages that occurs on or after the last day of the nine-and-a-half-month period that begins after the end of the plan year in which the failure first occurred; or (2) the first payment of wages that occurs following the end of the month after the month in which the employee provided notice of the failure
  • Provides a notice to the employee no later than 45 days after the correct deferrals begin
  • Makes corrective contributions for any missed matching contributions that a participant would have received had the deferral been made, plus earnings

The safe harbor correction method can be used only for failures that began on or before December 31, 2023.

SECURE 2.0 includes a similar — yet permanent — correction option that is addressed in the guidance:

  • Effective date. A contribution failure can be corrected if the deadline to implement the correct deferrals is after December 31, 2023. Similar to the EPCRS temporary safe harbor correction, correct deferrals must begin by the earlier of the date of the first payment of compensation after (1) the nine-and-a-half-month period following the plan year in which the error occurs; or (2) if the employee reports the error, the second month after the month of notification. Therefore, in some circumstances, a contribution failure that began before 2024 might be eligible for correction.
  • Correction implementation. Generally, the correction rules under the temporary EPCRS safe harbor apply for correcting the failures covered under the tax code. The notice includes two important updates:
    • The correction is available for terminated employees.
    • The allocation of matching contributions must be made within a reasonable period of time after the correct elective deferrals begin (or would have begun for a terminated employee). Reasonable is defined as being made by the last day of the sixth month following the month in which correct elective deferrals begin (or, with respect to a terminated employee, would have begun but for the termination of employment). For failures that began on or before December 31, 2023, an allocation made by the end of the third plan year after the year that the error occurred is considered a reasonable time frame.

Roth employer contributions

Prior to SECURE 2.0, the only contributions that could be made on a Roth basis were elective deferrals. A plan, however, could offer a participant the ability to make an in-plan Roth conversion of pre-tax elective deferrals and employer contributions as well as after-tax participant contributions.

Under SECURE 2.0, a 401(a), 401(k), 403(b) or governmental 457(b) plan may now permit a participant to designate employer matching or nonelective contributions as designated Roth contributions. This change applies to contributions made after December 29, 2022.

Some of the details and clarifications included in the notice covering this provision are noted below:

  • Application of elective deferral rules. Rules such as those existing for Roth elective deferrals apply to employer contributions designated as Roth contributions. For example, any designation of a matching contribution or nonelective contribution as a Roth contribution must be made by the employee no later than the time that the contribution is allocated to the employee’s account and must be irrevocable, and an employee must have an effective opportunity to make (or change) that designation at least once during each plan year.
  • Requirement for full vesting. An employee must be fully vested in his or her matching or nonelective contributions to be eligible for designation as Roth contributions, but the plan can still have a vesting schedule. More specifically, a matching contribution may be designated as a Roth contribution only if the employee is fully vested in matching contributions at the time the contribution is allocated to the employee’s account. Similarly, a nonelective contribution may be designated as a Roth contribution only if the employee is fully vested in nonelective contributions at the time the contribution is allocated to the employee’s account.
  • Taxation and reporting. The applicable taxation and reporting of the employer Roth contributions are as follows:
    • Roth employer contributions are subject to income tax in the year allocated to the participant’s account, even if the designated Roth matching or Roth nonelective contributions are deemed to have been made on the last day of the employer’s prior taxable year.
    • Roth employer contributions are not subject to federal income tax withholding, nor are they subject to FICA taxes or FUTA taxes, although special FICA rules may apply for governmental 457(b) plans. An employee who designates a matching contribution or nonelective contribution as a Roth contribution may need to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty.
    • Roth employer contributions are reported as an in-plan Roth rollover on Form 1099-R for the year allocated.
    • No requirement to allow all types of Roth contributions. The Roth feature for matching or nonelective contributions can be added to a plan that does not have Roth elective deferrals. More specifically, a qualified Roth contribution program may, but is not required to, include every type of designated Roth contribution.
    • Rollovers. Roth employer contributions are permitted to be rolled over to another designated Roth account or to a Roth IRA similar to Roth elective deferrals.

Plan amendments

Previously, the deadline to amend plans to reflect recent legislation (including the Coronavirus Aid, Relief, and Economic Security Act; the SECURE 1.0 Act and the SECURE 2.0 Act) was generally December 31, 2025. The IRS notice extends this deadline one year (sometimes longer) for plan amendments (both required and discretionary) to reflect recent legislative changes.

The new amendment deadlines are:

  • December 31, 2026, for qualified and 403(b) plans that are not (1) governmental plans, (2) collectively bargained plans, or (3) a 403(b) plan maintained by a public school
  • December 31, 2028, for collectively bargained qualified plans and collectively bargained 403(b) plans of most tax-exempt organizations
  • December 31, 2029, for a 403(b) plan maintained by a public school
  • December 31, 2029, for any other type of governmental plan (or, if later, the first day of the first plan year beginning more than 180 days after the date of notification that a governmental 457(b) plan does not meet tax code requirements)

Director, Retirement and Executive Compensation

Senior Director, Retirement and Executive Compensation

Senior Director, Retirement and Executive Compensation

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