Not one week into the new year and we already have a slew of retirement changes that trustees and plan professionals will have to consider. On December 29, 2022, President Biden signed the 2023 Consolidated Appropriations Act into law. The law, which authorizes $1.7 trillion for government funding, also includes what is commonly called the “SECURE 2.0 Act.” This Act is a multi-year bicameral effort to expand the changes codified back in 2019 under the original SECURE Act.
The new law contains close to ninety (90) separate provisions with separate effective dates. Most of the changes are aimed towards defined contribution plans like 401(k) and 403(b) plans. Below is a summary of some of the new provisions
Changes to the Required Minimum Distribution Rules
- Increase the beginning date for Required Minimum Distributions (“RMDs”) to age 73 for any person who was not 72 or older by the end of 2022. The start date will increase to age 75 beginning January 1, 2033.
- Reduce the penalty for individuals who fail to timely take RMDs. The penalty will decrease from 50% of the amount that should have been distributed to 25% and is effective for the 2023 taxable year. Moreover, the penalty is further reduced to 10% if the failure is corrected within 2 years.
- Starting in 2024, Roth accounts in employer sponsored plans, such as a 401(k) plan, will be exempt from the RMD rules while the participant is still alive.
- The surviving spouse of a participant who dies before commencing RMDs can elect to be treated as the employee for the purposes of commencing and calculating that benefit. This provision is effective for calendar years beginning after December 31, 2023.
No Requirement to Recover Certain Overpayments
- Beginning with the effective date of the Act, plans are not required to seek recovery of certain overpayments. Additionally, rollovers of overpayments do not have to be removed from the transferred account. Instead, the fiduciary is granted discretion to determine whether or not to recovery all or a part of an inadvertent overpayment.
- If the Plan elects to recover a mistaken overpayment it must (1) not impose any interest, penalties or liquidated damages, (2) commence recovery within 3 years after the overpayment first began; (3) limit annual reductions to 10% of the overpaid amount; (4) keep future benefit payments at 90% of the amount that should have been paid under the terms of the Plan; and (5) cease collection after the full dollar amount is collected.
- Plans cannot forgive overpayments if the participant or beneficiary is “culpable.” Examples include fraud, misrepresentations, omissions, or if the individual knew that the benefit payment(s) were “materially in excess” of the correct amount.
Revised Annual Funding Notice
- The new law also changes the Annual Funding Notice that defined benefit plans must furnish to participants. Under the current rules, the Notice must disclose the plan’s “funding target attainment percentage.” Starting with the 2024 plan year, the notice will replace that metric with the “percentage of plan liabilities funded.”
Lost Participant Database
- Within two years following the date of enactment, the Secretaries of the Department of Labor and Treasury are supposed to create an online searchable database that individuals can use to determine whether they are owed any money from a retirement plan. Plan sponsors will be required to provide information necessary to populate the database.
Disaster Relief Rules and Hardships
- For plan years beginning after December 29, 2022, plans can accept a participant’s self-certification of a hardship event in a 401(k) or 403(b) plan. Under current law, participants can already certify the other component necessary to justify a distribution: financial need.
- The law also codified the disaster area rules adopted by the IRS following many recent disasters. Effective for disasters that occurred on or after January 26, 2021, plans can allow participants to take distributions of up to $22,000 within 180 days of the disaster and repay that amount over a 3-year period to avoid the ten percent (10%) early distribution penalty. The loan limit is also increased to the lesser of 10% of the vested account or $100,000.
Emergency Savings Accounts & Withdrawals
- Defined Contribution plans can offer an emergency savings account within the plan to all non-highly compensated employees. The contributions are made from employee pay on an after-tax basis but cannot exceed $2,500 per year (limit is indexed for inflation).
- Defined Contribution plans can also allow in-service withdrawals of up to $1,000 for a “personal or family emergency.” The participant can repay the distribution within 3 years to avoid the 10% early withdrawal penalty.