The SECURE 2.0 Act of 2022 Brings Changes for Workplace Retirement Plans in 2023

The Consolidated Appropriations Act, 2023 was signed into law at the end of 2022 includes the SECURE 2.0 Act of 2022. SECURE 2.0 includes over 90 changes to rules governing workplace retirement plans.  Many changes will go into effect this year and will require sponsors to consider how their plan operates.

It is expected that the Internal Revenue Service (IRS) will give additional guidance on the new provisions; how soon that guidance will be available is anyone’s guess.  Unless it is announced otherwise, employers that operate in accordance with mandatory or optional changes have until the end of 2025 to adopt the amendments in their plan document.

Employer Contributions Designated as Roth

This is a big change that employers will want to consider.  Either to attract talent, or to provide an additional benefit to current employees. Effective December 29, 2022, Plan Sponsors may allow participants to designate the employer matching and nonelective contributions as after-tax Roth contributions. The contributions would be included in the participant’s taxable income in the year the matching contribution was made. Employer contributions designated as Roth must be immediately 100% vested.  Employers wishing to adopt this provision will need to amend their plan to allow for it.

SEP IRAs will also be able to treat employer contributions as Roth starting this year. 

Recordkeepers and TPAs are awaiting guidance from the IRS on implementation.  The matching Roth contribution will likely need to be tracked in its own bucket for recordkeeping purposes.  In the meantime, Employers considering making this change should discuss it with their tax professionals.

Employee Certification for Hardship Distributions

Plan Sponsors that allow hardship withdrawals can now rely on an employee’s self-certification that they have experienced a deemed hardship for purposes of taking a hardship withdrawal from a 401(k) or 403(b) plan.  And the amount of the withdrawal is not more than their financial need.

Up until now, an employee requesting a hardship distribution had to provide documentation to their employer proving they needed the withdrawal.  It was in the employer’s best interest to obtain the proof in case they were ever audited.

The new provision is effective for plan years beginning after December 29, 2022.

Startup Plan Tax Credit Increasing for Small Businesses

Starting this year, the tax credit small businesses (50 or less employees) may take for adopting a new workplace retirement plan is increasing from 50% to 100% of administrative costs. The credit remains at 50% for employers with 51-100 employees.

Employers that offer a defined contribution plan may also receive an additional credit based on the amount of employer contributions of up to $1,000 per employee. This additional credit phases out over five years for employers with 51-100 employees.

For employers that join an existing multiple employer plan (MEP), the start-up credits are available for three years. The MEP rule is retroactively effective for taxable years beginning after December 31, 2019.

Plan Disclosure Notices

Employers who make mid-year plan changes such as an amendment or investment change, are no longer required to provide notices under ERISA or IRS rules to employees who do not participate in their workplace retirement plan. This change should make plan administration easier.

Prior to SECURE 2.0, plan sponsors were required to provide all eligible participants with notices, regardless of their enrollment status in the plan.

Starting this year, employees that are notified of their eligibility to enroll in the plan and choose not to, will be considered unenrolled participants. Unenrolled participants will only need to receive an annual reminder notice regarding their eligibility to participate.  

Participants Born in 1951 Can Wait Another Year Before Taking Their First RMD

Plan sponsors are notified of which participants need to take their RMDs each plan year.  The required minimum distribution age is increasing from 72 to 73 starting this year for those born between 1951 and 1959.  For those born 1960 or later, their first RMD starts at age 75.

This is not new, but something plan fiduciaries should consider: Participants that are still employed and have hit the RMD age, can wait to take their first RMD until after they are considered a terminated participant.  If plan participants choose to begin taking their first RMD, even if they are still contributing to the plan, they will be required to continue taking RMDs each year.