The Internal Revenue Service and U.S. Department of Labor recently issued guidance on various aspects of the Consolidated Appropriations Act of 2023, commonly referred to as SECURE 2.0. Below is a summary of key provisions that plan sponsors should review.

1. Automatic enrollment mandate. The Notice clarifies SECURE 2.0's requirement for 401(k) and 403(b) plans established on or after 12/29/22 to include an eligible automatic contribution arrangement (EACA, as defined in Internal Revenue Code (Code) Section 414(w)(3)). If applicable, the EACA must be included in plan years beginning after 12/31/2024.
   • 401(k) and 403(b) plans established on or after 12/29/22 must implement an EACA for plan years beginning after 12/31/24.
   • Plan sponsors are not required to implement an EACA for a "pre-12/29/22 plan," which covers: (1) 401(k) plans that were established and included a cash or deferred arrangement before 12/29/22; and (2) 403(b) plans established before 12/29/22 (no requirement for a 403(b) plan to have permitted deferrals pre-12/29/22).
   • If two single employer plans merge and each is a pre-12/29/22 plan, the ongoing plan is not required to implement an EACA. Similarly, if a pre-12/29/22 plan merges with a non-pre-12/29/22 plan, the ongoing plan will not be required to implement an EACA but only if the pre-12/29/22 plan is the surviving plan and the merger occurs within the Code Section 410(b)(6)(C) transition period (i.e., the transition period that provides for relief from the minimum coverage requirements in the context of certain transactions). For all other pre-12/29/22 plan mergers outside the Section 410(b)(6)(C) context where one plan is not a pre-12/29/22 plan, the ongoing plan will be required to implement an EACA.
   • If a plan is spun off from a pre-12/29/22 plan, generally the spun-off plan is not required to implement an EACA.
   • While not specifically covered, the Notice appears to permit a pre-12/29/22 plan to add a new category of eligible employees after 12/29/22 without an automatic contribution arrangement for the newly eligible employees. Further IRS guidance would be welcome.

2. Terminal illness distributions. As described in our previous advisory, the 10% early withdrawal penalty under Code Section 72(t)(1) will not apply to terminal illness distributions.
   • A "terminally ill individual distribution" (TIID) requires a physician's certificate, is includable in gross income but is not subject to the 10% penalty, and may be repaid. The Notice explains who qualifies as a "physician" and the content requirements for the certification including that the illness or physical condition can reasonably be expected to result in death in 84 months or less.
   • TIIDs may be made from any section 401(a) plan, including defined benefit and 401(k) plans, and any 403(b) plan. However, a TIID cannot be made from a governmental 457(b) plan.
   • There is no limit on the amount that a participant can receive as a TIID, but terminally ill individuals must be otherwise eligible for another permissible in-service distribution from the plan (such as a hardship or age 59½ distribution) to receive a TIID. The TIID rules do not create a separate deemed hardship event or distribution right.
   • Even if a plan does not permit TIIDs, the participant can treat an otherwise permissible in-service distribution as a TIID and report it on their tax return.

3. Cash balance guidance. The Notice explains how SECURE 2.0 relaxed the accrual requirements under Code Section 411. Cash balance plans with age or service-based pay credits and variable interest crediting rates:
   • May permit the interest crediting rate to fall below a certain point without violating the Code's accrual requirements. Prior to SECURE 2.0, a plan of this type had to provide a fixed annual minimum interest crediting rate, which is no longer needed.
   • Can be amended to comply with the new SECURE 2.0 rules without violating Code Section 411(d)(6).

4. Safe harbor corrections for automatic enrollment arrangements. SECURE 2.0 codified certain correction guidance in EPCRS[1] regarding automatic enrollment. The Notice provides the following key clarifications:
   • The correction procedures are available for current and terminated employees, with slightly relaxed notification requirements for terminated employees.
   • Corrective matching contributions (adjusted for earnings) must be made within a reasonable period after the date corrective elective deferrals begin (or would have begun for a terminated employee). The "reasonable period" requirement is met if the corrective allocation is made: (1) six months from when correct deferrals begin/would have begun; or (2) if the error began on or before 12/31/23, the three-year correction period in EPCRS.

5. Amendment deadlines. The Notice provides extended deadlines to adopt amendments (both required and discretionary) related to the original SECURE Act, CARES Act, CAA 2020 and SECURE 2.0. The new deadlines are:
   • December 31, 2026, for qualified plans that are not collectively bargained or governmental plans and 403(b) plans not maintained by a public school.
   • December 31, 2028, for collectively bargained plans.
   • December 31, 2029, for governmental plans or 403(b) plans maintained by a public school.

6. Employer Roth contributions. The Notice explains how employer contributions can be treated as Roth contributions.
   • Employees can choose to designate employer matching contributions or nonelective contributions be made to the plan on a Roth basis.
   • Roth contributions are subject to income tax in the year allocated to the account but are not subject to employment taxes and are reported as an in-plan Roth rollover on Form 1099-R for the year allocated.

7. Incentives for participation in plans. As described in our previous advisory, prior to SECURE 2.0, financial incentives to encourage employees to contribute to plans were prohibited under the contingent benefit rule (except for matching contributions). To encourage enrollment, SECURE 2.0 permits de minimis financial rewards paid by the employer (not plan assets), such as gift cards, to incentivize employees to elect deferrals to 401(k) and 403(b) plans. The Notice provides guidance on de minimis financial incentives:
   • The incentive cannot exceed $250 in value, and it is available only to employees with no existing deferral election (i.e., an employer cannot give an incentive to an employee who is already making deferrals).
   • The incentive can be provided in installments contingent on the employee's continued deferrals.
   • Any incentive is taxable income to the employee and subject to the same withholding and reporting requirements as other fringe benefits.

Guidance on Pension Linked Emergency Savings Accounts (PLESAs)

As described in our previous advisory, SECURE 2.0 allows defined contribution plans to establish a PLESA for non-highly compensated participants, funded with Roth contributions, eligible for match and permitted to be subject to auto-enrollment. The account is held in cash or a money-market type fund, is not subject to the usual plan restrictions on withdrawal or the 10% penalty tax, and can be tapped as often as once per month.

The IRS recently issued Notice 2024-22 with anti-abuse rules, and the DOL followed with FAQs regarding ERISA compliance.

In Notice 2024-22 the IRS addresses the concern that a participant may contribute to their PLESA but take frequent distributions to maximize matching contributions. To combat this, plan sponsors may adopt reasonable anti-abuse procedures (but cannot forfeit matching contributions, suspend participant contributions, or suspend matching contributions on non-PLESA contributions).

Key features of the DOL FAQs include the following:

• Employees can be automatically enrolled in PLESAs (at 3% or less) but must receive prior written notice and must be able to opt out and withdraw their money.
• Contributions count towards the annual limit on deferrals ($23,000 in 2024).
• Employers can set the maximum balance (up to $2,500) and can include or exclude earnings in determining the limit. Neither minimum balances nor annual limits are permitted.
• Deposits for these accounts must be made following the usual rules for deposits of employee contributions.
• Withdrawals do not require an emergency and can be made at the participant's discretion.
• Withdrawals can be subject to reasonable fees or charges after the first four withdrawals, and reasonable administrative fees are permitted.
• These accounts cannot be subject to liquidity constraints (e.g., surrender charges) and must be held in liquid form (e.g., cash, or an interest-bearing deposit account). A qualified default investment alternative (QDIA) cannot be used for a PLESA unless it is a limited duration QDIA.

Proposed Auto-Portability Regulations

The DOL issued proposed regulations on automatic portability transactions under SECURE 2.0. Per the DOL, the goal is to help workers keep track of their retirement savings accounts and improve retirement security by reducing cash-outs when they change jobs. This is intended to prevent a participant's retirement accounts from being splintered across different IRAs when they are involuntarily cashed out of plans by the IRA provider sending the account to the individual's new employer.

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Please contact your DWT benefits attorney for more information.