SECURE Act 2.0 Optional Provisions

Posted July 5, 2023

In late December 2022, Congress passed the Consolidated Appropriations Bill (2023) that included provisions of a retirement bill now known as SECURE Act 2.0. The focus of the bill is retirement-based accounts such as IRAs, Roth IRAs and employer sponsored retirement plans including 401(k)s, 403(b)s, SEP and SIMPLE IRAs. Compared to the first SECURE Act passed in December 2019, which had roughly a dozen provisions around these accounts, SECURE Act 2.0 has dozens of new provisions[1].

In this three-part series, we’ll break down which provisions are mandatory and of the optional provisions, which ones we recommend to our clients.

The following are the “optional” provisions:

Designation of a Fiduciary for a Pooled Employer Plan (PEP)

Effective date: Plan years after December 31, 2022

Permits a PEP to designate a named fiduciary (other than a PEP employer) to collect employer contributions provided the fiduciary implements written contribution collection procedures that are reasonable, diligent and systematic.

Self-certification of Hardships and Unforeseen Emergency Withdrawals

Effective date: Plan years beginning after December 29, 2022

A plan administrator may rely on an employee certification that a hardship withdrawal or unforeseen emergency distribution is based upon an immediate and heavy financial need, as described in the Treasury regulations, and that the amount requested is no more than is necessary.

Separate Top-Heavy Testing of Excludable Employees

Effective date: Plan years after December 31, 2023

Currently, separate non-discrimination testing permits employees under 21 years of with less than one year of service to be excluded (the “Excludable Employees”) since the lnternal Revenue Code does not require them to be eligible for plan participation.

Separate non-discrimination testing incentivizes plan sponsors to include these Excludable Employees in the plan since their deferral rates will have no impact on non-discrimination tests. The same is not true for Top-Heavy testing. lncluding the Excludable Employees could cause Top-Heavy Test failures and be expensive for plan sponsors.

Starter 401(k) Plans for Employers

Effective date: Plan years after December 31, 2023

A starter 401(k) plan or 403(b) plan would generally require that:

All employees be default enrolled in the plan at a 3% to 1 5% of compensation deferral rate.
Only deferrals are permitted. The limit on annual deferrals is the same as the IRA contribution limit, ($6,000 in 2022 and subject to IRA annual cost of living adjustments in $500 increments) with an additional $1,000 in catch-up contributions beginning at age 50.

Student Loan Payments for Matching Purposes

Effective date: Plan years after December 31, 2023

Permits an employer to make matching contributions to a retirement plan with respect to “qualified student loan payments.”

Qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.
Separate nondiscrimination testing for employees who receive matching contributions on student loan repayments.
A retirement plan sponsor may rely on employee certification of payment.
SECURE 2.0 directs Treasury to publish regulations relating to this provision.

Withdrawal for Emergency Personal Expenses

Effective date: Distributions made after December 31, 2023

Provides an exception to the IRS 10% premature distribution penalty tax for certain distributions for emergency expenses, which are unforeseeable or immediate financial needs relating to “personal or family emergency expenses.”

Only one distribution is permissible per calendar year of up to $1,000.
Taxpayer has the option to repay the distribution within three years. No further emergency distributions are permissible during the three-year repayment period unless direct repayment occurs, or aggregate elective deferrals are contributed to the plan in at least the amount that was distributed and not repaid.
Plan administrator may rely on a participant’s certification unless the plan administrator has actual knowledge to the contrary.

Exemption for Certain Automatic Portability

Effective date: Transactions occurring on or after December 29, 2023

Permits retirement plan recordkeepers and other firms to provide employer plans with automatic portability services. Such services involve the automatic transfer of a participant’s default IRA (established in connection with a distribution from a former employer’s plan) into the participant’s new employer’s retirement plan, unless the participant affirmatively elects otherwise.

Requirements: (1) must be an active participant in the new employer plan; and (2) the automatic portability provider acknowledges fiduciary status.

Emergency Savings Accounts under Defined Contribution Plans

Effective date: Plan years after December 31, 2023

Retirement plans may offer their non-highly compensated employees plan-linked emergency savings accounts. (Once an individual becomes a highly compensated employee (as defined in the lnternal Revenue Code), then contributions must stop).

Plans may automatically enroll employees into these accounts at no more than 3% of their salary.
The account is capped at $2,500 (or lower as set by the employer). The $2,500 cap is subject to IRS annual cost of living adjustments in $100 increments.
Once the cap is reached, the additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance attributable to contributions falls below the cap.
Contributions are made on a Roth-like basis.
Treated as elective deferrals for purposes of retirement matching contributions with an annual matching cap set at the maximum account balance of $2,500 or lower.
Allows at least one withdrawal per calendar month. The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals.
Exempt from IRS 10% premature withdrawal penalty tax.
At separation from service emergency savings accounts can be distributed or rolled into a Roth source within a plan or IRA.

[1] *Voya “SECURE 2.0: Key Provisions,” Revised January 27, 2023

Shawn Harrison

As partner in CoSource Financial Group, LLC, Shawn’s main role is business development of 401(k) plans throughout the Gulf Coast. Many of his clients are specialists in the oilfield, car dealerships and sugar industries. Shawn has been a leader in the corporate retirement plans for more than 20 years. Shawn assists the plan sponsor as fiduciary to their company’s retirement plan to navigate their responsibilities to ensure optimal investments, reasonable fees and informed participants. He and his team create a best practices retirement plan that helps protect the plan sponsor from liability and loss, while promoting positive participant outcomes. Our motto is “boots on the ground,” so you will not catch Shawn in the office often, but will find him on the road meeting with his clients and participants at their offices. He lives with his wife, Julie, and children, Katherine, Molly Sue and Shawn Patrick, in Thibodaux, where they enjoy the outdoors of Louisiana.