MANDATORY FOR PLANS
Effective for: Plan years beginning after 12.31.2020 (12-month periods starting before 01.01.2021 not taken into account)
Applies to: 401(k) plans

The initial SECURE Act created a new class of plan participants called “long-term part-time employees” or “LTPT employees.” An LTPT employee is an individual who worked three consecutive 12-month periods with at least 500 hours of service. However, the rule does not apply to employees covered under a collective bargaining agreement and non-resident aliens. In addition, plans may require employees to reach age 21 by the end of the three-consecutive-year period to qualify.

Hours and years of service are generally calculated the same as hours and years of service for other plan eligibility rules. The employee’s first 12-month period will be the anniversary of his or her employment and then the plan may either continue using the anniversary years or switch to a plan year basis.

Once an employee qualifies as an LTPT employee, the plan is required to give the LTPT employee the ability to make elective deferrals. The plan can apply an entry date requirement so long as the LTPT employee is enrolled for elective deferrals no later than the earlier of (1) the first day of the first plan year after the LTPT employee requirements are met; or (2) the date six months after the date on which he or she satisfied such requirements.

In addition, LTPT employees are given a year of vesting service under the plan for each 12-month period in which they have at least 500 hours of service and break in service rules for such employees use 500 hours. If LTPT employees satisfy the general plan eligibility rules, they are no longer considered LTPT employees and rules applicable to other participants apply to them except for this special vesting rule.

Although employers are required to give LTPT employees the ability to make elective deferrals to the plan, they are not required to make employer non-elective or matching contributions on their behalf (but can choose to do so). An employer may elect to exclude LTPT employees from safe harbor contributions, non-discrimination testing, and the top-heavy vesting and benefit requirements.

Although this rule under the SECURE Act is effective for plan years beginning after December 31, 2020, 12-month periods beginning before January 1, 2021, are not considered for purposes of qualifying as an LTPT employee.

MANDATORY FOR PLANS
Effective for: Plan years beginning after 12.31.2024
Applies to: 401(k) plans and 403(b) plans subject to ERISA

SECURE 2.0 updates the LTPT employee rule from the SECURE Act, reducing the number of consecutive years with 500 or more hours of service an employee needs to qualify as an LTPT employee from three to two. For counting hours under the updated rule, only periods on and after January 1, 2023, are eligible.

In addition, SECURE 2.0 extends the LTPT employee rule to 403(b) plans subject to ERISA.

SECURE 2.0 also clarifies something left ambiguous in the SECURE Act by confirming that plans only need to give LTPT employees years of vesting service for 12-month periods beginning on and after January 1, 2021.

In proposed regulations, the Department of the Treasury confirmed that plans can exclude LTPT employees based on the same plan rules used to exclude other employees so long as the exclusion is not a proxy for imposing an age or service condition.

OPTIONAL FOR PLANS
Effective for: Distributions made after 12.31.2023
Applies to: Qualified plans, 403(b) plans, and governmental 457(b) plans

Under prior law, the maximum amount that a plan could distribute to a participant without the participant’s consent was $5,000. SECURE 2.0 updates this limit to $7,000. However, SECURE 2.0 maintains the requirement that any distribution without the participant’s consent that exceeds $1,000 must be made through a rollover to an IRA established on the participant’s behalf.

OPTIONAL FOR PLANS
Effective for: Plan years beginning after 12.31.2023
Applies to: 401(k) plans, 403(b) plans, and governmental 457(b) plans

SECURE 2.0 allows individual account plans to establish “pension-linked emergency savings accounts” within the plan or “PLESAs”. These accounts are considered designated Roth accounts and may (but do not have to) be subject to automatic enrollment rules with the right to opt out (automatic amount cannot exceed 3% of compensation).

Participation must be limited to employees who meet the age, service, and other requirements of the plan and are not highly compensated employees. However, an employee is eligible without regard to whether they otherwise participate in the plan and an employee who had contributions made and then becomes highly compensated can still access amounts already in the account.

To qualify as a PLESA, the account must not have a minimum contribution or account balance requirement, allow for discretionary participant withdrawals at least once per calendar month, meet investment rules, and not charge a fee for at least the first four withdrawals in a plan year (though reasonable fees can be charged for additional withdrawals). PLESAs are made part of the plan and must be included in the plan document.

Contributions and earnings need to be accounted for separately from other plan contributions and earnings. Plans may not accept further contributions to a participant’s PLESA to the extent the portion attributable to contributions, (i.e., not including earnings) would exceed the lesser of $2,500 (as adjusted for inflation) or the amount set forth in the plan.

There are disclosure obligations for plans offering PLESAs where participants must be notified of, among other things, the purpose of the PLESA, the limits on and tax treatment of contributions, any fees, expenses, or restrictions, election procedures, the participant’s election, and the amount in the PLESA.

If a plan provides for employer matching contributions, the employer will be required to make matching contributions on amounts contributed to the PLESA at the same rate as any other matching contributions. These amounts do not go to the PLESA. The matching contributions will be made like any other matching contributions, will be subject to all other plan limits on matching contributions, and may not exceed the maximum PLESA balance for a plan year; however, any matching contributions made under the plan are treated first as attributable to a participant’s elective deferrals other than PLESA contributions.

An employer can terminate a PLESA under the plan at any time, without regard to anti-cutback rules. If the employer does so, participants may transfer the money into another Roth source in the plan or receive the money. Similar rules apply when a participant terminates employment with the plan sponsor.

On January 12, 2024, the IRS published Notice 2024-22, providing guidance on anti-abuse rules to prevent participant manipulation of PLESAs. SECURE 2.0 provides that a plan sponsor may employ reasonable procedures solely to the extent necessary to prevent manipulation of the rules of the plan to cause matching contributions to exceed the intended amounts or frequency. The IRS commented that the following would be unreasonable measures in response to PLESA withdrawals: (1) forfeiting matching contributions on account of PLESA contributions, (2) suspending the ability to make PLESA contributions, or (3) suspending matching contributions to the plan.

In addition, on January 17, 2024, the Department of Labor (“DOL”) issued guidance on PLESAs in the form of questions and answers. This guidance provided further information on the prohibition against minimum balance requirements, the contributions cap, the contribution timing rules, how withdrawals may be paid, fees that can be charged against a PLESA, and other disclosure obligations.

OPTIONAL FOR PLANS
Effective for: Transactions on and after 12.29.2023
Applies to: Qualified defined contribution plans, 403(b) plans, and governmental 457(b) plans

SECURE 2.0 establishes a new prohibited transaction exemption for automatic portability transactions. In general, the rules facilitate the automatic transfer of an employee’s assets from an IRA that was established because of a mandatory distribution from a retirement plan of the employee’s old employer to the retirement plan of the employee’s new employer.

The rules require the employee to have been given advance notice of the transfer and a chance to object. This notice must be provided at least 60 days in advance of the transaction and must describe, among other things, the transaction, all fees that will be charged, and the employee’s right to opt out. The automatic portability provider must also provide a supplemental notice to the employee not later than three business days after the transaction occurs.

The automatic portability provider is the entity that executes the transfer and must acknowledge in writing that it is a fiduciary with respect to the IRA from which the transfer is occurring. The fees of the automatic portability provider must be reasonable and must be disclosed and approved by a fiduciary of the plan receiving the transfer. In addition, the automatic portability provider may not market or sell data relating to the IRA or participants in the plan.

There are other recordkeeping, audit, and website requirements for automatic portability providers.

The Secretary of Labor is directed to issue guidance as necessary to carry out the rules. This guidance may include regulations or other guidance related to, among other things, the notice requirements to employees, the disclosure requirements to plans, requirements for plans to disclose information about the transactions in their summary plan descriptions (SPDs), investing money received in a transaction, and correcting errors.

MANDATORY FOR PLANS
Effective for: Plan years beginning after 12.31.2023
Applies to: Defined benefit plans

SECURE 2.0 updates the content of this annual notice defined benefit plans are required to provide to participants. In general, it changes the metric that needs to be disclosed to show the funded status of the plan and requires additional information to be disclosed, including the average return on the plan’s assets for the year.

AFFECTED PLAN SPONSORS SHOULD BE AWARE OF THE STATUS OF THE RULE
Effective: 12.30.2022
Applies to: 403(b) plans

Under existing law, 403(b) plans are generally limited to investing in annuity contracts and mutual funds held in custodial accounts. SECURE 2.0 sought to expand that by permitting 403(b) plans to invest in collective investment trusts, or CITs.

However, SECURE 2.0 only amended the 403(b) rules and did not amend the corresponding rules under securities law. Therefore, additional action is needed before 403(b) plans will be able to take advantage of the change.