Other Provisions of Interest


This Overview provides information about major SECURE 2.0 provisions, effective in the near term, that for the most part do not fit into other categories. While it is possible that regulations and guidance may change some of this information, this Overview provides a breakdown of key provisions as they stand now.

For all SECURE 2.0 provisions, plans will have until the final day of the first plan year beginning on or after January 1, 2025, to adopt a compliant plan amendment. This date is extended to the final day of the first plan year beginning on or after January 1, 2027, for governmental and collectively bargained plans.

COVERAGE FOR LONG-TERM PART-TIME EMPLOYEES

SECURE Act Rule

MANDATORY FOR PLANS
Effective for: Plan years beginning after 12.31.2020 (12-month periods 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.

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). If any employer does not give them an employer contribution, LTPT employees may be excluded from 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.

SECURE 2.0 Rule

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 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.

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.

There remains some uncertainty whether plans can exclude LTPT employees based on the same plan rules used to exclude other employees. However, exclusions that are expressly based on service conditions, such as those relating to employees who are “part-time” or something similar, will not be able to exclude LTPT employees.

OTHER SECURE 2.0 PROVISIONS OF INTEREST

Increased Dollar Limit for Mandatory Distributions

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.

Pension-linked Emergency Savings Accounts

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. These accounts are considered designated Roth accounts and may (but do not have to) be subject to automatic enrollment rules.

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 who had contributions made and then becomes highly compensated can still access amounts already in the account.

To qualify as a pension-linked emergency savings account, the account must:

  1. Not have a minimum contribution or account balance requirement;
  2. Allow for participant withdrawals (in whole or in part) at least once per calendar month (which are not subject to the 10% early withdrawal penalty);
  3. Be invested by the plan sponsor in an interest-bearing deposit account or an investment product offered by a state or federally regulated financial institution that is designed to preserve principal and provide a reasonable rate of return, consistent with the need for liquidity; and
  4. Not charge a fee for at least the first four withdrawals in a plan year.

These accounts 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 savings account 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.

SECURE 2.0 establishes a new disclosure obligation for plans offering these accounts. Not less than 30 and not more than 90 days prior to the first contribution to the savings account and annually thereafter, participants must be notified of, among other things, the purpose of the savings account; the limits on and tax treatment of contributions; any fees, expenses, or restrictions; election procedures; the participant’s election; and the amount in the savings account.

If a plan provides for employer matching contributions, the employer will be required to make matching contributions on amounts contributed to the savings account at the same rate as any other matching contributions. However, these amounts do not go to the savings account. 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 savings account balance for a plan year.

An employer can terminate a savings account arrangement 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.

SECURE 2.0 directs the Secretary of the Treasury to issue regulations or other guidance by December 29, 2023, with respect to rules preventing abuse of these accounts. In particular, these rules are to relate to reasonable procedures that a plan can employ to limit the frequency or amount of matching contributions on savings account contributions to prevent participant manipulation.

Automatic Portability Transactions

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 by December 29, 2023, 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.

Updated Defined Benefit Plan Annual Funding Notices

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.

Investment by 403(b) Plans in Collective Trusts

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.

Trust services are offered through Alerus Financial, N.A., which does not provide legal or tax advice. The information and opinions in this communication are for general information only and not intended to provide tax, legal or investment advice or recommendations for any particular situation or type of retirement plan. Nothing in this communication should be construed as legal, investment or tax guidance, nor as the sole authority on any regulation, law, or ruling as it applies to a specific plan or situation. Plan sponsors should always consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions presented in this communication are subject to change without notice.