SECURE 2.0 update: What takes effect this year

It’s been just over a year since Congress passed the bipartisan SECURE 2.0 Act in an effort to boost the retirement system. With a few notable exceptions, the Biden administration has largely provided the timely guidance necessary for implementation, and Congress has provided a systematic rollout of effective dates for various provisions over the next several years. However, this year could pose challenges for remaining on schedule. Congress has struggled to fund the government and has had several shutdown scares in just the past three months — and it’s an election year.

Rulemaking in election years is often a race to ensure that rules cannot be overturned in a Congressional Review Act (CRA) challenge should the election result in a different party in charge. While the SECURE 2.0 provisions shouldn’t be considered controversial or subject to a CRA challenge, it’s likely that the administration will emphasize its own priorities in the first half of the year and cram SECURE 2.0 guidance in the second half.

Additionally, there’s been a change in leadership of the committees of jurisdiction since the passage of SECURE 2.0, which has altered the focus and priorities of the committees and the administration. For example, Sen. Bernie Sanders (I-VT) now chairs the HELP Committee and is reluctant to celebrate this bipartisan achievement as he believes SECURE 2.0 favors industry and wealthier individuals. He was, however, successful in lobbying for the inclusion of a small program at the Department of Labor (DOL) that would encourage employee ownership through employee stock ownership plans (ESOPs) among other methods. Despite the fact this program isn’t effective until 2025, the DOL launched an initiative to promote worker-owned businesses in July 2023.

Bipartisan effort to correct errors

Although SECURE 2.0 was a bipartisan, bicameral effort that went through normal order in the four committees of jurisdiction, a number of inadvertent errors were discovered after the bill was signed into law. A “technical correction” is a term of art for the tax writing committees. It signals an inadvertent drafting error, not a policy error, and correcting such mistakes is considered to be revenue neutral.

There were several critical provisions plagued by errors, such as:

• Mandatory distribution age. One provision increased the required minimum distribution (RMD) to age 73 (for individuals who turn age 72 after Dec. 31, 2022) and dictated another increase to age 75 (for individuals who turn age 74 after Dec. 31, 2032). However, there was confusion about the application of the rule for individuals who were born in 1950, who turned age 72 in 2022 and age 73 In 2023.
• Catch-up contributions. In the provision mandating Roth catch-up contributions for participants earning $145,000 or more, drafters unintentionally deleted language that would permit catch-up contributions.
• Treatment of student loan payments as elective deferrals for the purposes of matching contributions. As drafted, this provision wasn’t clear whether qualifying student loan payments combined with elective deferrals could exceed the statutory limits. 

After months of debate regarding the scope of the corrections package, in early December 2023, the committees of jurisdiction released a bipartisan discussion draft technical corrections bill, the Tax Technical Corrections Act of 2023, containing 16 corrections as well as 32 minor clerical amendments. The bipartisan, bicameral staff are seeking to attach this package to any must-pass moving vehicle, however, staff has noted that the technical package is not in play for the tax deal that was recently announced by Senate Finance Chair Ron Wyden (D-OR) and House Ways & Means Chair Jason Smith (R-MO). It’s likely that the technical package will not move until a lame duck, end-of-the-year package. 

Agency implementation efforts 

Treasury and the DOL have been quite active in addressing the most urgent questions from SECURE 2.0, however, this activity has been later than the agencies have suggested, and the administration has missed some statutory deadlines in issuing guidance already. That includes the DOL’s now-delayed report on its review of Interpretive Bulletin 95-1, which provides guidance to pension plans that are purchasing annuities to “de-risk” by transferring its benefit liabilities to an annuity provider. We expect the DOL to provide that report to Congress in the short term.

Also, the IRS has been long-expected to release guidance on the provision treating student loan payments as elective deferrals for the purpose of matching contributions. That provision went into effect at the beginning of the year. The IRS is also expected to release updated guidance on the IRC 72(t) regulations since SECURE and SECURE 2.0 contained a number of exceptions to the early withdrawal penalties. 

Overview of guidance released in 2023 

Near the end of August, Treasury heeded the calls that plans couldn’t implement the requirement for catch-up contributions to be made on a Roth basis for eligible participants making over $145,000 in the preceding calendar year. Effective in 2024, Treasury announced that it would adopt a two-year administrative delay on this provision. Treasury also extended the relief for non-spouse beneficiaries inheriting IRAs in 2020 or 2021, after the owner’s required beginning date. This notice doesn’t, however, extend the 10-year period for full distribution of the inherited IRA.

In December 2023, Treasury released several pieces of SECURE 2.0 guidance from long-term, part-time employees to the “grab bag” of guidance covering a dozen issues in a question-and-answer format. It includes automatic enrollment for new plans, increased startup tax credits, and small financial incentives to encourage participation. While this guidance has been relatively non-controversial, the long-term, part-time guidance applies to plan years beginning this year. Many felt this complicated provision should be granted administrative relief since the regulations were proposed just weeks before they became applicable; such relief has not been granted. 

The major provisions that become effective in 2024 are: 

• Treatment of student loan payments as elective deferrals for the purposes of matching contributions. Treasury officials had initially suggested that guidance for the student loan match would be included in their “grab bag” of guidance, but it wasn’t. Treasury is likely to issue guidance in the near future on this provision. 
• Emergency withdrawals. Plan sponsors may allow participants to take an early distribution for emergency expenses up to $1,000 with no early distribution penalty. The IRS also provided initial guidance on pension-linked emergency savings accounts (PLESAs). PLESAs are treated as designated Roth accounts, so participants make contributions on an after-tax basis and withdrawals are generally tax-free. Specifically, this initial guidance addresses the anti-abuse provision designed to prevent participant churning to receive the employer match in the related defined contribution account and continuously drain both accounts.
• Contribution limit for SIMPLE plans. SECURE 2.0 increased the annual deferral limit for SIMPLE plans based on the number of employees. For certain small employers, higher deferral limits are permitted only if the employer provides a 4% match or 3% employer contribution.
• Starter 401(k) plans. Employers that don’t offer a retirement plan may offer a starter 401(k) plan or safe harbor 403(b) plan under this provision. Generally, these starter plans would require employees to be automatically enrolled in the plan, and the limit on annual deferrals would be the same as the IRA contribution limit.
• Rollover of excess 529 assets to a Roth IRA. Capped at a lifetime maximum of $35,000, this provision would allow excess assets in a 529 qualified tuition program to be rolled into a Roth IRA tax-free. There is a 15-year holding period for the 529 account in order to prevent gaming of this provision.
• Simplified rollover guidance. SECURE 2.0 directed Treasury to simplify and standardize the rollover process by issuing sample forms. Such guidance is statutorily required to be released by the end of 2024.

Is there political motivation for a SECURE 3.0?

Despite the fact that retirement remains one of the few bipartisan issues in Congress, new leadership in the committees of jurisdiction aren’t likely to find sufficient common ground to pass another large retirement bill. HELP Chair Bernie Sanders has not shown great interest in retirement, except to expand defined benefit plans and ESOPs. HELP Ranking Member Bill Cassidy (R-LA) has demonstrated an interest in retirement and introduced a couple of bipartisan retirement bills with Sen. Tim Kaine (D-VA). Should the Senate flip in 2024, it’s likely that Sen. Cassidy would try to build on the SECURE 2.0 success. The other committees of jurisdiction have largely been quiet since the passage of SECURE 2.0 and the release of the technical correction package.

There is one issue remaining from SECURE 2.0 that must be finished in the banking committees — allowing 403(b) plans to utilize collective investment trusts. This remains a critical priority for many retirement stakeholders. House Financial Services has marked up a bill addressing the issue, and with House Financial Services Chair Patrick McHenry (R-NC) retiring at the end of this Congress, we expect this’ll be considered one of his must-pass bills. Senate Banking hasn’t expressed interest in taking up this issue, but Senate Banking Chair Sherrod Brown (D-OH) has several priorities he’d like to complete, so conditions are brewing for a banking deal to come together in a must-pass, lame-duck vehicle.

Finally, no discussion of a retirement policy outlook would be complete without mentioning the possibility of a big tax reform package coming together before the expiration of certain Tax Cuts and Jobs Act (TCJA) provisions at the end of 2025. Whether the election drives Congress to address tax issues via reconciliation or through an old-fashioned compromise, with retirement expenditures being one of the biggest expenditures, it creates a ripe opportunity for budget gimmicks to pay for other priorities, as was discussed pre-TCJA with “Rothification” of the retirement system and more recently with the mega IRA provisions that were discussed ahead of the Inflation Reduction Act. The only thing that can be counted on is that the retirement space will remain active for years to come.

With contributions from Mindset.