On May 5, 2021, the House Ways and Means Committee unanimously approved H.R. 2954, the Securing a Strong Retirement Act. The bill is nicknamed “SECURE 2.0” because it builds upon 2019’s Setting Every Community Up for Retirement Enhancement (“SECURE”) Act, H.R. 1994.
There will likely be changes to the bill before it goes to the House floor, which could occur before the August recess. The Senate is likely to consider the legislation after Labor Day, and the committees of jurisdiction will likely want to make a number of changes. Below, we summarize a number of provisions relevant to public sector plan sponsors. Unless otherwise noted, the provisions below apply to 403 and 457 plans.
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Sec. 101. Expanding automatic enrollment in retirement plans
Under current law, automatic enrollment and automatic escalation may be used by 401(k) and 403(b) plans, but are not required. Under the legislation, new 401(k) and 403(b) plans would be required to include automatic enrollment with a default rate of between 3% and 10%, as well as automatic escalation of 1% per year up to a maximum of at least 10%, but no more than 15%. The bill would also raise the cap on permissible automatic escalation for safe harbor plans to 15% and to 10% in any year ending before 2025 and 15% for years ending in 2025 or after for non-safe harbor plans. Note that this section does not apply to 457 plans. Effective for plan years beginning after December 31, 2022.
Sec. 104. Enhancement of 403(b) plans
Current law does not permit 403(b) plans to invest in collective investment trusts (“CITs”) and the legislation would eliminate that limitation and bring 403(b)s in line with private sector plans. Effective for amounts invested after December 31, 2021.
Sec. 105. Increase in age for required beginning date for mandatory distributions
Currently, as established by the 2019 SECURE Act, required minimum distributions generally must begin by age 72. Prior to January 1, 2020, the age at which required minimum distributions were required to begin was 70½. The legislation would increase the required minimum distribution age to 73 beginning in 2022, 74 beginning in 2029, and 75 beginning in 2032. Effective for distributions after December 31, 2021 for individuals attaining age 72 after that date.
Sec. 108. Multiple Employer 403(b) Plans
The SECURE Act provided for the creation of PEPs, which allowed unrelated employers to join the same plan while still being considered one plan. PEPs are not subject to the same DOL commonality requirements as closed MEPs. 403(b) plans were not included in these provisions in 2019. The legislation would provide that 403(b) plans can be established and maintained as a MEP/PEP under rules similar to qualified plans. It would also provide relief from the “one bad apple rule” for 403(b) MEPs/PEPs that satisfy rules similar to the qualified plan rules. Effective for plan years beginning after December 31, 2021. Special rules would also be included for certain non-ERISA employers.
Sec. 109. Treatment of student loan payments as elective deferrals for purposes of matching contributions
Currently, a matching contribution cannot be made based on student loan repayments. The IRS has ruled (through a private letter ruling, and more general guidance is pending) that a plan design that provides for a nonelective employer contribution can be based on student loan repayments without violating the contingent benefit rule. Under the legislation, employer contributions made on behalf of employees for “qualified student loan payments” would be treated as matching contributions, so long as certain requirements are satisfied. Effective for plan years beginning after December 31, 2021.
Sec. 112. Small immediate financial incentives for contributing to a plan
The current law contingent benefit rule prohibits 401(k) and 403(b) plan participants from receiving financial incentives (other than matching contributions) for contributing to a plan. The legislation would allow participants to receive de minimis financial incentives for contributing to a 401(k) or 403(b) plan by providing an exemption from the contingent benefit rule. Effective for plan years beginning after the date of enactment.
Sec. 113. Safe harbor for correction of employee elective deferral failures
The IRS’ Employee Plans Compliance Resolution System (EPCRS) contains rules allowing plans to correct errors, including with respect to missed deferrals under automatic enrollment or automatic escalation features. The bill would create a safe harbor that a plan will not fail to be a qualified plan merely because of a “reasonable administrative error” in administering automatic enrollment or automatic escalation features so long as that error is corrected within 9 ½ months of the end of the plan year in which the error occurred and is resolved favorably toward the participant and without discrimination toward similarly situated participants. Effective for any errors with respect to which the date that is nine and one-half months after the end of the plan year during which the error occurred is after the date of enactment.
Sec. 201. Remove required minimum distribution (“RMD”) barriers for life annuities
Under current law, all annuity payments must be nonincreasing or only increase following the limited exceptions. One exception is for annuity contracts purchased from insurance companies, which permits increases that meet an actuarial test. The current annuities actuarial test does not permit certain guarantees such as certain guaranteed annual increases, return of premium death benefits, and period certain guarantees for participating annuities. The bill would amend the RMD rules to relax these rules and permits commercial annuities that are issued in connection with any eligible retirement plan to provide additional types of payments, such as certain lump sum payments and annual payment increases at a rate less than 5% annually. Effective upon enactment.
Sec. 202. Qualifying longevity annuity contracts (“QLACs”)
Existing regulations limit the premiums an individual can pay for a QLAC to the lesser of $135,000 or 25% of the individual’s account balance. The bill would eliminate the 25% requirement and clarify that a divorce occurring after a QLAC is purchased but before payments begin will not affect the permissibility of the joint and survivor benefits under the contract. The legislation further clarifies that employees may rescind a contract during the 90-day trial period (“short free look period”). Generally effective for contracts purchased on or after enactment. For joint and survivor annuity contracts and the short free look period, the provisions are effective for contracts purchased on or after July 2, 2014.
Sec. 203. Insurance-dedicated exchange-traded funds (“ETF”)
The investment assets held in the segregated asset account for a variable annuity or life insurance contract must be adequately diversified. If the assets are not adequately diversified, the variable contract is not treated as an annuity or life insurance contract. The bill would direct the Secretary of the Treasury to revise the regulations setting forth diversification requirements with respect to variable contracts to facilitate the use of ETFs. Effective for investments made on or after the date that is seven years after the date of enactment.
Sec. 301. Recovery of retirement plan overpayments
Fiduciaries for plans that have mistakenly overpaid a participant must take reasonable steps to recoup such overpayment, such as collecting the overpayment from the participant or employer in order to maintain the tax-qualified status of the plan. EPCRS includes various procedures for correcting overpayments made from defined benefit and defined contribution plans. The PBGC also has overpayment recoupment policies for terminating defined benefit plans subject to ERISA.
Under the bill, a 401(a), 403(a), 403(b), and governmental plan (not including a 457(b) plan) would not fail to be a tax favored plan merely because the plan fails to recover an “inadvertent benefit overpayment” or otherwise amends the plan to permit this increased benefit. There is also fiduciary relief for failure to make the plan whole. However, the plan sponsor must still satisfy minimum funding requirements and prevent/restore an impermissible forfeiture.
Alternatively, if the plan sponsor elects to offset future plan payments to recover the overpayment, restrictions would be imposed on the offset. Moreover, restrictions would be imposed on collection efforts from the participant (e.g., no interest, must recover within 3 years, etc.). In certain cases, the overpayment would also be treated as an eligible rollover distribution. Effective upon enactment.
Sec. 305. Eliminating unnecessary plan requirements related to unenrolled participants
Under current rules, employees who choose not to participate in an employer-sponsored plan (“unenrolled participants”) are required to receive numerous communications from the plan sponsor. The bill would amend the requirements for plan sponsor notices to unenrolled participants to consist solely of an annual notice of eligibility to participate during the annual enrollment period (and providing any document so entitled upon request). Effective for plan years beginning after December 31, 2021.
Sec. 307. Expansion of Employee Plans Compliance Resolution System
Under existing rules, employer sponsors of qualified plans have certain opportunities to self-correct plan errors under EPCRS. This generally involves operational failures that are insignificant (or otherwise corrected within a two year period). The legislation would allow any eligible inadvertent failure (as defined in the bill) to be self-corrected under EPCRS (subject to any IRS imposed restrictions). It also directs the Secretary to expand EPCRS to (1) allow custodians of IRAs to address eligible inadvertent failures, and (2) add additional safe harbors for correcting such inadvertent failures (including earnings calculations). Note that this provision does not apply to 457 plans. Effective upon enactment.
Sec. 308. Eliminate the “first day of the month” requirement for governmental Section 457(b) plans
Currently, participants in a 457(b) plan generally may only defer compensation if an agreement providing for the deferral has been entered into before the first day of the month in which the compensation is paid or made available. This provision would conform the rule for governmental 457(b) plans to the rule for 401(k) and 403(b) plans by allowing participants of governmental 457(b) plans to change their deferral rate at any time before the compensation is available to the individual. For tax-exempt 457(b) plans, participants may defer compensation for any calendar month only if an agreement providing for such deferral has been entered into before the beginning of such month. Effective for taxable years beginning after enactment.
Sec. 311. Exclusion of certain disability-related first responder retirement payments
Disability-related retirement payments are typically included in the recipient’s taxable income. For first responders, the bill would exclude service-connected disability pension payments (from a 401(a), 403(a), governmental 457(b), or 403(b) plans) from gross income after reaching retirement age up to an annualized excludable disability amount. Effective for amounts received with respect to taxable years beginning after December 31, 2026.
Sec. 315. Repayment of qualified birth or adoption distribution limited to 3 years
Following the SECURE Act, current law does not limit the period during which a qualified birth or adoption distribution (QBAD) may be repaid and qualify as a rollover contribution. The legislation would require qualified birth or adoption distributions to be recontributed within three years of the distribution in order to qualify as a rollover contribution. (This aligns the rule with similar disaster relief provisions and simplifies plan administration.) Effective as if included in section 113 of the SECURE Act.
Sec. 316. Employer may rely on employee certifying that deemed hardship distribution conditions are met
Applicable Treasury regulations provide that hardship distributions may be made on account of an immediate and heavy financial need or an unforeseeable emergency. These needs are evaluated using facts and circumstances. (There is a streamlined hardship documentation approach that uses a self-certification process if certain requirements are met.) This provision would allow employees to self-certify that they have had one of the safe harbor events that constitutes a deemed hardship for purposes of taking a hardship withdrawal from a 401(k) plan or a 403(b) plan. The administrator can also rely on the employee’s certification that the distribution is not in excess of the amount required to satisfy the financial need. A similar rule applies for purposes of unforeseeable emergency distributions from governmental Section 457(b) plans. Effective for plan years beginning after December 31, 2021.
Sec. 317. Penalty-free withdrawals from retirement plans for individuals in case of domestic abuse
The bill would permit certain penalty-free early withdrawals in the case of domestic abuse in an amount not to exceed the lesser of $10,000 or 50% of the value of the employee’s account under the plan. In addition, such eligible distributions to a domestic abuse victim (defined in the bill) may be recontributed to applicable eligible retirement plans, subject to certain requirements. (This is similar to the QBAD provision.) This would also provide for an in-service distribution event for 401(k), 403(b), and governmental 457(b) plans. Effective for distributions made after the date of enactment.
Sec. 401. Amendments relating to Setting Every Community Up for Retirement Enhancement Act of 2019
- The SECURE Act changed the age on which the required beginning date for required minimum distributions was based, from age 70½ to age 72. The proposal would clarify that the increase in the age on which the required beginning date for required minimum distributions is based (to age 72) does not change the general requirement to actuarially increase the accrued benefit of an employee who retires in a calendar year after the year the employee attains age 70½ (other than a five-percent owner) to take into account the period after age 70½ in which the employee was not receiving any benefits under the plan.
- The SECURE Act also modified certain retirement contribution limits as they apply to “difficulty of care” payments. Generally, the amount that may be contributed to an IRA is limited by the compensation that is includible in an individual’s gross income for the taxable year. However, the SECURE Act modified the limit on nondeductible contributions to a traditional IRA to generally allow an individual to contribute a difficulty of care payment. The proposal would also clarify that the excise tax on excess contributions to an IRA generally does not apply to difficulty of care payments contributed to an IRA.
Effective as if included in the section of the SECURE Act to which the amendment relates.
Sec. 501. Provisions relating to plan amendments
Current law generally requires plan amendments to reflect legal changes to be made by the tax filing deadline for the employer’s taxable year in which the change in law occurs (including extensions). Many governmental plans have provisions that provide that, in general, accrued benefits cannot be reduced by a plan amendment (the “anti-cut-back rule”). Individually designed plans have the Required Amendment List that provides some additional time for amendments. The legislation would allow plan amendments made pursuant to this bill to be made by the end of the 2023 plan year (2025 plan year in the case of governmental plans) as long as the plan operates in accordance with such amendments as of the effective date of a bill requirement or amendment. If a plan operates as such and meets the amendment timeline and requirements of this bill, then the plan will be treated as being operated in accordance with its terms, and the amendment will not violate the anti-cutback rule (unless so designated by the Secretary). The legislation would extend the plan amendment deadlines under the SECURE Act and the CARES Act to these new dates. Effective upon enactment.
Sec. 602. Hardship withdrawal rules for 403(b) plans
Prior to the Bipartisan Budget Act of 2018 (BBA), the hardship rules for 401(k) plans and 403(b) plans were generally the same. The BBA created some differences, primarily allowing 401(k) plans to make hardship distributions from more contribution sources, such as qualified nonelective contributions (QNECs), and earnings on elective deferrals instead of just from employee deferrals. This provision would conform the hardship distribution rules for Section 403(b) plans to those of Section 401(k) plans. Therefore, a 403(b) plan would be able to distribute QNECs, qualified matching contributions, and earnings on any of these contributions (including elective deferrals). Effective for plan years beginning after December 31, 2021.
Sec. 603. Elective deferrals generally limited to regular contribution limit
Section 401(k), 403(b), and governmental 457(b) plans may permit employees to make catch-up contributions (if age 50 or older), subject to certain limitations. The legislation would require 401(a), 403(b) or 457(b) plans that have catch-up contributions to be designated as Roth contributions. Effective for taxable years beginning after December 31, 2021.
Sec. 604. Optional treatment of employer matching contributions as Roth contributions
Current law does not permit employer matching contributions to be made on a Roth basis. The legislation would allow 401(a), 403(b) or 457(b) plans to permit employees to designate matching contributions as Roth contributions. Matching contributions designated as Roth contributions are not excludable from income. Effective for contributions made after enactment.