login-customizer domain was triggered too early. This is usually an indicator for some code in the plugin or theme running too early. Translations should be loaded at the init action or later. Please see Debugging in WordPress for more information. (This message was added in version 6.7.0.) in /home1/natiopq9/public_html/wp-includes/functions.php on line 6131The post Diving Into SECURE 2.0: New Changes Ease Plan Sponsor Administrative Burdens appeared first on The National Law Forum.
]]>The SECURE 2.0 Act of 2022 (SECURE 2.0) significantly changes the legal and administrative compliance landscape for U.S. retirement plans. Foley & Lardner LLP is authoring a series of articles that take a “deep dive” into key SECURE 2.0 provisions that will affect how employers structure and administer their 401(k) plans, pension plans, and other types of employer-sponsored retirement plans.
Last month, we discussed SECURE 2.0’s new required minimum distribution (RMD) rules. In this article, we examine certain SECURE 2.0 changes designed to simplify plan administration for sponsors of defined contribution plans (including Code Section 401(k), 403(b) plans, and 457(b) plans)1 and encourage employees to save for their retirements.
In a 1986 press conference, President Ronald Reagan infamously quipped: “the nine most terrifying words in the English language are: ‘I’m from the government, and I’m here to help.’” While legislation affecting retirement plans can sometimes be frustratingly complex (can you say “ERISA”?), SECURE 2.0 contains a number of provisions designed to lessen the administrative burdens faced by 401(k) plan sponsors (employers).
Each of the administrative changes discussed below is optional – employers aren’t obligated to adopt any of them.
If an employer elects to do so, however, the changes are generally effective for plan years beginning after SECURE 2.0’s enactment. So, an employer with a calendar year plan (i.e., a plan using a January 1 to December 31 plan year) may incorporate the changes into its 401(k) plan in 2023 (depending on the employer’s own objectives and the ability of its recordkeeper to accommodate any requested changes).
Many 401(k) plans permit participants to request hardship withdrawals from their plan accounts to help alleviate the impact of any “immediate and heavy” financial need the participant may be facing. Certain life events (such as funeral expenses, college tuition, expenses to repair a participant’s residence, etc.) automatically constitute an “immediate and heavy” financial need. In the past, 401(k) plan participants requesting hardship withdrawals had to prove both that: (i) the event leading to the financial hardship had occurred, and (ii) the participant lacked the cash or other resources to meet it.
Following a 2019 change in the IRS’s rules, however, employers were permitted to rely on a participant’s certification that he or she had insufficient cash or liquid assets to reasonably meet his or her financial need. To receive a hardship withdrawal, though, the participant still had to prove the hardship event itself occurred.
Now, under the new SECURE 2.0 changes, participants can self-certify both that: (i) the hardship event occurred, and (ii) they lack the financial resources to alleviate it. Unless the employer knows the participant’s certifications are untrue, it may rely on the certifications when determining whether to grant a hardship withdrawal. Employers should nevertheless caution participants to retain underlying documentation of both the hardship event and their financial circumstances, in case the IRS requires the employer to produce such documentation under audit.
This change should streamline the hardship withdrawal process considerably. Employers will no longer need to determine whether a participant has experienced a true hardship or if the participant lacks the funds to address it, and participants will get the funds they need quicker.
Employers know that printing and distributing required participant notices (describing investment options, fees, and participants’ rights under their 401(k) plan) isn’t cheap. Even if employers provide such notices electronically, they must still take time and effort to ensure the notification process meets IRS and DOL standards.
Another SECURE 2.0 change attempts to ease this burden. Under that change, an employer won’t violate ERISA if it fails to provide required notices to individuals eligible for, but not enrolled in, the employer’s plan. However, this exemption will only apply if those individuals (called “unenrolled participants” by SECURE 2.0) received a summary plan description and other eligibility notices when first eligible to participate in the 401(k) plan.
Consistent with Congress’ aim of improving retirement readiness in the U.S. workforce,2 employers can’t just ignore unenrolled participants. SECURE 2.0 requires employers to provide unenrolled participants with annual notices reminding them of their eligibility to participate in the plan. The notice must also describe any employer contributions, vesting schedules, and election deadlines. The employer must also provide unenrolled participants with any otherwise-required documents upon request.
SECURE 2.0 doesn’t specify which notices are covered by this change, and we anticipate further guidance from the agencies addressing that issue, and describing the content of the annual reminder notice. Nevertheless, this change will allow employers to save time, money, and internal resources previously spent on the printing and distribution of unnecessary plan notices.
Before the enactment of SECURE 2.0, the only incentive employers could use to encourage 401(k) plan enrollment among employees was the promise of matching contributions. However, consistent with its goal of improving retirement readiness, SECURE 2.0 permits employers to offer “de minimis” financial incentives to encourage plan enrollment. Such incentives may not be paid from plan assets.
While SECURE 2.0 does not define de minimis, the Senate summary of SECURE 2.0 mentions, without further explanation, “low-dollar” gift cards. Regardless of the amount, employers must treat the value of gift cards as taxable income to the employees receiving them. The incentive would also be subject to income and employment taxes. It’s possible certain tangible incentives (such as small gifts of food, books, or flowers) would be excluded from compensation if, considering their value and frequency, it would be unreasonable or impractical for the employer to account for them.3 Guidance from the IRS on this issue would be welcomed.
Before SECURE 2.0, employers could only make employer matching contributions to their 401(k) plans on a pre-tax basis – Roth matching contributions weren’t permitted. If participants wanted to convert pre-tax employer matching contributions into Roth contributions, they had to complete an in-plan Roth conversion (if permitted by the plan), and pay tax on the amount converted and any accumulated earnings.
Now, under SECURE 2.0, employers may offer 401(k) plan participants the option of receiving employer matching contributions or profit-sharing/nonelective contributions on a Roth basis. Such contributions must, however, be nonforfeitable to the participant (i.e., 100% vested).
Most recordkeepers should be able to accommodate this election. Even before SECURE 2.0’s enactment, many recordkeepers assisted participants in completing in-plan Roth conversions.
Before offering this new SECURE 2.0 option to participants, employers should consider whether, in their circumstances, it makes sense to eliminate vesting requirements imposed on matching or profit-sharing/nonelective contributions.
Under current law, employers may automatically cash out the 401(k) plan accounts of terminated participants whose balances don’t exceed $1,000. If a terminated participant’s account balance equals or exceeds $1,000, but is less than $5,000 (increasing to $7,000 in 2024 – another SECURE 2.0 change), the employer may roll the former participant’s account balance over to an individual retirement account (IRA) established on the participant’s behalf.
After being transferred to an IRA, a former participant’s funds will generally be invested in a default investment option intended to protect the former participant’s principal. Despite that intent, the former participant’s funds may be lost or eroded by the IRA provider’s fees.
SECURE 2.0 addresses this issue by permitting employers and their recordkeepers to transfer the IRA balances of former 401(k) plan participants into retirement plans maintained by the individuals’ new employers (unless a former participant elects otherwise). This change will help participants consolidate their retirement savings in a single employer-sponsored retirement plan, lessening the likelihood those funds will be forgotten or lost due to inaction.
As noted above, the SECURE 2.0 changes described in this article are optional – employers aren’t obligated to adopt them. However, employers considering adopting one or more of the SECURE 2.0 changes should work with their recordkeepers to ensure the requested changes can be incorporated into their plans’ administrative processes. Employers may also need to adopt plan amendments to properly document the incorporation of certain SECURE 2.0 changes into their 401(k) plans (for example, updating the plan’s hardship withdrawal determination process or to allowing the employer to make Roth matching contributions). Such plan amendments must be adopted by the end of the plan year in which the change is effective.
These SECURE 2.0 changes should be popular with employers looking to lessen the administrative burden (and cost) of maintaining their 401(k) plans. We anticipate that, over time, the IRS and the DOL will issue guidance clarifying the scope of many of these SECURE 2.0 changes. Employers eager to implement the time- and money-saving SECURE 2.0 changes described herein for the 2023 plan year should take a good faith approach to doing so.
1 For convenience, in this article, we’ll refer to all such plans, collectively, as “401(k) plans.”
2 According to a 2022 survey, 55% of Americans say their retirement savings are not where they need them to be. Around 35% said they were “significantly behind” in saving for retirement.
3 This is the approach taken by the IRS in connection with respect to other de minimis fringe benefits.
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]]>The post Biden Administration Sets New Course on ESG Investing in Retirement Plans appeared first on The National Law Forum.
]]>In late 2022, the Department of Labor finalized a new rule titled “Prudence in Selecting Plan Investments and Exercising Shareholder Rights,” largely reversing Trump-era guidance that had strictly limited the ability of plan fiduciaries to consider “environmental, social, and governance” (ESG) factors in selecting retirement plan investments and generally discouraged the exercise of proxy voting. In short, the new rule allows a fiduciary to consider ESG factors in selecting investment options, provided that the selection serves the financial interests of the plan and its participants over an appropriate time horizon, and encourages fiduciaries to engage in proxy voting.
The final rule moves away from 2020 Trump-era rulemaking by allowing more leeway for fiduciaries to consider ESG factors in selecting investment options. Specifically, the rule states that a “fiduciary’s duty of prudence must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis and that such factors may include the economic effects of climate change and other ESG considerations on the particular investment or investment course of action.” The rule makes clear, however, that there is no requirement to affirmatively consider ESG factors, effectively limiting its scope and effect and putting the onus on fiduciaries to determine whether they want to incorporate ESG factors into their assessments of competing investments.
The new rule became effective in January 2023, except for delayed applicability of proxy voting provisions. However, twenty five state attorneys general have joined a lawsuit in federal court in Texas that seeks to overturn the regulation. The court is in the Fifth Circuit, which historically has been hostile to past Department of Labor regulations (including Obama-era fiduciary rules overturned in 2018, though the ESG rule is less far-reaching than the fiduciary rule and may survive a challenge even in the Fifth Circuit). Congressional Republicans have also introduced a Congressional Review Act (CRA) review proposal to repeal the regulation that has gained the support of Joe Manchin (D-WV). Although CRA actions are not subject to Senate filibuster rules, they are subject to presidential veto, which President Biden is sure to do if the repeal reaches his desk.
Employers should assume that the ESG rules will remain in effect and engage with plan fiduciaries, advisors, and employees and determine the extent to which ESG considerations should (or should not) enter into fiduciary deliberations when considering plan investment alternatives. Some investment advisors have already begun to include separate ESG scorecards for mutual funds and other investments in their regular plan investment reviews. Fiduciaries should also consider whether and how the approach that is ultimately taken should be reflected in the plan’s investment policy statement. Plans that delegate full control over investments to an independent fiduciary (an ERISA 3(38) advisor) should engage with their advisor to determine whether and the extent to which ESG considerations will be part of that fiduciary’s process, and whether that is consistent with the desires of the plan fiduciaries and participants.
Article By Alex H. Glaser and Timothy Brechtel of Jones Walker LLP
For more labor and employment legal news, click here to visit the National Law Review.
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]]>The post SECURE 2.0 Act Brings Slate of Changes to Employer-Sponsored Retirement Plans appeared first on The National Law Forum.
]]>In December, the SECURE 2.0 Act of 2022 (“SECURE 2.0”) was passed, a package of retirement provisions providing comprehensive updates and changes to the SECURE Act of 2019. The legislation includes some key changes that affect employer-sponsored defined contribution plans, such as profit-sharing plans, 401(k) plans, 403(b) plans and stock bonus plans. While some of the changes are effective immediately upon the law’s enactment, most required changes are not effective before the plan year beginning on or after January 1, 2024, so employer sponsors have time to prepare for compliance.
Plan sponsors are currently allowed to provide for automatic enrollment and automatic escalation in 401(k) and 403(b) plans. SECURE 2.0 requires new 401(k) and 403(b) plans to automatically enroll participants at a new default rate, and to escalate participants’ deferral rate each year, up to a maximum of 15%, with some exceptions for new and small businesses. This provision applies to new plans with initial plan years beginning after December 31, 2024.
The Act currently requires 401(k) plans to permit participation in the deferral part of the plan only by an employee who worked at least 500 hours (but less than 1000 hours) per year for three consecutive years. SECURE 2.0 changes this participation requirement by long-term part-time employees working more than 500, but less than 1000, hours per year to two consecutive years instead of three. However, this two-year provision does not take effect until January 1, 2025, which means the original SECURE Act three-year provision still applies for 2024. Employers should start tracking hours for part-time employees to determine whether they will be eligible in 2024 or 2025 under this provision. For vesting purposes, pre-2021 service is disregarded, just as service is disregarded for eligibility purposes. This provision is applicable to 401(k) plans and 403(b) plans that are subject to ERISA and does not apply to collectively bargained plans. This provision applies to plan years beginning after December 31, 2024.
If a defined contribution plan permits participants who have attained age 50 to make catch-up contributions, the catch-up contributions are now required to be made on a Roth basis for participants who earn at least $145,000 (indexed after 2024) or more in the prior year. This provision is effective for taxable years beginning after December 31, 2023.
Currently, required minimum distributions must begin at age 72 for participants who have terminated employment. SECURE 2.0 increases the age to age 73 starting on January 1, 2023, and to age 75 starting on January 1, 2033. This means that participants who turn 72 in 2023 are not required to take an RMD for 2023; instead, they will be required to start taking RMDs for calendar year 2024, the year in which they turn 73. This provision is effective for distributions made after December 31, 2022, for individuals who turn 72 after that date.
SECURE 2.0 provides for an exception from the 10% early withdrawal tax on emergency expenses, defined as certain unforeseeable or immediate financial needs, on a limited basis (once per year, up to $1000). Plans may allow an optional three-year payback period, and participants are restricted from taking another emergency withdrawal within three years of any unpaid amount on a previous withdrawal. This provision is effective for plan years beginning on or after January 1, 2024.
Almost all new defined contribution plans will be required to auto-enroll employees upon hire (existing plans are exempt from this provision). This provision is applicable for plan years beginning on or after January 1, 2025.
Currently, the catch-up contribution limits for certain plans are indexed for inflation and apply to employees who have reached the age of 50. SECURE 2.0 increases catch-up contribution limits for individuals aged 60-63 to the greater of: (1) $10,000 (indexed for inflation), or (2) 50% more than the regular catch-up amount in effect for 2024. This provision is effective for plan years beginning on or after January 1, 2025.
Current law requires employers with SIMPLE IRA plans to make employer contributions to employees of either 2% of compensation or 3% of employee elective deferral contributions. SECURE 2.0 allows employers to make additional contributions to each employee of a SIMPLE plan in a uniform manner, provided the contribution does not exceed the lesser of up to 10 percent of compensation or $5,000 (indexed). This provision is effective for taxable years beginning after December 31, 2023.
The new law also permits an employer to elect to replace a SIMPLE IRA plan with a safe harbor 401(k) plan at any time during the year, provided certain criteria are met. The current law prohibits the replacement of a SIMPLE IRA plan with a 401(k) plan mid-year. This provision also includes a waiver of the two-year rollover limitation in SIMPLE IRAs converting to a 401(k) or 403(b) plan. This change is effective for plan years beginning after December 31, 2023.
Currently plans may automatically cash-out a vested participant’s benefit that is between $1,000 and $5,000 and roll this amount over to an IRA. SECURE 2.0 allows plans to increase the $5,000 involuntary cash-out limit amount to $7,000. This provision of the law is effective for distributions made after December 31, 2023.
Under current law, a discretionary plan amendment must be adopted by the end of the plan year in which it is effective. SECURE 2.0 allows plans to make discretionary plan amendments to increase benefits until the employer’s tax filing deadline for the immediately preceding taxable year in which the amendment is effective. This applies to stock bonus, pension, profit-sharing or annuity plans to increase benefits for the preceding plan year. This provision is effective for plan years beginning after December 31, 2023.
SECURE 2.0 eases the administrative burden on plan sponsors by eliminating unnecessary plan notices to unenrolled participants. Under the amended law, plan sponsor notices to unenrolled participants may consist solely of an annual notice of eligibility to participate during the annual enrollment period, as opposed to numerous notices from the plan sponsor. This provision is effective for plan years beginning after December 31, 2022.
Under SECURE 2.0, student loan payments may be treated as elective deferrals for the purposes of matching contributions to a retirement plan. This provision is available for plan years beginning on or after January 1, 2024.
Previously, employer matching contributions could not be made as Roth contributions. Effective on the date of the enactment of SECURE 2.0, 401(a), 403(b), or governmental 457(b) plans may allow employees the option to designate matching contributions as Roth contributions.
Currently, EPCRS contains procedures to self-correct certain limited, operational failures that are insignificant and corrected within a three-year period. SECURE 2.0 expands this, generally permitting any inadvertent failure to be self-corrected under EPCRS within a reasonable period after the failure is identified, without a submission to the IRS, subject to some exceptions. This provision went into effect on the date of enactment.
Currently, fiduciaries for plans that have mistakenly overpaid a participant must take reasonable steps to recoup the overpayment (for example, by collecting it from the participant or employer) to maintain the tax-qualified status of the plan and comply with ERISA. Under SECURE 2.0, 401(a), 403(a), 403(b), and governmental plans (not including 457(b) plans) will not lose tax qualification merely because the plan fails to recover an “inadvertent benefit overpayment” or otherwise amends the plan to permit this increased benefit. In certain cases, the overpayment is also treated as an eligible rollover distribution. This provision became effective upon enactment with certain retroactive relief for prior good faith interpretations of existing guidance.
Effective for plan years beginning after December 31, 2023, SECURE 2.0 creates two new plan designs for employers who do not sponsor a retirement plan: a “starter 401(k) deferral-only arrangement” and a “safe harbor 403(b) plan.” These plans would generally require that all employees be enrolled in the plan with a deferral rate of three percent to 15 percent of compensation.
SECURE 2.0 allows participants to receive de minimis financial incentives (not paid for with plan assets) for contributing to a 401(k) or 403(b) plan. Previously, plans were prohibited from offering financial incentives (other than matching contributions) to employees for contributing to a plan. This provision became effective for plan years starting after the date of enactment.
If a retirement plan operates in accordance with the Acts, plan amendments must be made by the end of the 2025 plan year (or 2027 for governmental and collectively bargained plans). (The amendment deadlines for SECURE and CARES were extended late last year.)
Article By John D. Arendshorst, Andrea M. Gumushian, and Kristy L. De Vos of Varnum LLP
For more labor and employment legal news, click here to visit the National Law Review.
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