An Employee Benefit Plan Sponsor’s 2023 End-of-the-Year “To Do List”
As we enter Q4, we present our annual end-of-the-year “to do list” for plan sponsors to consider as they reflect on the various laws and legal updates enacted over (or effective beginning) the past year.
Consider SECURE 2.0 Amendments. On December 29, 2022, President Biden signed into law the “SECURE 2.0 Act of 2022,” which is the most significant piece of retirement-related legislation since ERISA in 1974, with nearly 100 sections expanding retirement laws.
While plan amendments under SECURE 2.0 are not required until 2025 (or 2027, for governmental plans), plans must nonetheless operate in accordance with SECURE 2.0’s requirements as they become effective. We’ve outlined the SECURE 2.0 provisions that become effective on January 1, 2024. For a comprehensive list of the SECURE 2.0 provisions, please review our article here.
- Increased RMD Age (Again): The SECURE Act of 2019 increased the required minimum distribution age from 70½ to 72. SECURE 2.0 further increases the RMD age to 73 for individuals who attain age 72 after December 31, 2022 (and again increases the age to 75 for individuals who attain age 74 after December 31, 2032).
- TO DO: Operate your plan using the new RMD age and clean up any RMD issues caused by the recent cluster of RMD-related law changes (including the 10-year rule, outlined below).
- Optional Roth Treatment for Employer Contributions: SECURE 2.0 allows a defined contribution plan to grant participants the option to treat employer matching contributions as Roth. While on paper, this option sounds simple, it has been met with several hurdles in implementation. (For example, what is the tax treatment of these Roth contributions for participants who are not vested and then terminate employment?).
- TO DO: Plan sponsors should carefully consider how this option would be administered before amending their defined contribution plan to implement it.
- Student Loan Repayments as Elective Deferrals: Employers may now make matching contributions under 401(k), 403(b), or governmental 457(b) plans for employees who make student loan repayments. Specifically, an employer’s matching contribution may be based on an employee’s student loan repayment instead of the employee’s elective deferral contribution to the plan. This option could be key for employee recruiting and retention in light of the recent expiration of the COVID-19 relief suspending student loan repayments.
- TO DO: Amend your 401(k), 403(b), or governmental 457(b) plan to implement this option, if desired, and communicate the change to participants.
- Long-Term, Part-Time Employees: The SECURE Act required “long-term, part-time” employees to be eligible to make elective deferral contributions to a 401(k) plan. Beginning January 1, 2025, SECURE 2.0 expands the definition of “long-term, part-time” employees to include employees who have provided at least 500 hours of service in a plan year for two consecutive years (instead of three) to be eligible to make elective deferral contributions. It also requires elective deferral eligibility for long-term, part-time employees in 403(b) plans beginning January 1, 2025.
- TO DO: Track the hours of part-time employees to determine whether any are considered “long-term” under both the SECURE Act’s definition and SECURE 2.0’s definition. Any long-term, part-time employees under the SECURE Act’s definition must be eligible to participate in the plan’s elective deferral feature effective January 1, 2024.
- Increased Limit for Mandatory Distributions: Currently, employers may automatically rollover a former employee’s account into an IRA if the account balance is between $1,000 and $5,000. SECURE 2.0 increases the limit to $7,000.
- TO DO: Consider amending your plan to implement this change, if desired.
- Emergency Withdrawals: Except in limited circumstances, employees are subject to a 10% early withdrawal penalty tax for withdrawing amounts from their retirement accounts before retiring. SECURE 2.0 now allows an employee to take up to $1,000 of “emergency withdrawals” in a calendar year without incurring such early withdrawal penalty.
- TO DO: Amend your plan to implement this change if desired, and implement a procedure for participants to request an emergency withdrawal from the plan.
- Withdrawals for Domestic Abuse Survivors: Domestic abuse survivors may withdraw up to the lesser of $10,000 (indexed annually for inflation) or 50% of their account balance without incurring the 10% early withdrawal penalty tax. The participant may repay the withdrawn money over three years and will be refunded for any income taxes on the amount repaid.
- TO DO: Amend your plan to implement this change if desired, and implement a procedure for participants to request an emergency domestic abuse survivor withdrawal.
- De Minimis Incentives to Boost Participation: 401(k) and 403(b) plans can now offer de minimis financial incentives to employees to encourage plan participation. Pre-SECURE 2.0, incentives were prohibited under ERISA and raised concerns under the prohibited transaction rules of both ERISA and the Internal Revenue Code. Now, SECURE 2.0 has carved out an exception to help boost participation, but the incentives may not be funded with plan assets. Examples of de minimis incentives likely include gift cards, water bottles, t-shirts, etc. Note that cash or gift cards (or anything else with a “readily determinable value”) would be taxable income to the employee.
- TO DO: Consider offering incentives to help boost participation, but consider the possible tax implications, and make sure the incentive is not more than “de minimis.”
Prepare for Required Minimum Distributions Under the 10-Year Rule. A quick refresher: the SECURE Act of 2019 eliminated the ability for certain beneficiaries to “stretch” an inherited participant’s account balance over the beneficiary’s life or life expectancy. Instead, a beneficiary who is not an “eligible designated beneficiary” must cash out the entire balance of the participant’s account within 10 years of the participant’s death (dubbed the “10-year rule”).
The SECURE Act did not specify how often the distributions must be made to comply with the 10-year rule, so most experts assumed a beneficiary could wait until the 10th year to cash out the entire account balance. However, the IRS issued a proposed rule in February 2022, interpreting the SECURE Act as requiring beneficiaries to take annual distributions for each of the 10 years after the participant’s death.
This came as a surprise to most plans, and most had not complied with the annual distribution requirement. With this in mind, the IRS provided relief from RMD compliance for post-death distributions under the 10-year rule for 2021 and 2022. The IRS recently extended that relief for RMDs in 2023, too, but we expect compliance will be required for the 2024 distribution year.
- TO DO: Be prepared to make required annual distributions pursuant to the proposed regulations under the 10-year rule, starting in 2024.
Implement Pre-Pandemic Deadlines. President Biden announced the end of the public health emergency related to COVID-19 in May. In response, plan sponsors should implement pre-pandemic deadlines for their employee benefits-related matters. Specifically, plan sponsors should have updated all deadlines under COBRA, HIPAA special enrollment, and ERISA claims and appeals earlier this summer.
- TO DO: Update your internal processes to implement pre-pandemic deadlines, and confirm all participant communications regarding such deadlines are accurate.