Congress passed the SECURE 2.0 Act of 2022 to encourage workers to save for retirement. The Internal Revenue Service (IRS) recently issued additional guidance on various provisions of the SECURE 2.0 Act in the form of IRS Notice 2024-2. Much of this guidance focuses on optional features that employers have been reluctant to utilize without further guidance from the IRS.
De Minimis Financial Incentive Benefits
Section 113 of the SECURE 2.0 Act, a notable provision in the legislation, refers to the "de minimis financial incentive benefit." Under Section 113, employers may offer small financial incentives to increase employee participation in retirement plans. Although Section 113 does not define specifically what a de minimis financial incentive benefit may include, the legislative history does include gift cards as an example.
A de minimis financial incentive benefit is exempt from the tax on prohibited transactions, as Section 113 amended ERISA to exempt this benefit from the ERISA prohibited transaction rules. Section 113 applies to plan years beginning after December 29, 2022.
This guidance provides the following as to the "de minimis financial incentive benefit":
- The maximum de minimis financial incentive benefit is $250.00;
- An employer may only offer the de minimis financial incentive benefit to employees who have elected not to defer retirement contributions from their paychecks if they choose to start deferred contributions within a certain timeframe;
- The employer can offer the de minimis financial incentive benefit in a lump sum or installments;
- A matching contribution by an employer to an employee's deferred contribution cannot constitute a de minimis financial incentive benefit;
- The employer may not pay the de minimis financial incentive benefit from plan assets;
- Any de minimis financial incentive benefit that employees receive is included in their gross income and wages and subject to income tax withholding and reporting; and
- The de minimis financial incentive benefit applies to 401(k) and 403(b) plans.
Plan Amendment Deadlines Extended
IRS Notice 2024-2 extends the plan amendment deadlines for any changes plans choose to make because of the SECURE Act, the SECURE 2.0 Act, and the CARES Act until December 31, 2026. The Notice extends the amendment deadline to December 31, 2028, for collectively bargained plans and until December 31, 2029, for governmental plans.
Roth Matching and Non-Elective Contribution Options
The SECURE 2.0 Act allows employers to offer participants in 401(k), 403(b), and governmental 457(b) plans the option of employer matching or non-elective contributions to be made on a Roth (after-tax) basis. The Notice clarifies several details about this option, which few employers have implemented. For instance, the Notice explains that an employee must be fully vested to make this election. Furthermore, the same rules that apply to Roth elective deferral elections apply to matching / non-elective contribution elections. Plans are not required to offer this feature and need not offer Roth elective deferrals or in-plan Roth conversions to add this feature to their plans. The guidance also addresses various other outstanding questions for plans interested in offering it as an option for their plan participants.
Terminal Illness Distributions
SECURE 2.0 created an exception to the 10% tax under the Internal Revenue Code for early withdrawals from retirement plans for terminally ill individuals. The Notice clarifies this exception, including describing the process by which the individual must certify their terminal illness. Additionally, plans are not required to permit terminal illness distributions.
Self-Correction for Automatic Enrollment
SECURE 2.0 made certain forms of relief for plan sponsors permanent, including those related to automatic enrollment correction and escalation errors. The Employee Plans Compliance Resolution Systems (EPCRS) previously had granted plans this temporary relief. As a result, the plan does not have to make a corrective contribution to missed deferrals so long as it makes the correction no later than 9 ½ months after the end of the plan year in which the error first occurred or the first payment of compensation made to the employee on or after the last day of the end of the month after the month in which the participant notifies the plan of the error, whichever is later. However, the plan does have to make up any missed matching contributions resulting from the error within a reasonable period.
New Plan Auto-Enrollment
401(k) and 403(b) plans established on or after December 29, 2022, beginning in plan years beginning after December 31, 2024, must include an automated enrollment feature. However, there are exceptions to this requirement, including any plans established before December 29, 2022. The Notice also discusses how plan mergers will work with this new requirement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.