In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act increased the Required Minimum Distribution (RMD) age for retirement plan participants from age 70 1/2 to 72. Additionally, it introduced opportunities for Long Term Part Time (LTPT) employees to make deferral contributions to retirement plans in situations where they have not yet met the plan’s eligibility requirements. An updated version of the SECURE Act—the SECURE 2.0 Act of 2022—was signed by President Biden on December 29, 2022, as part of the Consolidated Appropriations Act of 2023. While this omnibus spending bill covers a variety of topics, changes to qualified retirement plans were included to encourage earlier plan participation and a better retirement outcome. SECURE 2.0 modifies the original RMD and LTPT provisions while introducing new rules. Here is what lies ahead:
Effective as of the date of enactment:
- Distributions to terminally ill participants will be exempt from the 10% early withdrawal penalty tax.
- Plan sponsors of a 401(k), 403(b) or 457(b) plan may permit participants to elect their company matching and non-elective contributions be treated as Roth contributions.
Effective for Plan years beginning on or after 1/1/23:
- Required Minimum Distribution (RMD) age increases from 72 to 73.
- If a participant turned 72 prior to 1/1/23 and they have begun receiving their RMD, they will continue to receive their RMD in 2023.
- For participants who turn 73 in 2023, their 1st RMD is due by 12/31/23 or they may opt to delay it until 4/1/24. If they choose the latter, they will take both their 1st and 2nd payment in 2024.
- The penalty assessed to the participant for not taking an RMD timely is reduced from 50% of the amount not distributed to 25%.
- The age increases further to 75 in 2033.
Effective for Plan years beginning on or after 1/1/24:
- RMDs will not be required from Roth 401k or Roth 403(b) balances.
- Currently Roth IRAs are exempt from RMDs but Roth balances in qualified plans are included in the calculation of the required amount to be distributed. Calculations for 2023 RMDs will include Roth 401(k) balances but they will be excluded from future calculations.
- Catch-up contributions to qualified retirement plans must be Roth deferrals.
- This does not apply to participants with compensation under $145,000 in the prior year.
- Matching contributions on student loan repayments.
- Sponsors of a 401(k) Plan, 403(b) Plan or SIMPLE IRA will be able to match student loan repayments made by employees. This also applies to governmental employers who sponsor a 457(b) Plan.
- The employee will make student loan payments on the loan that was taken to pay for qualified higher education expenses and the employer will be permitted to deposit a matching contribution into the qualified plan on their behalf.
- Hardship rules for 403(b) plans will conform to the rules that apply to 401(k) Plans.
- In addition to employee contributions being available as a hardship distribution, earnings on those contributions will be available as well.
- Distributions will be available for domestic abuse survivors.
- The available amount will be the lesser of $10,000 or 50% of the participant’s account and will be exempt from the 10% early withdrawal penalty tax.
- The amount will be eligible to be repaid to the plan over 3 years.
- Emergency distributions up to $1,000 will be available.
- One distribution per year for unforeseeable or immediate financial needs relating to personal or family emergency expenses.
- The distribution will be exempt from the 10% early withdrawal penalty tax.
- The amount will be eligible to be repaid within 3 years.
- No additional emergency distribution during the 3-year period will be available unless repayment has occurred.
- Long Term Part Time (LTPT) Employees will be eligible to contribute elective deferrals to their employers’ 401(k) Plans.
- LTPT Employees are those who have worked at least 500 hours a year for three consecutive years.
- Plan Sponsors may opt to offer matching contributions (subject to vesting schedule).
- Hours of service prior to 2021 are disregarded for both eligibility and vesting.
- This provision does not apply to collectively bargained plans.
Effective for Plan years beginning on or after 1/1/25:
- Long Term Part Time (LTPT) Employees will be eligible to contribute elective deferrals after TWO consecutive years of working 500 hours instead of three years.
- This provision will now apply to both 401(k) Plans and ERISA 403(b) Plans.
- Hours of service prior to 2023 are disregarded for 403(b) Plans.
- Increased Catch-Up Contributions.
- Participants aged 60 to 63 will be eligible to defer larger catch-up contributions.
- Required automatic enrollment provisions.
- New 401(k) and 403(b) plans must include automatic enrollment provisions where the default employee contribution rate is at least 3% but not more than 10%. Each following year, the amount is increased by 1% until it reaches at least 10% but not more than 15%.
- This provision does not apply to businesses with 10 or fewer employees or new companies in business less than 3 years.
- Plans that exist as of December 29, 2022 (date of enactment) are grandfathered and, therefore, are not required to include automatic enrollment provisions.
- Plans that are established in 2023 and 2024 should pay attention to this provision, though, since the provision may apply to them for 2025.
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This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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