Benefits Monthly Minute
The January Monthly Minute digs deeper into the IRS’ SECURE 2.0 implementation guidance.
SECURE 2.0 Implementation Guidance Wrap-Up
As promised, in the January Monthly Minute, we are providing additional details of the IRS’ SECURE 2.0 implementation guidance. Noted below are some specifics of Notice 2024-2’s most salient provisions.
- Auto-Enrollment: Section 101 expands automatic enrollment requirements. But which 401(k) plans are covered by the new automatic enrollment mandates?
- A 401(k) plan established before December 29, 2022 is generally exempt (grandfathered) from the automatic enrollment requirement. Notice 2024-2 includes several variations on this rule, particularly in the M&A context. For example, the guidance clarifies that a merger of two grandfathered plans will not result in the loss of grandfathered status, however, merging a non-grandfathered plan into a grandfathered plan will generally result in a non-grandfathered ongoing plan. And, if a plan is spun-off from a single-employer grandfathered plan, the spun-off plan is generally treated as grandfathered as well.
- Early Distribution for Terminal Illness: Section 326 sets forth an exception to the Section 72(t) additional tax on early distributions for individuals with a terminal illness.
- SECURE 2.0 permits 401(k) plans to be amended to provide for in service distributions to terminally ill participants. Notice 2024-2 explains that in order to be considered a terminally ill individual, an employee must furnish a certification, signed by a physician, that satisfies specific content requirements. Further, an employee who is a physician may not self-certify as to his/her own terminal illness, and the distribution must be made on or after the date of the physician certification. Related documentation and timing requirements, as well as recontribution rights, are also explained in the Notice.
- Safe Harbor for Correction of Elective Deferral Failures: Section 350 provides that if certain conditions are satisfied, a plan may correct administrative errors with respect to automatic enrollment (and escalation) failures.
- The Notice clarifies that such failures may be corrected by following the safe harbor correction method set forth EPCRS (Appendix A, section .05(8), for failures related to automatic contribution features in a 401(k) plan) and that errors may be corrected with respect to both active and terminated employees. Further, corrective allocations of matching contributions (adjusted for earnings) must be made within a reasonable period (generally within six months from when corrective deferrals begin, or three years for errors that begin on or before December 31, 2023).
- Optional Roth Treatment of Employer Contributions or Nonelective Contributions: Section 604 of SECURE 2.0 generally permits plans to allow participants to designate matching contributions and nonelective contributions as Roth contributions.
- Rules similar to the rules for designated Roth elective contributions apply to designated Roth matching and nonelective contributions under Section 604. For example: any designation of a matching or nonelective contribution as Roth must be made by the employee no later than the time that the contribution is allocated to the employee’s account, the designation must be irrevocable, and designated Roth matching and nonelective contributions are subject to income inclusion in the year the contribution is allocated to the individual’s account. An employee must have an opportunity to make (or change) the Roth designation at least annually, and vesting requirements and reporting obligations also apply.
- Financial Incentives for Contributing: Section 113 of SECURE 2.0 sets forth rules for providing de minimis financial incentives (not paid with plan assets) to employees who elect to make 401(k) contributions.
- Section 113 did not specify what constitutes a de minimis financial incentive, although legislative history mentions small gift cards as an example. The Notice explains that a financial incentive is a de minimis financial incentive only if it does not exceed $250 in value. Further, financial incentives may be paid in installments that are contingent on the employee continuing to defer. Thus, if the employer provides a $100 gift card with a promise to provide an additional $100 gift card a year later, but only if the employee continues to defer, then the $200 total is still a de minimis financial incentive. Such incentives will generally be included in the employee’s gross income and wages and are subject to applicable withholding and reporting requirements.
KMK Comment: As mentioned in the December Monthly Minute, the Notice generally extends the deadline to amend a qualified plan for SECURE Act, SECURE 2.0, the Miners Act and Sections 2022 or 2023 of the CARES Act to December 31, 2026, however, the extended deadline does not impact the requirement for plan operations to reflect applicable law prior to plan amendment. For this reason, it is critical for plan sponsors to carefully review the additional guidance provided in Notice 2024-2 with legal counsel and administrators to make sure your plan is being operated correctly.
The KMK Law Employee Benefits & Executive Compensation Group is available to assist with these and other issues.
KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.
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