Welcome to the Q4 2023 Fiduciary Hot Topics, where we give you the up-and-coming conversations you might be having with your plan sponsors. This quarter's hot topics cover SECURE 2.0 updates, changes to catch-up contributions, EPCRS, and more. If you would like a PDF version, download here. For our premium marketing members, auto-branding is available in the Resource Center of our portal.

Presenter: John Nelson, Esq.

Summary

The SECURE Act 2.0 is significant due to its numerous changes, with over 90 in total. While it is possible that some changes may be overlooked, it is important to be aware of the highlights. The effective dates of the changes vary, with some immediately effective upon enactment and others taking effect in subsequent years. It is worth noting that all provisions will not be fully effective until 2027. For a detailed description of all the changes, refer to the Hot Topics for the first quarter of 2023. The IRS has delayed the rule requiring employees with annual compensation over $145,000 to make catch-up contributions on a Roth basis. This rule, allowing older employees to exceed the annual limit, was set to take effect next year but has been postponed until 2026 due to concerns about implementation. The SECURE Act 2.0 has made a significant change to the IRS Employee Plans Compliance Resolution System (EPCRS). The requirement to submit a VCP filing for errors has been eliminated, except for the most serious ones. This change, effective immediately, is unusual as resolving errors has typically been left to the discretion of the IRS. Under the SECURE Act, any error can now be self-corrected as long as it is considered an "eligible inadvertent failure." There is no specific time period for self-correction, and even in the event of an audit, self-correction is allowed if the plan sponsor can show effort to correct the error before the IRS discovers it.

Under EPCRS, plan sponsors originally had to contribute 50% of missed deferrals and 100% of missed match, but the IRS reduced this to 25% in some cases and waived it entirely for quick corrections. For plans with auto enrollment, there is a permanent safe harbor that exempts plan sponsors from making up missed deferrals if the error is corrected within 9 ½ months after the end of the plan year or the date the employee notifies the sponsor of the error. As of the date of enactment, plan sponsors are no longer required to collect and retain documentation for hardship distributions. Instead, they can rely on participants' self-certification of the hardship event, amount, and insufficient liquid assets. Employees with small balances may be forced out on termination. This allows plans to avoid the expense of maintaining small accounts, potentially for many years. The cap on accounts that may be forced out increases from $5,000 to $7,000 in 2024. This is a long overdue as this cap has not increased since 1986. Beginning in 2025 an “eligible automatic contribution arrangement” (EACA) will be mandatory for all new plans. Employees must be auto enrolled at between three and 10 percent of compensation, with one percent per year auto escalation up to 10 percent. Although not effective until 2025, keep in mind that this requirement applies retroactively to all plans established after the date of enactment.

Two provisions in the SECURE Act allow participants to access their plan accounts in the event of an emergency. In-service withdrawals are permitted for personal or family emergencies, with a $1,000 annual cap that can be repaid within three years. There is also the option to add "emergency savings accounts" with a cap of $2,500, allowing employees to contribute up to three percent of their compensation on a Roth basis. These contributions count against the annual limit on deferrals/Roth contributions and are eligible for matching contributions. However, some plan sponsors have expressed concerns about the complexity of plan design and administration, as well as communicating these accounts to participants. As is true of 401(k) plans, catch up contributions may be made to IRAs. However, the catch-up limit is much smaller, only $1,000 and is not indexed for inflation. Beginning next year this limit will be indexed.

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