Important new year-end changes impacting employers and their employee benefit plans

United States Congress from east side

While many were out last week finishing up their last-minute Christmas shopping, Congress passed the highly anticipated retirement plan legislation known as “SECURE Act 2.0” and the U.S. Departments of Labor, Health and Human Services, and Treasury (the “Departments”) issued good-faith relief from the troublesome prescription drug reporting that is otherwise due December 27, 2022.  There are too many provisions to cover comprehensively (SECURE Act 2.0, by itself, is hundreds of pages long), but the following provides a summary of various highlights.

New retirement plans laws

SECURE Act 2.0 includes a number of new rules and opportunities for employers and their qualified retirement plans, including:

  1. Increased age for required minimum distributions. The current age at which a qualified retirement plan must start forcing distributions for many participants is age 72.  For any individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033, the new applicable age is 73.  For an individual who attains age 74 after December 31, 2032, the applicable age is 75.
  2. Increased catch-up contribution limit for ages 60-63. For 2022, participants who were at least 50 years old were able to save an additional $6,500 (on top of the $20,500 limit that applied to all participants).  This limit increases to $7,500 for 2023.  Starting with the 2025 tax year, SECURE Act 2.0 pushes the limit even further for individuals between the ages of 60-63 to the greater of (a) $10,000, or (b) 150% of the regular catch-up amount for 2024.
  3. Catch-up contributions = Roth. For tax years after December 31, 2023, catch-up contributions (for those ages 50 or older) must be made on a Roth basis, except for an eligible participant whose wages for the preceding calendar year do not exceed $145,000 (indexed for inflation).
  4. Student loan payments outside retirement plan can be matched inside retirement plan. For plan years beginning after December 31, 2023, an employer may “match” a qualified student loan payment made by the employee outside the plan up to a certain limit.  The employee must certify that the payment on the loan was made.  The Secretary of the Treasury must permit employers to establish reasonable procedures for an employee to claim these matching contributions, including an annual deadline for an employee to make a claim.
  5. Employers can give small gift cards to employees to incentivize 401(k) deferrals. Employers can give employees a de minimis financial incentive outside of the retirement plan (such as a gift card) to encourage employees to make 401(k) deferrals within the plan.
  6. New emergency 401(k) distribution feature. For plan years beginning after December 31, 2023, a retirement plan participant can take – generally, once every three years – a penalty-free distribution of up to $1,000 for emergency personal or family expenses.  This new emergency distribution can be repaid to the plan within three years.
  7. Part-time workers eligible earlier. A qualified retirement plan must now generally allow a part-time employee to make 401(k) deferrals if they have completed 500 hours of service in two consecutive 12-month periods.
  8. New emergency savings accounts. A sponsor of a defined contribution retirement plan can include in its plan an emergency savings account for non-highly compensated employees, and can fund such accounts through automatic enrollment.  Contributions to these accounts are capped at $2,500 and must be funded after-tax with Roth contributions.  Participants must be allowed to withdraw funds at least once per calendar month.
  9. New retirement savings lost and found. Within two years, the U.S. Department of Labor must establish an online searchable database to be known as the “Retirement Savings Lost and Found”.  This will allow an individual to search for information and locate the administrator of any plan for which the participant is or was a participant or beneficiary.
  10. Increased mandatory distribution limit. Currently a retirement plan sponsor can distribute a terminated participant’s account, without the participant’s consent, if their balance does not exceed $5,000.  SECURE Act 2.0 pushes this to $7,000.
  11. New distribution available for victims of domestic abuse. On or after January 1, 2024, a domestic abuse victim can take a qualifying distribution of up to the lesser of (a) $10,000; or (b) 50% of their vested plan account balance.  A distribution qualifies if it is made within the one-year period beginning when the individual is a victim of domestic abuse by a spouse or domestic partner.  Any such distributed amount may be repaid to the plan.
  12. Matching & nonelective contributions can be treated as Roth contributions. A qualified retirement plan may allow employees to designate employer matching contributions or nonelective contribution as Roth contributions.
  13. New 401(k) plans must have automatic enrollment. A new retirement plan will not be treated as a qualified 401(k) plan unless the plan contains an “eligible automatic enrollment feature” that automatically enrolls participants at a 3% minimum deferral amount and then increases the automatic deferral percentage by 1% each year thereafter (up to 10% for plan years ending before 2025 and 15% for plan years thereafter).  Existing retirement plans, governmental plans and church plans are exempt from this requirement.
  14. Changes to saver’s match. An eligible individual who makes qualified retirement savings contributions for a tax year will potentially qualify for a matching contribution that will be paid to the retirement plan by the federal government.  The amount of the matching contribution will be as much as 50% of elective deferrals that do not exceed $2,000.  The calculation is tricky and the amount of the potential match phases out based on income.
  15. Indian tribal government domestic relations orders. Under SECURE Act 2.0, a domestic relations order issued by an Indian tribal government may qualify as a “qualified domestic relations order” just like a domestic relations order of a State.

Please note that the applicability of these provisions may vary based on the type of qualified retirement plan, e.g., 401(a) plan, governmental plan, church plan, etc.  Also, please remember this is just a summary.  There are numerous details regarding each of these new rules and opportunities.

Prescription drug reporting: Good-faith relief and extended grace period

The Internal Revenue Code, the Employee Retirement Income Security Act of 1974, and the Public Health Service Act were all previously amended to require group health plans to report certain information related to prescription drugs and other health care expenditures.  This information includes, among other things, general information regarding the plan; the 50 most frequently dispensed brand prescription drugs; the 50 most costly prescription drugs by total annual spending; and the 50 prescription drugs with the greatest increase in plan expenditures over the preceding plan year.

Under prior guidance, the deadline to report this information for the 2020 and 2021 reference years is December 27, 2022.  Last Friday, December 23, 2022, the Departments issued much-needed relief stating they will not take enforcement action with respect to any plan that uses a good faith, reasonable interpretation of the regulations and the Prescription Drug Data Collection (RxDC) Reporting Instructions in making its submission.  The Departments are also providing a submission grace period through January 31, 2023, and will not consider a plan to be out of compliance with these requirements provided that a good faith submission of 2020 and 2021 data is made on or before January 31, 2023.