Notice 2023-80: SECURE 2.0 Guidance for Retirement Plans

The Internal Revenue Service (IRS) has released initial guidance on the SECURE 2.0 Act of 2022 in Notice 2024-02. This notice provides the first official instructions for employers and plan administrators regarding significant changes to retirement plan operations. The guidance addresses mandatory plan features, optional provisions for participants, and methods for correcting common administrative errors.

For plan sponsors, the notice offers a framework for making decisions about plan design and administration ahead of formal regulations. It allows for the implementation of new features while ensuring that plans can maintain their qualified status by adapting to the updated legal landscape.

Mandatory Automatic Enrollment Guidance

A component of the SECURE 2.0 Act is a mandate for certain new retirement plans to automatically enroll employees. This requirement targets 401(k) and 403(b) plans established on or after December 29, 2022. A plan is considered “established” on the date its governing documents are formally adopted, not its effective date. This rule will first apply for plan years beginning after December 31, 2024.

The legislation includes several exceptions to this automatic enrollment mandate. The rules do not apply to:

• Small businesses with 10 or fewer employees.
• New businesses that have been in existence for less than three years.
• Governmental plans.
• Church plans.

For plans subject to the mandate, the default contribution rate for newly enrolled employees must be at least 3% of their compensation but no more than 10%. The plan must also include an automatic escalation feature, which requires the employee’s contribution rate to increase by one percentage point each year until it reaches at least 10%, with a maximum of 15%.

The notice clarifies how these rules apply to corporate mergers. If two or more plans established before the cutoff date merge, the ongoing plan retains its grandfathered status. However, if a grandfathered plan merges with a newer plan subject to the rules, the resulting plan will generally lose its exemption and must comply with the automatic enrollment requirements.

New Distribution and Contribution Rules

Notice 2024-02 clarifies several optional provisions that plan sponsors can add to their retirement plans. One addition is a penalty-free distribution option for individuals with a terminal illness, which allows an employee to take a distribution without the standard 10% early withdrawal tax. A terminally ill individual is defined as someone certified by a physician as having an illness expected to result in death within 84 months.

To access these funds, the employee must furnish sufficient evidence of their condition to the plan administrator and can then claim the tax exception on their personal income tax return. The individual can recontribute the distributed amount back into a retirement plan within a three-year period. This option is available for distributions from 401(k), 403(b), and IRA accounts.

Another change allows employers to offer employees the option to designate employer contributions as Roth contributions. This applies to both matching and nonelective contributions. For this to be permissible, the employee must be fully vested in the contribution and make an irrevocable election to designate it as Roth no later than when it is allocated to their account.

When an employer contribution is designated as Roth, its value is included in the employee’s gross income for that tax year and is reported on Form 1099-R. The employee pays income tax on the contribution amount upfront, but the contributions and any earnings can be withdrawn tax-free in retirement if qualified distribution rules are met.

The guidance also allows employers to offer small, immediate financial incentives, valued up to $250, to encourage employees to enroll in the company retirement plan. These incentives cannot be paid for using plan assets and must be funded from the employer’s general assets.

Correcting Automatic Contribution Errors

The SECURE 2.0 Act introduced a permanent safe harbor to help employers correct administrative errors related to automatic contribution features. This safe harbor makes it less burdensome for plan sponsors to fix mistakes when they fail to implement an employee’s election for an automatic enrollment or escalation feature.

To qualify for this correction method, the employer must begin implementing correct deferrals by the earlier of 9 ½ months after the end of the plan year in which the error occurred or the month after the employee notifies the employer of the error. This timeline encourages prompt resolution of these administrative failures.

This safe harbor relieves the employer of the requirement to make a Qualified Nonelective Contribution (QNEC) to compensate for missed elective deferrals. As long as the correction is made within the specified timeframe, the employer is only responsible for contributing any matching contributions that would have been made on the missed deferrals, plus earnings.

To complete the correction, the employer must provide a notice to the affected employees. This communication must inform them of the error, explain the correction being made, and clarify that the company will provide the appropriate matching contributions.

Plan Amendment Deadlines and Reliance

The SECURE 2.0 Act provides an extended period for plan sponsors to formally amend their plan documents to reflect these changes. For most private-sector retirement plans, the deadline to adopt amendments is December 31, 2026. The deadline for collectively bargained plans is December 31, 2028, and for governmental plans, it is December 31, 2029.

The guidance allows plan sponsors to begin operating their plans in accordance with the new provisions immediately, even before formal amendments are adopted. This is known as operating in “good-faith reliance.” An employer can implement new features as long as they follow the requirements of the law and associated IRS guidance.

This ability to rely on the guidance is contingent upon the eventual adoption of the formal plan amendment. A plan sponsor must adopt the required amendments by the specified deadline to retroactively validate the plan’s operations and maintain its qualified status.