On December 29th, President Biden signed the Consolidated Appropriations Act of 2023. Although primarily a spending bill that funds the federal government for the year, it did include important retirement plan reforms. The Securing a Strong Retirement Act of 2021, commonly referred to as the SECURE Act 2.0, implements important plan reforms designed to encourage broader workplace retirement plan access and participation. This legislation builds on the reforms made in the original SECURE Act of 2019. While many of the changes affect individuals, there are several important updates impacting plan sponsors. This includes changes to correction rules, streamlined participant notifications, and updated top-heavy testing. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.
- Participation Incentives – There is a provision in the Act that now allows employers to offer small financial incentives to non-participating employees to encourage participation. An example of such an incentive would include a low-dollar gift card. While this change is effective immediately, it is important to note that plan assets may not be used to acquire incentives.
- Multiple Employer 403(b) Plans – The Act allowed 403(b) plans to participate in Multiple Employer Plans (MEP) and Pooled Employer Plans. There are also changes to the “One Bad Apple” Rule, which allow compliant employers to remain in the MEP even when one employer fails to meet compliance requirements. This change is effective for plan years starting January 1, 2023.
- New Starter 401(k) Plan Types – There are many reasons why an employer may elect not to provide workers with a retirement savings plan. To incentivize action, the Act now permits companies to offer a Starter 401(k) or Safe Harbor 403(b) plan. These plans generally require default enrollment with a 3% to 15% compensation deferral rate. It is important to note that annual deferral limits should match those used by IRAs. This change is effective January 1, 2024.
- EPCRS: Eligible Inadvertent Failures – The Employee Plan Compliance Resolution System (EPCRS) allows employers to correct plan errors using the Self Correction Program (SCP) without disclosing the details to the IRS. The Act expands the errors which can be corrected under SCP to include eligible inadvertent failures. These are errors that occur despite the existence of practices and procedures designed to ensure compliance. Eligibility requires that the error must be corrected within a reasonable period after discovery and must not have been identified by the IRS first. This change is effective as of the date of legislation enactment.
- EPCRS: Inadvertent Plan Loan Failures – The Act also permits employers to self-correct inadvertent plan loan failures. Under prior regulations, plans had to resolve certain loan issues through the more complicated Voluntary Correction Program (VCP). Now the rules have been changed to allow inadvertent plan loan failures to be corrected using the SCP. This change is effective as of the date of legislation enactment.
- Separate Top-Heavy Tests – Most defined contribution plans are required to conduct a top-heavy test to ensure the plan does not favor key employees. When a plan fails this test, it can lead to costly corrections, especially for the affected employees. The Act will allow a plan to conduct top-heavy testing for excludable (workers under age 21 or with less than one year of service) and non-excludable employees to be shown separately. The modification removes the incentive to limit plan access to employees that would otherwise participate. This change is effective January 1, 2024.
- Streamlined Unenrolled Participant Notifications – Currently, employees that elect not to participate in a workplace retirement plan are required to receive various notifications and updates. The Act changes these rules to only include an annual notice of eligibility to participate during the enrollment period. This change is effective starting January 1, 2023.
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