Vanguard news : Fiduciary Regulatory | January 08, 2024

IRS delivers SECURE 2.0 Act 'grab bag' guidance

Originally published December 21, 2023
On December 20, 2023, the IRS issued Notice 2024-2 (informally referred to as a "grab bag"), which provides clarification on a number of SECURE 2.0 Act provisions in a question-and-answer format. Among the several items addressed in the guidance, the summaries below highlight key takeaways for defined contribution plans. 

Mandatory automatic enrollment 

SECURE 2.0 requires 401(k) plans established after December 29, 2022, to automatically enroll employees no later than 2025 (plan years beginning after December 31, 2024). The Notice provides clarification on how to treat plan mergers and spin-offs, specifically if a plan established after December 29, 2022, is merged with a plan established before that date (known as a preenactment 401(k)). It clarifies that the merged plan will generally be required to automatically enroll participants unless the merger takes place by the end of the year following the year of the merger/acquisition (that is, the section 410(b)(6)(C) transition period). Additionally, a spin-off of a plan will not change whether the plan is required to automatically enroll participants. So, if a preenactment 401(k) plan spins off another plan, the spun-off plan will continue to be treated as a preenactment 401(k) plan.

The Notice also clarifies that 403(b) plans are not required to automatically enroll participants if the plan was established before December 29, 2022.

Terminal illness distributions

SECURE 2.0 provides an exception to the 10% additional tax on early distributions for terminally ill individuals. The Notice provides additional information about the following components of the provision:

  • Participant must have a distributable event: The Notice confirms that the terminally ill employee must be eligible for a distribution from the plan (for example, in-service or termination distributions). The terminal illness itself does not entitle a participant to a distribution.

  • The provision is optional: Plans are not required to recognize terminally ill individual distributions when reporting the distribution (that is, no special tax reporting or withholding is required). If a plan does not recognize terminally ill individual distributions, employees may treat an otherwise permissible distribution as a terminal illness distribution on their tax return.

  • Certification requirements: The Notice provides additional details about the content and manner of the terminal illness certification.

  • Distribution timing: To qualify as a terminal illness distribution, the distribution must be made on or after the date a physician certifies the terminal illness.

  • Distribution limits: The Notice confirms that there is no limit on the amount of a terminal illness distribution.

  • Repayment: A participant who was certified as terminally ill and took a distribution may repay that distribution to any qualified retirement plan or IRA within three years of the original distribution. The repayment will be treated as a rollover.

Financial incentives for participation 

SECURE 2.0 permits plan sponsors to provide de minimis financial incentives to employees who elect to participate in the plan. A financial incentive is considered de minimis only if its value does not exceed $250 and may be provided only to employees who are not already making deferrals in the plan.

A de minimis financial incentive may be provided in installments where a participant is required to continue participating to receive future installments. Additionally, de minimis financial incentives are not treated as contributions to the plan. The Notice also clarifies that employees who receive de minimis financial incentives are subject to the same tax, withholding, and reporting requirements that apply to other employer-provided fringe benefits. 

Roth employer contributions

SECURE 2.0 adds an optional provision to permit employer contributions (that is, matching and/or nonelective contributions) to be made on a Roth basis. The Notice defines these contributions as “designated Roth matching contributions or designated Roth nonelective contributions.” This feature is optional and plans that permit employees to make Roth contributions are not required to offer designated Roth matching contributions or designated Roth nonelective contributions. For plans that allow this feature, employees may only designate an employer contribution as Roth if that contribution is fully vested at the time it is received. Designated Roth matching contributions or designated Roth nonelective contributions are included in a participant's income in the year in which they are allocated, even if the contribution is attributable to the prior year. From a taxation perspective, designated Roth matching contributions and designated Roth nonelective contributions are excluded from wages for federal tax withholding, FICA, and FUTA purposes and are reported using IRS Form 1099-R (not IRS Form W-2). 

Correction of deferral failures

The Notice provides clarifying guidance regarding the timing of the correction of deferral failures under the Employee Plans Compliance Resolution System and confirms that these correction methods are available for both active and terminated employees. 

Amendment deadline

The Notice extends the deadline to adopt amendments that relate to the CARES Act, the SECURE Act, and SECURE 2.0 to December 31, 2026 (regardless of plan year). Later deadlines apply to governmental plans and certain collectively bargained plans.

Miscellaneous provisions

The Notice also contains guidance on several SECURE 2.0 provisions not addressed in this article, including SIMPLE contribution limits, SIMPLE IRAs, SEP/SIMPLE Roth IRAs, start-up credit for new plans, and cash balance plan projections.


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