IRS delivers SECURE 2.0 Act 'grab bag' guidance
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
Correction of deferral failures
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