IRS Issues Notice 2024-2 Outlining Guidance on SECURE 2.0 Provisions
The IRS issued Notice 2024-2 (Notice), which provides guidance in a question and answer format concerning certain provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0). The following is a brief overview of key provisions in the Notice, which was issued on Dec. 20, 2023.
Automatic Enrollment/Auto-Escalation Mandates
SECURE 2.0 mandates that for plan years beginning after Dec. 31, 2024, a plan or arrangement with a qualified cash or deferred arrangement (CODA) must include both an automatic enrollment feature and an automatic escalation feature unless it meets an exemption. However, a CODA enacted before Dec. 29, 2022 (the date SECURE 2.0 was adopted), or a CODA in a church plan or governmental plan is generally exempt from the auto-enrollment requirement.
The Notice clarifies that a CODA is established on the date the plan terms providing for the CODA are initially adopted, not the effective date of the CODA. Thus, if an employer adopted a qualified CODA in October 2022 with an effective date of Jan. 1, 2023, the CODA would be exempt from the auto-enrollment and auto-escalation requirements of SECURE 2.0.
The Notice also addresses exemptions from the auto-enrollment and auto-escalation requirements applicable to mergers and spinoffs for both single employer plans and multiple employer plans.
De Minimis Financial Incentives
SECURE 2.0 provides that 401(k) plans and 403(b) plans may offer a de minimis financial incentive (not paid for with plan assets) to employees who elect to have contributions made to the plan pursuant to a CODA or salary reduction agreement. The Notice states that matching contributions do not qualify as a de minimis financial incentive and also specifies that the financial incentive:
- cannot exceed $250 in value
- can be offered only to employees who do not already have an election to defer in effect
- may be made in installments contingent on continuing to defer
Safe Harbor Corrections
In response to safe harbor guidance for correcting elective deferral issues that expired in 2023, SECURE 2.0 implemented a new statutory safe harbor through which employers may correct reasonable administrative errors involving automatic contributions and automatic escalations. Errors must be corrected within 9½ months after the conclusion of the plan year in which the error occurred. The Notice:
- clarifies that this correction method is available for terminated employees as well as active employees
- modifies the notice requirements applicable to an affected terminated employee
Terminal Illness Distributions
SECURE 2.0 creates a new exception to the 10 percent penalty tax on early distributions to terminally ill participants. The Notice clarifies that SECURE 2.0 did not create a new distribution right – a terminally ill participant must otherwise qualify for a distribution from the applicable plan. In addition, a plan is not required to recognize terminally ill distributions. The Notice also provides additional guidance for plans that will recognize terminally ill distributions, including:
- the definition of a terminally ill individual
- the timing and contents of the required physician's certification
- the maximum amount of a terminal illness distribution
- a participant's right to repay a terminal illness distribution
Roth Matching and Nonelective Contributions
The Notice provides guidance on designated Roth matching and nonelective contributions, including:
- the Roth designation must be made no later than the date the contributions are allocated to the participant's account
- the Roth designation is irrevocable
- the participant must have the opportunity to make (or change) the Roth designation at least once during each plan year
- to make a Roth designation, the participant must be fully vested in that type of contribution when the contribution is allocated
The Notice also specifies certain tax withholding, tax reporting, and rollover rules applicable to Roth matching and nonelective contributions.
Updated Plan Amendment Deadlines
Finally, IRS Notice 2024-2 extends the deadlines for mandatory and discretionary amendments implemented by the SECURE Act, SECURE 2.0 Act, COVID-19-related distributions pursuant to the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the repayment of qualified disaster distributions and the reduction in the minimum age for in-service distributions in qualified pension plans and governmental 457(b) plans from age 62 to age 59½ as follows:
- General Amendment Deadline: Dec. 31, 2026
- Amendment Deadline for Collectively Bargained Plans: Dec. 31, 2028
- Amendment Deadline for Governmental Plans: Dec. 31, 2029 (possibly later for 457(b) plans)
If you would like assistance with amending your retirement plan or arrangement with respect to the updated SECURE Act 2.0 provisions, or if you have questions about how SECURE 2.0 and related guidance impacts your plan, contact the authors, another member of Holland & Knight's Executive Compensation and Benefits Team or your primary Holland & Knight attorney.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.