On December 20, 2023, the Internal Revenue Service (IRS) issued Notice 2024-2 providing miscellaneous guidance as to certain changes under the SECURE 2.0 Act of 2022 ("SECURE 2.0"). The Question & Answer format addresses a limited number of provisions under SECURE 2.0, and the IRS noted that the Notice is intended to assist plan sponsors in commencing implementation of these provisions rather than provide comprehensive guidance. We expect that the IRS will issue further guidance, including in the form of proposed regulations, in the upcoming year. Comments for Notice 2024-2 are requested by February 20, 2024, in particular with respect to the de minimis financial incentives described below.

This alert focuses on the provisions that we expect to be of most interest to retirement plan sponsors and does not fully address every aspect of the recent guidance. For example, guidance provided in the Notice as to small plan sponsors with respect to SIMPLE Plans, SIMPLE IRAs, and SEPs is not addressed in this alert.

Automatic Enrollment Expanded

Type of Plan Impacted: 401(k), 403(b)

Section 101 of SECURE 2.0 requires 401(k) and 403(b) plans to include an automatic enrollment feature to enroll participants in the plan upon becoming eligible, unless the employee makes an affirmative election to opt out of coverage or to defer at a different rate. Prior to SECURE 2.0, a plan sponsor could elect to implement an automatic enrollment feature, but it was not required.  This change applies to plans years beginning after December 31, 2024, but importantly does not apply to certain plans established before December 29, 2022 (referred to as a "pre-enactment section 403(b) plan," "pre-enactment qualified CODA," or “pre-enactment plan”).

• Meaning of "established" for purposes of exclusions. 
  • 401(k) Plans. For purposes of determining whether a qualified CODA is a pre-enactment qualified CODA, a qualified CODA is "established" on the date plan terms providing for the CODA are initially adopted, even if the effective date for the CODA is after the adoption date. For example, if a plan that includes a qualified CODA is adopted on October 3, 2022, with an effective date of January 1, 2023, the qualified CODA will be "established" on October 3, 2022, and not subject to the new automatic enrollment rules. 
  • 403(b) Plans. A 403(b) plan is a pre-enactment section 403(b) plan excepted from the automatic enrollment changes if it was established before December 29, 2022, without regard to the date that salary reduction provisions were adopted. 
• Mergers. A single employer plan that maintains a pre-enactment qualified CODA is unaffected if it merges with another single employer plan that also maintains a pre-enactment qualified CODA. However, if a single employer plan that maintains a pre-enactment qualified CODA merges with a single employer plan that does not include a pre-enactment qualified CODA ("post-enactment plan"), then the pre-enactment plan must be designated as the ongoing plan to continue to be treated as a pre-enactment plan after the merger, provided the merger occurs before the end of the transition period under Code Section 410(b)(6)(C). On the other hand, a post-enactment plan that is merged into a plan maintained by more than one employer that includes a pre-enactment qualified CODA will not be treated as maintaining a pre-enactment qualified CODA with respect to that employer in the ongoing plan. 
• Spin-offs. Generally, a new plan that includes a qualified CODA, which is spun-off from a pre-enactment plan, will also be treated as maintaining a pre-enactment qualified CODA. However, if the new spun-off plan was maintained by more than one employer, then the qualified CODA in the new spun-off plan will only be treated as a pre-enactment qualified CODA if it was treated as a pre-enactment qualified CODA in the pre-enactment plan with respect to the employer sponsoring the spun-off plan. 
• Starter 401(k) and Safe Harbor 403(b) Deferral-Only. The expanded automatic enrollment changes generally apply to a starter 401(k) deferral-only arrangement or to a safe harbor 403(b) deferral-only plan for plan years beginning after December 31, 2024.

Small Immediate Financial Incentives for Contributing to the Plan

Type of Plan Impacted: 401(k), 403(b)

Section 113 of SECURE 2.0 permits "de minimis financial incentives" that are not paid from plan assets to be offered in connection with an employee's decision to make elective deferrals to a 401(k) or 403(b) plan. Prior to SECURE 2.0, employers were not permitted to induce participation in a plan by providing immediate financial incentives to employees (the “contingent benefit rule”). These provisions are effective for plan years beginning after December 29, 2022, and are exempted from the prohibited transaction rules under the Code and ERISA.

• Limitations and taxation. 
  • A de minimis financial incentive cannot exceed $250 in value. 
  • The incentive is included in the employee's gross income and wages, and is subject to applicable withholding and reporting requirements, provided an exception under the Code does not apply. 
  • A matching contribution is not a de minimis financial incentive.
• Eligibility. A de minimis financial incentive may only be offered to employees for whom no election to defer under the plan is already in effect. 
• Installments permitted. A de minimis financial incentive may be provided in form of installments that are contingent on the employee's continued deferral to the plan. For example, an employer can provide a $100 gift card upon an elective deferral election with a promise to provide an additional $100 gift card the following year, if the employee continues to defer at that later date. 
• A de minimis financial incentive is not subject to the rules under the Code that apply to a plan contribution, including the qualification requirements and the deductibility timing rules.

Relief from Early Withdrawal Penalty for Terminal Illness

Type of Plan Impacted: 401(k), 401(a)(both DC & DB), 403(b), IRAs

Section 326 of SECURE 2.0 added a new exception to the 10 percent early withdrawal penalty under the Code for terminal illness distributions. An employee who is a terminally ill individual will be permitted to receive a distribution without a 10 percent early withdrawal penalty on or after the date on which a physician has certified that the individual has a terminal illness. These provisions are effective for distributions made after December 29, 2022.

• Definitions. 
  • A "terminally ill individual" means an individual who has been certified by a physician as having an illness or physical condition that can be expected to result in death in 84 months or less after the date of the certification. 
  • A "physician" generally means a doctor of medicine or osteopathy who is legally authorized to practice medicine and surgery by the state in which the doctor performs such function or action. The Notice clarifies that the term "physician" has the same meaning as the term is defined under Code Section 101(g)(4)(D) and section 1861(r)(1) of the Social Security Act. An employee who is a physician cannot certify their own terminal illness. 
  • A certification of terminal illness from a physician must contain specific information: 
    • a statement that an individual's illness or physical condition can be reasonably expected to result in death in 84 months or less after the date of the certification; 
    • a narrative description of the evidence that was used to support the statement in (i); 
    • the physician's name and contact information; 
    • the date the physician examined the individual or reviewed the evidence provided by the individual, and the date that the certification is signed by the physician; and 
    • the signature of the physician making the statement, and an attestation from the physician that, by signing the form, the physician confirms that the physician composed the narrative description based on the physician’s examination of the individual or the physician's review of the evidence provided by the individual. 
• Taxation.
  • The terminal illness distribution is includible in gross income, and generally there is no limit on the amount that may be distributed. 
  • If a qualified retirement plan does not permit a terminal illness distribution, but the employee otherwise qualified for a permissible in-service distribution, then the employee may treat the distribution as a terminally illness distribution on the employee's federal income tax return and will not be subject to the 10 percent early withdrawal penalty. 
  • A terminal illness distribution may be repaid to a qualified retirement plan or IRA in which the employee is a beneficiary and to which a rollover can be made, similar to the rules for qualified birth or adoption distributions.
• Impact on plan.
  • The Notice clarifies that relief under this provision does not provide an exception to any existing distribution restrictions (such as the distribution restrictions on elective deferrals to a 401(k) or 403(b) plan). An employee must otherwise be eligible for a permissible distribution to take advantage of this relief. 
  • A plan is not required to permit terminally ill distributions. If a plan permits terminally ill distributions, then it cannot make the distributions before the employee provides the administrator (or the IRA trustee, custodian, or issuer) the physician certification of terminal illness. If a plan does not permit terminally ill distributions, the employee can still treat an otherwise permissible distribution as a terminally ill distribution on their tax return, but must retain the physician’s certification in the event that the IRS later requests a copy.

Safe Harbor for Automatic Enrollment Correction

Type of Plan Impacted: 401(k), 403(b), governmental 457(b)

Section 350 of SECURE 2.0 codified the safe harbor for automatic enrollment corrections under the IRS' Employee Plans Compliance Resolution System (EPCRS), which provides that a qualified nonelective contribution (QNEC) is not required if an error is timely corrected and a required notice is given to affected employees. A plan may rely on the safe harbor when it fails (i) to implement an automatic enrollment or automatic escalation feature with respect to an eligible employee (or an affirmative election made by an eligible employee covered by such a feature), or (ii) to afford an eligible employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan ("implementation error"). The safe harbor is effective for failures that occurred after December 31, 2023, and plan sponsors can rely upon a reasonable good faith interpretation of these new provisions prior to that date.

• Timing of correction. An implementation error must be corrected and an employer must implement correct deferrals by the earlier of (1) the date of the first payment of compensation made by the employer to the employee on or after the last day of the 9½-month period after the end of the plan year during which an implementation error with respect to the employee first occurred, or (2) in the case of an employee who notifies the plan sponsor of the error, the date of the payment of compensation made by the employer to the employee on or after the last day of the month following the month in which the notification was made. Accordingly, the effective date with respect to an implementation error may vary from case to case depending on certain factors (e.g., the date the error occurs, the date compensation is paid, whether the employee notifies the plan sponsor of the error, or whether the plan year is a fiscal or calendar year). 
• Terminated employees. The safe harbor is also available for correcting an implementation error with respect to an employee who terminates employment before the date when correct elective deferrals would otherwise have started. However, the notice requirements will vary slightly between active and terminated employees. 
• Timing of corrective match. A corrective allocation of matching contributions (adjusted for earnings), if applicable, must be made within a reasonable period, under the relevant facts and circumstances, after the date on which the correct elective deferrals begin, but no later than:
  • The last day of the sixth month following the month in which correct elective deferrals begin (or would have begun for terminated employees); or
  • For an automatic contribution error that begins on or before December 31, 2023, by the end of the third plan year following the year in which the error occurred.

Optional Treatment of Employer Matching or Nonelective Contributions as Roth Contributions

Type of Plan Impacted: 401(a), 403(b), governmental 457(b)

Section 604 of SECURE 2.0 permits employees to elect to receive any employer matching or nonelective contributions as a Roth contribution, provided the employer contributions are fully vested. Prior to SECURE 2.0, these contributions could not be made on a Roth contribution basis and employees would have to convert them to Roth once in the plan if the plan permitted such conversions. These changes are effective for contributions made after December 29, 2022, and are optional.

• Similar rules apply. Similar rules to those that apply for designated Roth elective contributions apply to designated Roth employer matching and nonelective contributions. These include in-service withdrawal restrictions, separate accounting requirements, and the timing of elections changes.
• Full vesting required. Employer contributions may only be designated as Roth contributions if the employee is fully vested in that type of contribution at the time the contributions are allocated to the employee's account. Employer contributions may still be subject to a vesting schedule, and it will not cause a plan to fail nondiscrimination testing.
• Limitations and Taxation. 
  • Gross Income. Designated Roth employer matching and nonelective contributions are includible in an individual's gross income for the taxable year in which the contribution is allocated to the individual's account. These contributions will be reported on Form 1099-R in the same manner as an in-plan Roth conversion.
  • Wages. Designated Roth employer matching or nonelective contributions are excluded from wages for purposes of federal income tax withholding. 
  • FICA and FUTA.
    • 401(a) and 403(b) Plans. Designated Roth employer matching or nonelective contributions are not subject to FICA and FUTA. 
    • Governmental 457(b) Plans. Designated Roth employer matching or nonelective contributions are subject to FICA for employees of state and local governments that are subject to Social Security or Medicare tax. However, these contributions are not subject to FUTA. 
  • Not compensation. Roth employer matching or nonelective contributions are excluded from the safe harbor definition of compensation under Code Section 415.
• Plan design. A plan can allow Roth matching and nonelective contributions without allowing Roth elective deferrals, and vice versa.

Plan Amendment Deadlines Extended and Additional Relief

The deadline for plan sponsors to adopt plan amendments for any required changes pursuant to SECURE 2.0 were further extended under Notice 2024-2. Plan amendments apply retroactively to the effective date of the SECURE 2.0 changes, the regulations thereunder, or as specified by the plan.

• For qualified plans and 403(b) plans, the new extended deadline for plan sponsors (other than for governmental or collectively bargained plans) to amend is December 31, 2026. Applicable collectively bargained plans have an extended deadline to December 31, 2028. Governmental plans have an extended deadline to December 31, 2029.
• For governmental 457(b) plans, the new extended deadline for plan sponsors to amend is the later of (i) December 31, 2029, or (ii) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the Secretary that the plan was administered in a manner that is inconsistent with the requirements of Code Section 457(b).

In the meantime, plans should be operating in accordance with the applicable SECURE 2.0 changes. The issued guidance also confirms that a plan will not fail to satisfy the anti-cutback requirements under the Code and ERISA provided the applicable amendment deadlines are met as described above.

Next Steps

To prepare for these changes, plan sponsors should take the following next steps:

• Consider any necessary plan design and/or operational changes to address the new guidance;
• Consider whether it is in the employer's and participants’ best interest to implement any of the optional changes;
• Consult with the plan administrator and recordkeeper to confirm any required administrative updates and whether the recordkeeper can administer the change; and 
• Consult with benefits counsel to discuss any questions regarding implementation and required plan amendments.

For more information about how SECURE 2.0 might affect your employee benefit plans, please contact your Ice Miller Workplace Solutions lawyer with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.