IRS Publishes Guidance Addressing Several SECURE 2.0 Provisions: 

On December 20, 2023, the IRS published Notice 2024-2 (the “Notice”) to help explain various provisions of the voluminous law known as SECURE 2.0. (The February 2023 edition of The Speed Reader provided an overview of dozens of SECURE 2.0 provisions, and I continue to provide training for clients in this regard.)

This article summarizes Notice provisions that will be of interest to many sponsors of qualified retirement plans, 403(b) plans, and 457(b) plans.

Terminal Illness Distributions:  SECURE 2.0 added a new exception to the 10% penalty tax, for any distribution made to a terminally ill employee. Under the Notice, the term “terminally ill individual distribution” means any distribution from a qualified plan or a 403(b) plan that is made:

De Minimis Financial Incentives:  SECURE 2.0 provides that a de minimis financial incentive (not paid for with plan assets) provided to employees who elect to make 401(k) or 403(b) plan contributions will not violate the Internal Revenue Code’s (“the Code”) contingent benefit rule. However, SECURE 2.0 did not specify what would constitute a de minimis financial incentive. Per the Notice, gift cards in small amounts are an example of a de minimis financial incentive an employer might offer to boost employee participation in its retirement plan. Also per the Notice, a financial incentive is a de minimis financial incentive only if it does not exceed $250 in value. Such an incentive can only be  offered to employees for whom no contribution election is already in effect.

• To an employee who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death in 84 months or less after the date of the certification; and
• On or after the date on which the employee has been certified by a physician as having a terminal illness. The certification must satisfy certain content requirements (e.g., it must include the physician’s contact information and his or her narrative description of the evidence that was used to support the statement of illness or physical condition).

To receive such a distribution, the employee must otherwise be eligible for a permissible in-service distribution under the plan. For example, a 401(k) plan can pay a terminally ill individual distribution to an employee who is eligible for a hardship distribution or a disability distribution, without violating the Code’s distribution restrictions.

The Notice also provides that if a plan does not permit terminally ill individual distributions and an employee receives an otherwise permissible in-service distribution that meets the requirements of both the permissible in-service distribution and a terminally ill individual distribution, the employee can treat the distribution as a terminally ill individual distribution on his or her federal income tax return.

Missed Plan Contributions:  SECURE 2.0 provides that if certain conditions are satisfied, a 401(k), 403(b), or 457(b) plan will not fail to be treated as such a plan solely because of a corrected reasonable administrative error made: (1) in implementing an automatic enrollment or automatic escalation feature for an eligible employee (or an affirmative election made by an eligible employee covered by such a feature); or (2) by failing to afford an eligible employee (in  an automatic enrollment/automatic escalation plan) the opportunity to make a contribution election because the employee was improperly excluded from the plan.

The corrective contribution for an employee’s missed deferrals must be made by the earlier of:

• 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 the error with respect to the employee first occurred; or
• In the case of an employee who notifies the plan sponsor of the error, the date of the first 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.

The corrective contribution for missed matching contributions must be made within a reasonable period after the date on which the employee’s correct elective deferrals begin. For this purpose,  a corrective matching contribution is made within a reasonable period if it is made by the last day of the sixth month following the month in which correct elective deferrals begin.

Plan Amendment Deadline:  The Notice extends the deadline for plans to be amended for the SECURE Act, the American Miners Act of 2019, the CARES Act, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, and SECURE 2.0 as follows:

• Non-Governmental Qualified Plans:  The new deadline is December 31, 2026.
• Governmental Qualified Plans:  The new deadline is December 31, 2029.
• Governmental 457(b) Plans:  The new deadline is the later of: (1) December 31, 2029; or (2) if applicable, the first day of the first plan year beginning more than 180 days after the date of notification by the IRS that the plan was administered in a manner that is inconsistent with the requirements of Code section 457(b).
• 403(b) Plans:  For non-public school plans, the new deadline is December 31, 2026. For  public school plans, the new deadline is December 31, 2029.    
  
  

Matching and Profit Sharing Contributions Made on a Roth Basis:  SECURE 2.0 provides that 401(k), 403(b), and governmental 457(b) plans can allow participants to elect to have matching and/or profit sharing contributions made on a Roth basis. Per the Notice:

• An employee’s designation of a matching contribution or profit sharing contribution as a Roth contribution must be made no later than the time when the contribution is allocated to his or her plan account.
• If a plan permits employees to designate matching contributions or profit sharing contributions as Roth contributions, employees must have an effective opportunity to make (or change) that designation at least once during each plan year.
• A Roth matching contribution or Roth profit sharing contribution is includible in an employee’s gross income, for income tax purposes, for the taxable year in which the contribution is allocated to his or her plan account.
• A matching contribution can be designated as a Roth contribution only if the employee is fully vested in matching contributions when the contribution is allocated to his or her plan account. Similarly, a profit sharing contribution can be designated as a Roth contribution only if the employee is fully vested in profit sharing contributions when the contribution is allocated to his or her plan account.
• Matching contributions and profit sharing contributions that are made to a 401(k),  403(b), or governmental 457(b) plan are excluded from wages for purposes of  employment taxes. Therefore, those contributions are generally not subject to federal income tax withholding, FICA taxes, or FUTA taxes. I say “generally” there because special FICA tax rules apply to governmental 457(b) plans.
• Matching contributions and profit sharing contributions made on a Roth basis must be reported as in-plan Roth rollovers, via Form 1099-R, for the year in which the contributions are allocated to the employee’s plan account.                               
• If any portion of an eligible rollover distribution is attributable to payments or distributions from a designated Roth account, that portion can only be rolled over to another designated Roth account or to a Roth IRA. For that purpose, the term “designated Roth account” includes a separate account that is established for designated Roth matching contributions or designated Roth profit sharing contributions.

The Notice also states that it “is not intended to provide comprehensive guidance as to the specific provisions of [SECURE 2.0], but rather is intended to provide guidance on discreet issues to assist in commencing implementation of these provisions” addressed in the Notice. The IRS continues to analyze the various provisions of SECURE 2.0 and anticipates issuing further guidance.