Transcript:
Operator:
So now without further delay, let's begin today's web seminar once, again, "Defined Contribution Plan Perspectives, 2023 Update on Regulation and Litigation". It is my pleasure to introduce your moderator for today, and that is Bill Sleboda, Senior Retirement Plan Advisor with PNC Institutional Asset Management. Bill, you have the floor.
William Sleboda:
Thank you very much, good day and welcome everyone. As indicated, my name is Bill Sleboda, Senior Retirement Plan Advisor within the Defined Contribution Group here at PNC and I'll be moderating today's session. As you know, PNC is committed to bringing our valued clients timely and insightful information that can be used to help make informed decisions with respect to your organization's qualified retirement plan. Today's webinar is part of our series as just indicated, "Defined Contribution Plan Perspectives", and specifically today we'll discuss the SECURE 2.0 Act.
We're privileged today to have two accomplished ERISA attorneys from Morgan Lewis joining us, John Ferreira and Claire Bouffard. Morgan Lewis is one of the largest employee benefit practices in the country. John and Claire, we really appreciate you being here today, thank you. John and Claire will walk us through key provisions of SECURE 2.0 and why they're important to you as a plan sponsor. Presentation will run roughly 45 minutes, we will certainly have questions, time for Q&A so if as indicated, if you have questions, please feel free to type it in the chat box. Any questions for whatever reason we don't get to today, we'll be sure to follow up with you after today's meeting. With that Claire, please go ahead.
Claire E. Bouffard:
Thanks Bill, it feels like in some ways this presentation has been a long time coming. I think since 2020 we've been teasing the SECURE Act 2.0, basically since the SECURE Act of 2019 or SECURE 1.0 was passed, some of these provisions had been kicking around and generally had bipartisan support, and so it was always like, is this going to be the year of SECURE 2.0? And so finally at the end of 2022, we did receive SECURE 2.0. It's the largest piece, most significant piece of retirement plan legislation since the Pension Protection Act of 2006.
We think it's more significant and larger in a lot of ways than SECURE Act 1.0. So of course we cannot cover every single provision, as Bill mentioned, in an hour, so we've selected some of the provisions that we think will be most interesting to you as sponsors of defined contribution plans, many 401k plans and those that will be effective in the shortest term. We are going to expect to see a lot more guidance that's going to be provided around SECURE 2.0. So there will be much more to hear in the future. Many sections of SECURE 2.0 specifically direct the DOL or the IRS to issue additional regulations to clarify some of the many open questions that we have in this space, and there are other questions that just remain open, so we'll try to flag some of those and try to give some answers to some of the questions that you might have outstanding. One of the key points in this presentation that we wanted to drive home is that a lot of these changes, particularly the optional changes, are going to be driven by not just what is in SECURE 2.0 or even waiting for additional guidance, but what record keepers and plan administrators can handle from a systems perspective.
So this is going to be something that you'll want to talk extensively about and in detail with your record keeper or your third party administrator to see what they are doing right now, what they plan to do and when they think they'll be able to implement certain provisions. So with that we'll go into a quick overview of SECURE 2.0. So as I mentioned, it was enacted at the end of 2022, so December 29th, 2022 is the date of enactment, and that's important because that date drives a lot of the deadlines for some of the various provisions or effective dates. Some of the provisions are already effective, some of the provisions will be effective in 2024, 2026, 2027, there's a variety of effective dates. We've noted the ones here for the provisions that we've highlighted and we've also picked out a little selection at the end of the slides that includes a list of other provisions that may or may not be of interest, but we've included a short description of what they are and effective dates for them.
There are some mandatory changes as part of SECURE, some of those that are most of interest to define, contribution plans are ones we'll discuss, but many of the other changes are optional. There is a General Amendment deadline for SECURE 2.0 and the IRS has made that line up with the deadline for SECURE 1.0 and CARES so handily enough, all of those amendments can all be wrapped up into one piece. Now it may be that it's going to be a long time before that deadline hits, so it may be a good idea to think about making sure that you're keeping track of how you've been administering the plans, especially if you haven't updated for SECURE 1.0 or CARES to make sure that you're thinking and noting down the things and steps that have been taken so that you'll be ready for those amendments when the time comes. And as we've noted here, there are certainly some provisions, particularly a few of the optional provisions that we will note that we may need more guidance before it makes sense to implement them because there are just a number of unanswered questions at this time.
And so with that we've listed the provisions that we're going to cover here and as I mentioned at the end we'll have a number of other provisions with effective dates if there's time or if there's questions about any of those, we can make sure to address those in a little bit more specificity. And so with that we'll move into covering some of these specific provisions. So the first is the increase to the required beginning date age. This feels in some ways a little bit like old news because at least this first part is going to look a lot like what happened with SECURE 1.0. So with SECURE 1.0, we increased the age component of the required beginning date from 70.5 to age 72. And that impacted employees who turned age 70.5 after December 31st, 2019. So people who had already reached age 70.5 prior to December 31st, 2019 still had their required beginning date as scheduled on April 1, 2020, potentially.
There was some other intervening things that happened like the CARES Act, but that was potentially the way that things were supposed to work. So similar to that, SECURE 2.0 again raises the age component of the required beginning date from age 72 to age 73. And this impacts participants who reach age 72 prior to December 31st, 2022, will continue to have their required beginning date as scheduled. And other participants who reach age 72 later will have an age 73 required beginning date. And we mentioned this just because I had actually seen in a few news articles where people said that, "Oh well, if you're reaching age 73 in 2023, then your required beginning date is delayed," which is not accurate. If you are reaching age 73 in 2023, that means you reached age 72 in 2022, and so your required beginning date would still be in April, 2023 as it was originally scheduled. Then there will be a further increase to the required beginning date age beginning in 2033 that will increase the age component of the required beginning date to 75. And we noted one little glitch here that hopefully is something the IRS will clarify, although this is quite long into the future. There's just sort of a funny error with how the required beginning date age change was described for certain participants where under the language as written, they would have two required beginning dates, one at age 73 and then one later at age 75, which doesn't make any sense.
So hopefully the IRS will clarify exactly how that's supposed to work. So this change is effective now, it was effective January 1st, 2023 and we've written that it's optional/mandatory. So it's optional in the sense that if you have a plan that requires participants to commence their benefit at a certain age, so let's say that you didn't adopt the SECURE 1.0 age increase and you said, "No, we want to continue to require our participants to commence their benefits at age 70.5," then that plan could continue to allow to require participants to commence their benefits at 70.5 rather than adopting this later date. Or if a plan adopted age 72 and said, "No, that's far enough, we want to keep requiring our participants to take distributions at 72, we don't want them to keep their money in the plan until 73," that is also fine. So in that sense, it's optional, but if you require participants to take their funds at a earlier age, that money would be treated differently because required minimum distributions are not rollover eligible. So the record keeper would need to have procedures in place to make it clear that if participants are taking distributions prior to their required beginning date, that those amounts are still properly being coded if they're not in the year for which they would have to receive a required minimum distribution. And so with that, I'll turn things over to John here to talk about Rothification.
John G. Ferreira:
Thank you Claire, and actually this is interesting 'cause I'm going to talk about a couple of Rothification-type changes. What I see here is actually a trend that I think is going to pick up steam over time in trying to push participants in 401k plans into doing Roth contributions, and even they have matching contributions made on a Roth basis. There was a proposal floating around somewhere between SECURE 1.0 SECURE 2.0 to actually mandate that all contributions be made on a Roth basis to 401k plans, that didn't end up being enacted, but you can see the camel's nose is well under the tent for some of the changes I'm about to talk about. And by the way, just so we understand what this is all about, converting pretax contributions to Roth contributions is a revenue raiser because the participants are going to pay taxes on the money going in, that tax doesn't get deferred and that actually creates tax revenue, and that's something that Congress likes. Revenue raisers allow them to offset things that will lose revenue, like pushing forward the requirement minimum distribution date. So Rothification, I think, is ripe for even more development as the years go on. But here we're going to talk about a couple of things that were in SECURE 2.0. One is the Rothification of employer contributions. This is effective immediately, but there are some open questions, and again, this is one like Claire said, where we're going to need some guidance from the IRS on a number of points, but basically what SECURE 2.0 allows an employer to do is make available to employees an election to have any fully vested matching and/or non-elective contributions made on a Roth basis rather than pretax, which is the way all those contributions are made now. They're treated as Roth going into the plan as opposed to the in-plan Roth conversions that you can do. But there are a lot of unanswered questions about how that can be done, the reporting, tax withholding and other issues that we are waiting for guidance from the IRS on. Again, theoretically you could put this into effect right now, it would apply to any contributions made after the enactment of the act, but I think that certainly all the plan sponsors we've talked to are in a wait and see mode until they get some better guidance on how this will be implemented.
William Sleboda:
John, do you see if, forgive me for interrupting, do you see-
John G. Ferreira:
Hang on a second, let me back up one here, okay.
William Sleboda:
Yeah, do you see anything imminently coming with regard to guidance on some of those topics? So if the question is specifically is if I'm doing this, if I make the decision to do this now, the Rothification of employer contributions, do I have to consider my ADP test, my ACP test? Do I have to consider the withholding aspects? So it sounds like more to come, but if a plan sponsor is saying to me today or to themselves today, the committee, "You know what? I want to do this, I want to make it available." Should I just wait till the end of the year? Is this something I could start doing on a payroll basis now? Is there an opinion one way or another? Probably it sounds like they should wait, but any other kind of thoughts around that?
John G. Ferreira:
I mean I think that that you could make some educated guesses about what some of the open questions are. For example, I don't imagine that for testing purposes anything will change between matching contributions going in pre-tax or Roth, they'll still be subject to ACP testing. Nonelective contributions will still be subject to non-discrimination testing under 401a4 of the code. I don't think that's going to change. And if we're treating these as Roth contributions, then I would also guess that they're going to be treated the same way as current Roth contributions out of people's pay, meaning they'll be subject to federal income tax and FICA withholding. Now how you implement that is tricky because payroll systems are set up to do income tax and FICA withholding with respect to amounts withheld from pay, but now you got to run the matching contributions through your payroll system, so I think to some extent, not only are we waiting for IRS guidance, but I think we're also waiting to see whether payroll vendors and record keepers can support this. And so that's yet another kind of gating factor before getting this into practice.
William Sleboda:
Great, that makes perfect sense, thank you John.
John G. Ferreira:
Okay. Now this one is actually mandatory and if there's anything that's really the camel's nose under the tent, it's this, so Rothification of catch-up contribution, so as you probably know, individuals who are over age 50, if they put in the amount that you're allowed to put in on a standard basis, a so-called 402g limit, they can also put in additional amounts, which are called catch-up contributions. Now this is an interesting change that SECURE 2.0 made. Basically it took the position that people who are highly paid, and we'll talk about what that means, have to make their contributions, their catch-up contributions on a Roth basis even though the rest of their contributions could have been made on a pre-tax basis if they chose to do that. And it's got a little bit of a glitch in it, which we'll talk about, but basically if people make more than $145,000 in wages and basically, wages subject to withholding, in the previous year then any catch-up contributions have to be made on a Roth basis. This is going to go into effect January 1st, 2024.
So we'll be looking at people making $145,000 or more this year to see who has to make contributions, catch-up contributions, on a Roth basis next year. And that $145,000 will be indexed. Now as Claire mentioned, this got passed December 29th, 2022, as you can well imagine, Congress was on their way out the door. So this thing was passed in kind of haste in the dead of night, you may recall some legislators grumbling about how this gigantic piece of legislation, they didn't get to read any of it and by the way, SECURE 2.0 was actually just part of this omnibus piece of legislation that got passed, so not surprisingly, they screwed up a few things. One of them is they actually deleted a section of the tax code that that says you can make catch-up contributions, that's going to have to get fixed. Everybody knows that was not intended, so that will get fixed whether the IRS just issues guidance or there's a technical correction. So I wouldn't worry about any of that.
So like I said, this is mandatory if you offer catch contributions. We've gotten questions, a number of questions like, "Well, this is going to be really hard to administer should we, what if we just say people can't make catch-up contributions?" And you can certainly do that, that would not be well received I think by most employees, particularly as they get older and that they want to kind of catch-up for not having contributed much when they were younger. One of the sort of of opposite approaches I've heard is, "Well, this is going to be really hard to administer, we've got to kind of track these people and make sure that their contributions are going in on a Roth basis. What if we just amend our plan to say all catch-up contributions have to be made on a Roth basis?" You can do that, again, there's a question about how the employees who aren't otherwise subject to this rule will respond to that. But this is something a lot of companies are now just thinking about in advance of 2024 when this has to be implemented. So like I said, I think these two changes are an indication that Rothification is a trend and I would not be surprised if in future pieces of legislation this doesn't continue to mushroom, defaulting people, you have to default them into Roth or saying that people who are making over $145,000 index have to make all their contributions on a Roth basis. So stay tuned for all of that. And speaking of catch-up contributions, catch-up contributions will now actually be able to be made in even larger amounts, but this is going to be a very tricky thing to handle administratively.
So basically for people who are ages 60 through 63, they will have an increase in the amount that they're allowed to make as catch-up contributions during the calendar years in which they reach those ages, so again, administratively you're going to have to track people. Now you just have to worry about whether they're 50 or over. Now you're going to have to say, okay, are they 60, 61, 62, 63? In those years they'll be able to make either $10,000 or 150% of whatever the regular age 50 catch-up limit is. So they'll be able to put even much larger amounts into the plan, but they go back down to the standard limit when they hit age 64. Now that's for tax year's beginning after 2024, so basically January 1st, 2025 for your typical calendar plan. We think this is most likely to be deemed an optional change, but we do need, again, guidance from the IRS on how this is implemented. And as I say, this one's going to be really tricky administratively if you, and particularly if you have to do this because there's, the possibility of error when somebody drops back down is pretty significant. So again, stay tuned on that one. Claire, back to you, oh.
Claire E. Bouffard:
So jumping over to the student loan match, this was a change that we had seen a lot of interest in. There had been a private letter ruling that was issued in, I believe it was 2018, that considered the possibility that employers could make a contribution to 401k plans that was based on student loan match. Now that wasn't a matching contribution, it was a non-elective contribution. And so that led to some concerns around non-discrimination testing, how these contributions were supposed to be verified, a number of different questions that I think sort of had people waiting to see what would happen because around the same time we started to see legislative proposals suggesting that maybe something would get passed that would allow any of these contributions to actually be treated as match.
So when the employee makes student loan repayments, the employer could deposit contributions into the 401k plan that would be matching contributions instead of non-elective contributions. And that would help to address and alleviate some of the concerns around having a subgroup of the population only that gets a special different kind of contribution that would be tested separately and just have a matching contribution that would look and feel just like any other matching contribution and could be tested in the same way. And that would also alleviate any potential concerns around, let's say, safe harbor as an example.
So we finally did get this as part of SECURE 2.0. This allows qualified student loan repayments as certified by the employee so there isn't a need to go and collect all of the various documentation for loan repayments, those can be used to generate matching contributions into the plan. So those would be subject to limitations, the limitations on elective deferrals would apply to the amount that would be taken into account as a qualified student loan repayment. The employees have to be otherwise eligible for match and the match rate that is given to employees who make student loan repayments has to be the same as the overall rate of match that's in the plan. And to further address some of the non-discrimination testing, there's actually a separate testing ability, so that's all very helpful. These changes will be effective December 31, 2023.
William Sleboda:
Claire, quick question, just one moment there. The question came in with regard to the quotes, "qualified student loan repayments." If a participant specifically in the plan, first of all, if this this is allowed by the plan and the participant is making student loan repayments for either their spouse or a dependent, is that qualified within the definition to your understanding?
Claire E. Bouffard:
So the SECURE 2.0 reflects that they have to be loans that are incurred by the employees. So potentially if they're incurred by the employee themselves, maybe on behalf of a dependent, there might be an argument there that that could work. But it has to be a loan that the employee has taken on. So it couldn't be like a prior spouse loan that wasn't something that the employee took on.
William Sleboda:
Okay, okay, thank you, and then one other follow up, the certified by the employee, so as far as we know, there's no additional evidence required that the employee should rely on going forward most folks have the opinion, "Well, I need to have some information," going back to kind of the old hardship rules, it sounds like there won't be any of that here, it's just as certified by the employee?
Claire E. Bouffard:
No, and and not to jump too much on something that John will cover, but a lot of the new withdrawal rights and the hardship certification is another SECURE 2.0 change, really shows a shift in the IRS's position in this regard of picking up all of these substantiating documents in favor of employee certification, which obviously gives increased access to money, to funds.
William Sleboda:
Right.
John G. Ferreira:
Well, but let me just add that I think there's a real distinction between relying on employee certification where they're just withdrawing their own money and relying on employee certification when they're going to end up, as a result of that certification, getting money from the company as matching money. I know I've talked to some plan sponsors who've said, "Yeah, okay that's fine but I'm going to need more than that." And in fact there are vendors with products that coordinate with your payroll system that basically say, "Look, an employee signs up, we will deduct his student or her student loan repayments from their pay, "and that'll allow you to, A, verify that they're making their loan repayments and B, track those and run them through your system as if they were pay so that you can match them more effectively. And I would expect that a lot of employers would prefer that 'cause that just makes the whole system work a little bit better and reassures them that they're only matching for people that really are paying their loans back.
Claire E. Bouffard:
Absolutely, that's a really good point. And you can always require something that's a little bit more than the minimum that the IRS allows you to accept.
John G. Ferreira:
And one of the other administrative headaches with this is going to be you may have people who are paying back student loans and still putting at least some money into the plan but say not enough to get the maximum amount to match. And so you're going to have to kind of coordinate the student loan repayment amounts, the amounts that they're contributing and figure out how much match they get as a result of the aggregation of those amounts. Actually I had a plan sponsor asked me yesterday, "Well, does this mean that somehow they can get more than the maximum that our other employees get?" And the answer is no, you would have to treat their student loan repayments and their contributions together in the same way you would treat everybody else's contributions and they could not get more in matching than anybody else could get here.
John G. Ferreira:
And one of the other administrative headaches with this is going to be you may have people who are paying back student loans and still putting at least some money into the plan but say not enough to get the maximum amount to match. And so you're going to have to kind of coordinate the student loan repayment amounts, the amounts that they're contributing and figure out how much match they get as a result of the aggregation of those amounts. Actually I had a plan sponsor asked me yesterday, "Well, does this mean that somehow they can get more than the maximum that our other employees get?" And the answer is no, you would have to treat their student loan repayments and their contributions together in the same way you would treat everybody else's contributions and they could not get more in matching than anybody else could get here.
Claire E. Bouffard:
And that raises another good point and open question with respect to reimbursements and how frequently the plan requires for employees to submit these amounts and what kinds of deadlines they can impose. And some of that the SECURE Act 2.0 doesn't directly address, but it does direct the IRS to issue regulations specifying with a little bit more detail how this process should work and how frequently perhaps plans should ask for these certifications to be made and whether they can set some kind of deadline that's no later, no earlier than three months after the end of the plan year to require employees to submit their certifications to get their matching contributions. So there will definitely be more to come on this.
William Sleboda:
Thank you for that, Claire, appreciate it.
Claire E. Bouffard:
The expansion of the long-term part-time employee rules, we wanted to touch on this in part because it connects to SECURE 1.0 and it's going to be effective very shortly, it's also a required change. So under SECURE 1.0 plan sponsors were required to allow employees who have at least 500 hours of service in each of three consecutive plan years into the plan solely for the purpose of making deferrals. So there is no requirement that those employees receive eligibility to receive matching or profit sharing contributions or any kind of employer contributions, but they do need to be able to make contributions and as a result they have separate testing and separate provisions were provided for them. One of the complicating factors that related to this and also was reinforced by some IRS guidance was how to deal with situations where these employees do become ultimately eligible for employer contributions under the normal plan provisions.
So they started out as a long-term ,part-time employee, but later they become eligible for employer contributions for vesting purposes because there was a suggestion that that plan sponsors would have to go back essentially to like the beginning of time and look at their service and determine if they had 500 hours of service in each year and credit those years of service for vesting purposes, which obviously if nobody knew to track this, nobody could do it. So that was a big open question that was looking to be resolved in an unfavorable way based on some of the IRS guidance. And SECURE 2.0 actually gave us some relief on this front and said, "No, you don't need to count years of service prior to 2021," which was the first year that plans had to start counting the 500 hours of service for purposes of determining eligibility to participate in the plan for the purposes of vesting service. So that really alleviates a major open question and potential burden on plans based on the long-term, part-time employee change.
The second change that SECURE made was one that's a little bit more employee favorable and that's to reduce the number of years of service that an employee has to have to be a long-term, part-time employee from three consecutive years in which they had 500 hours of service to two. So that isn't going to be effective immediately. We're just going to credit years of service starting in 2023 forward for that purpose. So the first year that an employee could get in under that provision is January 1st, 2025. So under SECURE 1.0 there are still some employees who could get in as early as January 1st, 2024 because we started crediting their service in 2021. But under the new rules that have been put in, they could get in in January 1st, 2025 based on having two years of service rather than three. This also extended, we just noted this as an aside, the extension of the long-term, part-time employee rule to 403b plans as well as 401k plans. SECURE 1.0 was only applicable to 401k plans and not 403b plans. So this is a mandatory change, it has to be adopted. This would be a good one to, again, to discuss with your record keeper or third party administrator and make sure that the appropriate service tracking is being done to be able to allow these employees in once they are eligible.
William Sleboda:
Claire, quick question there is, if a participant is long term, part-time, becomes, if you will, eligible and chooses not to defer into the plan, are they still counted as eligible for purposes of a plan that's on the cusp of 100 employees, 120 employees? Are they considered within the eligibility framework, if you will, for purposes of large plan or small plan?
Claire E. Bouffard:
I believe so, yes, I mean, just as you would have an employee who decides not to participate, who's eligible in the normal course, this is just a similar situation at this point.
William Sleboda:
Okay.
John G. Ferreira:
Although, let me jump in and say that the IRS recently published proposed changes to the Form 5500 of those changes is that for purposes of determining whether your plan has to have an audit, you'll only have to count people who actually have an account balance, not people who are just eligible but otherwise aren't participating. So I think that's actually going to be a really helpful thing for smallish plan sponsors who are kind of on the cusp of having to hire an auditing firm that this will mean mo more of them will not have to do that, at least for some longer period of time.
William Sleboda:
Great, thank you John.
Claire E. Bouffard:
Moving to the emergency savings account, we picked this provision 'cause it could be effective as early as next year. This is a completely new feature that will need to be baked into plans. It's something fairly different and reflects a lot of what seems like Congress' intent to make at least some portion of the account available at earlier times and making sure that participants have access to funds when they need it, if that is the consideration that's stopping them from saving, to try to give them these various different mechanisms to access their money as needed. So this is a small account that could be as large as $2,500 where participants who are not highly compensated employees can make contributions on a Roth basis. Those would be treated as any other elective deferrals to the plan for purposes of receiving match, for example.
So they would receive matching contributions to their main plan account and then these Roth contributions would sit in the emergency savings account. These amounts would be available for distribution at any time, there's no, they have to be available at least once per month, but they could be available more frequently. There's special requirements and restrictions around what they can be invested in. So it has to be a capital preserving option such as a stable value fund or a money market fund where it's designed to preserve the value of the account and they can access those funds relatively quickly. So there's still a number of questions around this. It is an optional provision, it can be adopted as early as plan years beginning after December 31st, 2023. So the earliest it could be adopted is January 1st, 2024 for a calendar year plan. But as you can see, it's something that's not been available in 401k plans before. So there would certainly need to be some kind of build out in work. So this is something you would want to discuss with your record keeper or third party administrator before considering implementing.
John G. Ferreira:
And I might just throw in that this is yet another example that I forgot to mention of the bias toward Roth because if this really catches on, employees will start potentially saying, "Look, I need to have the first dollars I put in every year go into this," or, "Have the first dollars until I get to 2,500 go into this emergency savings account just 'cause it's just so much more easily accessible for whatever I might need money for," and that's all going to go in on a Roth basis. So it kind of gets these participants, even if they haven't been making contributions on a Roth basis, kind of into the mode of making Roth contributions.
Claire E. Bouffard:
Absolutely, you could even add an automatic enrollment feature to the emergency savings account, which makes things a lot more administratively complicated potentially, especially if you have another automatic enrollment feature in your main plan. So the next change is the increased cash out limit. We included this one in part because this is one that I think a lot of plan sponsors have been very happy to see, this increases the current small sum cash out balance limit from $5,000 to $7,000, so that's helpful for plans that have a lot of potentially small balance accounts and then later down the line have trouble locating these people. One thing we did want to notice, there's a couple of SECURE 2.0 changes here that are kind of complimentary.
One is the retirement plan lost and found where eventually plans will need to report to certain information about themselves to the IRS so that plans participants who are looking for their plans will be able to go to a centralized database and find information about them. And the other is auto portability, which is a system where, again, if there's, if the infrastructure is in place, small balance cash out amounts can be matched even with unrelated employers, they go to like a, let's say a third party clearing house. And those accounts, like if there's a match in the system between the rollover IRA and a new employer plan account, that IRA can be automatically transported over to enrolled into the current employer account. So trying to help employees keep their accounts together and prevent retirement plan leakage. So the increased cash out threshold is available for plan years beginning after December 31st, 2023. So that would be January 1st, 2024 for any calendar year plans and it is optional, so if plans don't want to adopt the higher limit plans can continue to apply the $5,000 cash out threshold rather than increasing to $7,000. John?
John G. Ferreira:
Okay, and one of the things that SECURE 2.0 did in addition to the emergency savings is adopt a number of other changes that are intended to make 401k plan money more accessible to participants. And again, all of this is under the rubric of encouraging people to save. One of the major reasons people don't save or put money in a 401k plan is that they have a fear that they may have the need for that money under certain circumstances and that it's just difficult to get at it. So again, I think SECURE 2.0, and Claire alluded to this earlier with respect to hardships, it is kind of loosening the restrictions on people getting at their money if they need it before they reach retirement age so they will feel less fearful about parting with that money. So you see a whole number of withdrawal changes were enacted, one we already mentioned, which is self-certification of hardship events.
So for plan years after the date of enactment self-certification can be used and that makes it much, much more easy for people to get a hardship withdrawal because they don't necessarily have to provide evidence of the immediate and heavy financial need. And it'll also smooth out how record keeping systems handle hardship withdrawal requests. It's a lot easier if they use self-certification. People can click and say, "Yes, I certify that I have one of these needs, I certify that this is how much money I need," and their money comes back to them. What has happened over the years kind of sporadically is that where there have been various federal disasters, there have been changes in various prior statutes to allow better access to 401k funds to cover expenses that are created by those disasters. SECURE 2.0 just kind of permanently establishes a rule that if there's a federally declared disaster that the kind of relief we've seen for some of the prior disasters, increased loan limits, deferral repayment of loans, distributions that can be repaid within three years, any disasters that meet the federal declared disaster category, floods, hurricanes, those kinds of things can automatically now be subject to these rules. This is optional, but I do think it'll probably be adopted by most employers and it applies to disasters on or after January 26th, 2021. So some disasters that have already happened, you can make the people's money available.
Emergency personal expense withdrawals, now this is different than the emergency savings account. This says that basically you can take up to $1000 as an emergency personal expense, doesn't have to be for a hardship, and that can be repaid within three years. And that is optional also and can be put into effect starting next year. If someone's a victim of domestic abuse, then they can withdraw to $10,000 or 50% of their account. Again, they can pay it back within three years. This is optional as well, but that'll still go into effect at the beginning of next year. And finally, qualified birth or adoption distribution, this is just a clarification to existing law. It wasn't clear how long you had to repay a birth or adoption distribution. There were those that said, "Well, there's no limit on it," but SECURE 2.0 buttons that down, lines it up with all these others and says, "Yeah, you've got three years to repay," and this is for distributions after December 29th, 2022, so this is currently in effect.
One of the things that those of us who practice in this area really appreciated is this expansion of the so-called EPCRS, which is the Employee Plan Compliance Resolution System. That's the IRS program that allows you to fix mistakes. This has been something that a lot of plan sponsors have been asking for for years, and SECURE 2.0 significantly expands the availability of this program, and that's effective immediately, and it's a very positive change. One of the major changes is it used to be that you could only self-correct what are called insignificant failures. That distinction has now been eliminated. And basically, if something would otherwise be eligible for self-correction, it can be self-corrected regardless of whether it's significant or insignificant. It also expands your ability to self-correct errors even when you're under examination or an audit by the IRS. Much more significant, ability to self-correct loans, including relief from correcting 1099-R reporting, loans are one of the most frequent areas where mistakes get made, so this additional availability of the EPCRS is very, very welcome.
So all that's effective on the effective date of the enactment. We are going to get additional guidance from the IRS, and so they'll have some ability and discretion to interpret and set these rules probably in another next iteration of EPCRS. But again, we expect that that new EPCRS version's going to include all this expanded availability of self-correction, for example. And again, keeping kind of in the mode of fixing mistakes, one of the things that has often been a real issue with employers is what happens when we accidentally pay somebody more than they're entitled to? The traditional view of that was, well, that's not consistent with the terms of the plan. It creates a tax qualification issue. You have to go get the money back, or at the very least you have to attempt to get the money back. And a lot of employers are like, "Look, this is, particularly if it's not a big amount of money, we really don't want to bother to do that. Can't we just let them keep the money?" And one of the other things we had to tell people is, "Well, if you got an overpayment and you don't give it back to us, if you put it in an IRA, that's a bad IRA rollover, you got to go to your IRA provider and get the money back or you're going to be subject to penalties." So SECURE 2.0 really eased a lot of these restrictions on recovery of overpayment and this is effective immediately.
And by the way, one of the other things it does is actually restrict the ability to get overpayments back in some circumstances, which is again, something that advocates for participants have been arguing for. So planned fiduciaries can now decide, in their discretion, they're just not going to ask for the money back. And if amounts are rolled over that were in excess of what the person was actually entitled to get, those amounts can stay in an IRA, they don't have to be kicked out. And the plan sponsor can self-correct by amending the plan to address inadvertent overpayments. So let's suppose it turns out that for years people in a pension plan have been getting slightly more than they were entitled to because of some glitch in the way the plan was written, excuse me, because some glitch in the way the plan's being administered, the way it was written, it didn't provide for this additional amount, but they've been paying this additional amount.
The plan can now be actually self-corrected by a retroactive amendment that basically fixes the plan so it matches up to the amount of these overpayments. That's something that we've got often gotten IRS permission to do as part of a VCP application, but now we don't even have to to worry about that. And then there are some restrictions on your ability to recoup amounts for participants unless they're culpable, essentially, meaning, for example, that they provided some information that was false and that that's the basis on which this overpayment took place. So this is effective again, with the enactment of the act last year with relief for recoupment from the ongoing payments that begin prior to that date.
Now we only, we have two more slides that really just list a whole bunch of other things that SECURE 2.0 did, but we're running low on time and we have a lot of questions. So these are here for you if you want to kind of read through them, you can see that there are a number of changes that might be of some interest, but rather than going through these in any detail, I think maybe we'll go right to questions and answers if that's okay. Okay?
William Sleboda:
I think that's, I think that makes a lot of sense, John, thank you. I think when we look at all of the tenor and tone of the questions that are coming in, several of the questions have to do with the guidance aspect of this and somewhat technical in nature, specifically around one or two provisions. I think if we could start with maybe, John and Claire, kind of the overarching theme, so what I'm seeing and what a lot of my colleagues are seeing with our clients, many of them who are participants today, is really, they're going into committee meetings and they're saying, "What do I need to do today? What questions do I have to answer at the committee level today?" And then really, "What should I expect from my record keeper? What should I expect from other service providers in helping me go through what is important today?
So what is effective for this plan year?" I get, they get what's coming up in 2024 and 2025, we will deal with those later, but many of the questions kind of the tenor is around the guidance. "What should I expect from my record keeper?" Do you see, and maybe an unfair question, but do you see record keepers being able to implement all of these provisions this year in giving substantive opinions as to whether it's good or bad, or "How do I make my plan as competitive as as possible within the global space?" So for example, are are we seeing companies that are allowing for the student loan matched? Are we seeing companies that are allowing for this emergency savings account, realizing that some of these are not going to take place for another year or so. And so I know that's a kind of an overarching big question, but maybe specifically is, what's the hot button today for committee members? What should they be thinking about immediately from a fiduciary decision and practice perspective?
John G. Ferreira:
Okay, so let me kind of jump in there. First of all, one of the things that you have to be kind of cognizant of is what are the decisions that are fiduciary in nature and what are the decisions that are plan sponsor in nature? In general, it's the sponsor as the settlor of the plan that decides what amendments to adopt. There are some administrative things buried in here that could potentially be adopted as part of a plan's administrative procedures, but for the most part, things that require plan amendment are going to have to be plan sponsor kind of decisions. Now, at smaller mid-size companies, the committee's usually kind of a mix. There are people on the committee often who have the authority as the plan sponsor to make these decisions. In larger companies, there may be some disconnect there, but that's something to be thinking about.
With respect to record keepers, I've already been at committee meetings where the record keepers have gone through all the SECURE 2.0 changes, talked about what they're able to do. I do think though that for the optional changes, the record keepers are generally not going to, are not going to provide consulting advice. They'll tell you what their systems can do, they can tell you what, at some point down the road they'll be able to tell you what most of their base does, but they are almost certainly not going to recommend anything to you other than in the occasional situation where I see a record keep sort of steering people because they would like everybody to do X so that their system can consistently do X. But for the most part they're going to say, "These are things you need to decide and let us know." So should you have student loan matching, what are the implications for, with respect to your workforce, you allow them to elect Roth treatment for matching contributions? Those are things where I think you, the plan sponsors and committees really need to be talking to their consultants about, what choices to make within the scope of what their record keepers are able to do.
William Sleboda:
Right, right, good, good information. As you had mentioned, John, there's quite a few questions. Some, again are technical in nature. One specifically, "You hit upon perhaps a change to the Form 5500 filing." So if a plan today, for example, is over 100 participants, so they have to do an audit and as a result of this new rule, they fall under that scenario. The question specifically is, "Would they no longer have to do the audit?" I believe yes, but any scenario and realize this is just a proposed scenario to the Form 5500, but do you see that answer being anything different going forward?
John G. Ferreira:
I can't tell you that for certain, I'd have to go back and more carefully parse through the change, but I think the most likely outcome is that if they stop counting people who don't have an account balance, then it's the same as right now if the number of eligible employees falls below 100, so I think that you would no longer have an audit requirement.
William Sleboda:
Great, one other kind of question, emergency savings accounts, do we think that those would be able to be repaid similar to a loan provision?
John G. Ferreira:
Claire, do you want to field that one? Claire, are you on mute?
Claire E. Bouffard:
Sorry, I did go on on mute there for a second. No, so I think that's sort of a combination of things. So there's the emergency savings withdrawal, which can be repaid within three years, and then there's the emergency savings account, which would require you to replenish it from time to time, but you'd do that through contributions.
William Sleboda:
Great, thank you, and one final question, This had to do with long-term, part-time employees. So if a company, the question specifically is, "Can a long-term, part-time person get a match on their deferral if and when they become eligible? Is that a participant question or is that an employee question?" Again, I think we covered necessarily it's only at the discretion of the employer, but any other thoughts around that, does that make sense?
Claire E. Bouffard:
Yeah, I wasn't sure if the thought, the question maybe was, so if you had a long-term, part-time employee who became eligible under your regular plan rules, so let's say you had 1000 hours of service requirement and you also had the other long-term, part-time employee requirements, so you had somebody who is making deferrals all along and then sure enough, one year they work 1200 hours, so now they become eligible under the eligible for the match going forward, but they're no longer a long-term, part-time employee at that point.
William Sleboda:
Great, very good, well, I think that is about all the time we have today. John, thank you Claire, thank you, very, very informative. A lot of information as you'd indicated and a lot of guidance left to come, but greatly appreciate your input and thoughts today. And thank you everyone for joining today. We greatly appreciate your participation. We would love to continue the conversation with anybody that would like to feel free to reach out to your PNC representative, whether it be a retirement plan advisor or others within the organization, please do so. In addition, you can use the Contact Us form to meet with a member of the PNC team. Following the webinar, you'll be redirected to a quick survey where you can give us feedback and certainly ask any other additional questions. The feedback's important for us to be able to help us guide for future webinars. So with that, we conclude today's session. We greatly appreciate your time. Again, thank you, John, thank you, Claire.
John G. Ferreira:
Our pleasure.
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