IRS SECURE 2.0 Act Guidance Addresses Auto-Enrollment, Other Topics

As we have previously reported, the IRS released Notice 2024-2 on December 20, 2023, providing welcome guidance on a select number of provisions affecting qualified retirement plans, including 401(k) plans, under the SECURE 2.0 Act (SECURE 2.0).

Beginning with this blog, we will be addressing a few of the more prominent provisions contained in the Notice that are most likely to impact the majority of 401(k) plans, beginning with new automatic enrollment provisions.

Expansion of Automatic Enrollment

Under SECURE 2.0, effective on and after January 1, 2025, automatic enrollment is required for most (but not all) new 401(k) plans that were “established” (see below) after December 29, 2022. Automatic enrollment arrangements, of which there are several varieties, generally automatically enroll new eligible employees in the company’s 401(k) plan unless the employees affirmatively opt out of participation. (More information about automatic enrollment arrangements is available on the Dashboard.)

The Notice makes the following clarifications:

• A 401(k) plan is considered to have been “established” on the date on which the plan (or its 401(k) provisions) is initially adopted — not the date on which the plan or provisions become effective.
  • For example, if a plan is adopted on October 3, 2022 but is not effective until January 1, 2023, the plan was “established” prior to December 29, 2022 and is, therefore, not subject to the new SECURE 2.0 requirements.
• There are special rules for plan mergers, “spinoffs” and “starter” 401(k) deferral-only plans.

De minimis Financial Incentives for Contributing to 401(k) Plans

SECURE 2.0 permits employers to offer eligible employees “de minimis financial incentives” in exchange for their decision to contribute to the company’s 401(k) plan, effective for plan years beginning in 2023. The Notice clarifies that:

• A de minimis financial incentive cannot exceed $250 in value;
• The de minimis incentive must be included in the employee’s gross income and wages, and is generally subject to applicable withholding and reporting requirements; and
• A matching contribution cannot be considered a de minimis financial incentive.

Exception From Early Withdrawal Penalty Tax for Terminal Illness Distributions

Under SECURE 2.0, a terminally ill individual is permitted to take an in-service distribution without being subject to the generally applicable 10% early withdrawal penalty, effective for distributions made on and after December 29, 2022. The Notice makes the following clarifications:

• A “terminally ill individual” is defined as an individual who has been certified by a “physician” (see below) as having an illness or physical condition that can be expected to result in death in 84 months or less following the date of the certification.

• A “physician” means a doctor of medicine or osteopathy who is legally authorized to practice medicine and surgery by the state in which the doctor practices.
• A certification of terminal illness from a physician must contain specific information, including but not limited to the following:
  • 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 above statement; and
  • the physician’s signed attestation.
• Terminal illness distributions are includible in gross income, are generally not subject to a dollar limit on the amount that may be distributed, and may be repaid to a qualified retirement plan or individual retirement account to which a rollover can permissibly be made.
• Plans are not required to provide terminal illness distributions.

More to Come!

This does not cover all of the provisions of Notice 2024-2 that may be of interest to 401(k) plan sponsors and administrators. We will be following up with additional blogs discussing additional topics contained in Notice 2024- 2 shortly.

DISCLAIMER: This article is intended as a general overview of certain select provisions of Notice 2024-2 as it affects most 401(k) plans and is not meant to offer a comprehensive analysis of the provisions mentioned, or to address other provisions contained in the Notice, including provisions applicable to other types of retirement plans (such as defined benefit plans, governmental plans or 403(b) plans). As always, be sure to consult with your own ERISA attorney or other professional advisor for individualized advice with respect to your plan’s unique situation.