On December 29, 2022, President Biden signed into law, as part of the Consolidated Appropriations Act of 2023, the SECURE 2.0 Act of 2022 (“SECURE Act 2.0”). SECURE Act 2.0 builds on 2019’s Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) in seeking to improve the level of retirement savings for workers. SECURE Act 2.0 is a sweeping piece of legislation with many complex provisions.

This Insight highlights some of the most significant provisions of SECURE Act 2.0 that apply to employer-sponsored 401(k) plans, including provisions relating to contributions, distributions, and administrative matters.


Matching Contributions for Student Loan Repayments (Effective for Plan Years Beginning After December 31, 2023)

One of the reasons proffered for younger workers failing to save for retirement is the financial burden of repaying student loans. Prior to SECURE Act 2.0, matching contributions could only be made for employee elective deferrals, and although the Internal Revenue Service (IRS) previously ruled that employer non-elective contributions can be conditioned upon student loan payments, that ruling did not extend to employer matching contributions. The SECURE Act 2.0 amendment allows employer matching contributions to be made with respect to qualified student loan repayments rather than (or in addition to) employee elective deferrals. Moreover, such matching contributions will count toward safe harbor 401(k) plan requirements and safe harbor automatic enrollment 401(k) plan requirements.

Qualified student loan repayments eligible for match cannot exceed the lesser of the maximum deferral limit under Internal Revenue Code (IRC) Section 402(g) (the maximum deferral limit, which is $22,500 in 2023) and IRC Section 415(c) (the maximum annual addition limit, which in 2023 is the lesser or $66,000 or 100 percent of the participant’s compensation). In addition, the participant must certify annually to the employer making the matching contribution that the loan repayments were actually made.

Increased Catch-Up Contributions for Older Participants (Effective for Taxable Years Beginning After December 31, 2024)

Congress previously attempted to remedy retirement savings deficiencies by allowing participants age 50 or older to make additional contributions beyond the limits specified in the IRC or under the terms of a plan document. These contributions, called “catch-up contributions,” remained at a fixed amount (subject to adjustment for inflation) and did not vary with the participant’s age. For 2023, the maximum catch-up contribution limit is $7,500.

The SECURE Act 2.0 introduces catch-up contribution limits that increase as the participant ages. Under SECURE Act 2.0, starting in 2025, the maximum catch-up contribution for participants who turn age 60-63 during the tax year will be the greater of $10,000 or 150 percent of the regular catch-up contribution for 2024 (as indexed for inflation). For tax years beginning in 2024, catch-up contributions for participants earning $145,000 or more annually must be made as Roth contributions.

Emergency Savings Account (Effective for Plan Years Beginning After December 31, 2023)

Although current law allows for in-service withdrawals from 401(k) plans in the event of hardship, there is no specific arrangement within a 401(k) plan for a separate emergency savings account (ESA). SECURE Act 2.0 specifically allows employers to provide an ESA for non-highly compensated employees under the plan, which must be funded with Roth contributions. The plan may automatically enroll eligible participants in an ESA at 3 percent of compensation.

Once the ESA account balance reaches $2,500 (indexed for inflation) or a lower amount determined by the plan sponsor, no further contributions are allowed until the participant makes a withdrawal. There can be no minimum contribution or balance requirements. Participants must be allowed to take at least one withdrawal per month, and the first four withdrawals per year cannot be subject to fees. ESAs may be invested in cash, interest-bearing deposit accounts, and principal preservation accounts. The IRC does not appear to define what constitutes an emergency, suggesting that such withdrawals can be made for any purpose.

Optional Roth Employer Contributions (Effective Immediately)

Historically, all employer contributions to 401(k) plans have been pre-tax contributions, with participants not taxed on such contributions and related earnings until distribution. Under SECURE Act 2.0, employers may permit employees to elect that employer matching and non-elective contributions be made as Roth contributions. Roth employer contributions are taxable to the employee at the time they are made, and such contributions and their related earnings are not taxed upon distribution. Participants must be 100 percent vested in employer Roth contributions at the time they are contributed to the plan.

Automatic Enrollment and Automatic Increases for Newly Established 401(k) Plans (Effective for Plan Years Beginning After December 31, 2024)

One way to encourage retirement savings is by making contributions the default election and requiring participants to make an affirmative election to stop the contributions. Under SECURE Act 2.0, any 401(k) or 403(b) plan that is established after the date of enactment of SECURE Act 2.0 must contain an automatic enrollment provision that automatically enrolls employees (unless the employee opts out) and an automatic escalation provision that automatically increases participants’ deferral percentage each year. Employees must be automatically enrolled at a contribution percentage of at least 3 percent, but not more than 10 percent, and after each plan year in which a participant has completed a year of service, the contribution percentage must automatically increase by 1 percent until the contribution is at least 10 percent, but no more than 15 percent. Employers that join multiple employer plans (including, but not limited to, plans sponsored by payroll or human resources service providers) are considered to have established a new plan and are, therefore, subject to the automatic contribution and automatic enrollment requirements.

Participation of Long-Term Part-Time Employees (Effective for Plan Years Beginning After December 31, 2024)

Under the Employee Retirement Income Security Act (or “ERISA”), 401(k) plans are allowed to exclude part-time employees who have not completed a “year of service,” which is defined as the completion of at least 1,000 hours of service during a 12-month period. Under the SECURE Act, employees with at least 500 hours of service in a three-consecutive-year period must be eligible to participate in the employer’s 401(k) plan. Beginning in 2025, SECURE Act 2.0 reduces the number of consecutive years in which part-time employees are required to complete at least 500 hours of service to participate in a 401(k) plan from three years to two. Note that these long-term part-time employees are only required to be allowed to make employee contributions to the 401(k) plan; a plan sponsor is not required to make employer contributions (including matching contributions) on their behalf.


Increased Involuntary Cashout Limits (Effective for Distributions Made After December 31, 2023)

Former employees who maintain balances in qualified retirement plans present complications for plan administrators. For example, record-keeping fees are often based on the number of participants with accounts, whether active or inactive, and plan administrators must provide many plan disclosures to former employees until they take their full distributions from the plan.

To help alleviate these plan burdens, plans may “cash out” former participants without their consent. For participants with account balances of $1,000 or under, the distributions can be made directly to the participant. For participants with account balances between $1,000 and $5,000, the distribution must be rolled over to an individual retirement account (IRA) established for the participant unless the participant consents to a direct distribution. Under SECURE Act 2.0, the involuntary cashout/rollover limit increases from $5,000 to $7,000.

Long-Term Care Distributions (Effective for Distributions Made After December 28, 2025)

Distributions from a retirement plan before a participant reaches age 59½ (or age 55, if the benefit is in the form of an annuity) are subject to a 10 percent early withdrawal tax penalty unless an exception applies. SECURE Act 2.0 creates a new exception to the early withdrawal tax for distributions used to pay for certified long-term care insurance. “Certified long-term care insurance” has a very technical definition that loosely covers a qualified long-term care insurance contract, within the meaning of IRC Section 7702, or a rider or other provision under a life insurance or annuity contract that either covers the risk that the insured becomes chronically ill or provides meaningful assistance if the insured requires home-based or nursing home care. The exception from the 10 percent early withdrawal penalty will be limited to the lesser of (a) the cost of the insurance, (b) 10 percent of the participant’s vested account balance, or (c) $2,500 annually (to be adjusted for the cost of living).

Exception to the 10 Percent Penalty for Distributions for Terminally Ill Participants (Effective Immediately)

SECURE Act 2.0 provides an additional exception to the 10 percent early withdrawal penalty for distributions to terminally ill participants. “Terminally ill participants” are defined as those certified by a physician as having a terminal illness or condition that can reasonably result in death within 84 months of the date of the certification. Terminally ill participants who take distributions have the option of paying them back to the plan (if the plan permits) or to an IRA under rules similar to those relating to repayment of qualified birth or adoption distributions.

Required Minimum Distribution Age Raised (Staggered Effective Dates)

Participants in retirement plans must take required minimum distributions (RMDs) from the plan once they attain a certain age. The SECURE Act increased this age from 70½ to 72 for employees who turn 70½ after December 31, 2019.

SECURE Act 2.0 again increased the RMD age. Starting January 1, 2023, the RMD age is increased to age 73 for individuals who turn 72 after December 31, 2022. In addition, for individuals who turn 74 after December 31, 2032, the RMD age will increase to age 75.

Reduced Penalty on Failure to Take RMDs (Effective After December 31, 2022)

The IRC imposes a penalty on participants who do not take RMDs in a timely fashion, which was 50 percent of the amount by which the RMD for the year exceeded the distribution taken in that year. SECURE Act 2.0 reduces the penalty to 25 percent of that amount. The penalty rate is further reduced to 10 percent if the participant files a tax return reflecting the penalty by the earliest of (1) the date the IRS mails a notice of deficiency with respect to the penalty, (2) the date the penalty is assessed, or (3) the end of the second year following the year in which the full RMD was not taken.

Administrative Matters

Elimination of Notice Requirements for Unenrolled Participants (Effective for Plan Years Beginning After December 31, 2022)

There are numerous notices that are required to be sent to plan participants. Under current law, these notices must be sent to employees who are eligible to participate in a 401(k) plan, even if they have elected not to participate. SECURE Act 2.0 allows defined contribution plan sponsors to avoid sending multiple notices to unenrolled participants. Instead, the plan sponsor will be required to send unenrolled participants the summary plan description and an annual notice regarding their eligibility to unenroll and any application election deadlines. The plan sponsor must also provide any document requested by the participant that the participant would have been eligible to receive if the participant were enrolled in the plan.

Expansion of IRS Employee Plans Compliance Resolution System (Effective Immediately)

Under current IRS Employee Plans Compliance Resolution System (EPCRS) guidance (Revenue Procedure 2021-30), self-correction (without an IRS filing) of operational failures is only available for failures that are considered insignificant or for failures that are corrected by the end of the third plan year following the plan in which the failures occurred. Under Revenue Procedure 2021-30, the factors to be considered in determining whether an operational failure under a plan is insignificant include, among other things, whether other failures occurred during the period being examined, the percentage of assets and contributions involved in the failure, the number of years the failure occurred, the number of participants affected relative to the total number of participants in the plan, whether correction was made within a reasonable time after discovery of the failure, and the reason for the failure. Failures that are significant and not corrected by the deadline require an IRS filing and IRS approval in order to make corrections.

SECURE Act 2.0 allows any eligible inadvertent failure to be self-corrected at any time, unless the IRS identified the failure before self-correction began or the self-correction was not completed within a reasonable period after the failure was identified. An “eligible inadvertent failure” is defined as any failure that occurred despite the existence of standards and practices currently required for self-correction under EPCRS guidance.

What Employers Should Do Now

  • Begin as soon as possible to assess the impact of the changes required by SECURE Act 2.0 on your retirement plans.
  • Determine which optional provisions of SECURE Act 2.0 you desire to incorporate into your plans, and address operational compliance for all applicable provisions.
  • Once the above assessments and determinations are completed, begin to consult with your counsel on the timing of plan amendments, given that the Department of the Treasury may issue additional guidance.
  • Consider the timing and content of employee communications and updates to the summary plan descriptions.


For more information about this Insight, please contact:

Avi Bernstein
New York
Brianna Richardson
Gretchen Harders
New York

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