It’s time to stop pondering the massive SECURE 2.0 legislation that passed at the turn of the new year and start acting on it, say experts. Given that compliance timelines are staggered over the next several years, even knowing where to begin poses challenges for plan sponsors. Here is help for getting started.
Time To Get Going
Experts explain that SECURE 2.0 “is the aggregated and reconciled product of three bills,” making it extremely comprehensive: it is 400 pages long and includes many disparate provisions aimed at increasing participation in employer sponsored retirement plans. Kevin Selzer at Holland and Hart suggests that plan sponsors get going by addressing these aspects of SECURE 2.0:
Required Roth Contributions for Certain High Paid Participants. This provision requires participants who earn more than $145,000 (indexed beginning in 2025) to contribute catch-up contributions on a Roth basis. While this change is not effective until 2024, sponsors should be working with recordkeepers and payroll now to ensure their systems are ready. T-minus nine months and counting.
Ongoing Plan Corrections. Plans that have existing operational errors in the process of being corrected should evaluate how SECURE 2.0 impacts those corrections. The retirement plan correction procedure was expanded and modified, particularly related to overpayments and correction of “significant” operational errors.
Hardship Self-Certification. Plans may now allow participants to self-certify hardship distributions. Consider whether to adopt this change.
Retirement plan sponsors in the retail, hospitality, healthcare and other industries with “significant part-time workers” also need to address SECURE 2.0 provisions aimed at making it more possible for part-time workers to participate in saving. Experts explain:
SECURE 2.0 reduced the number of consecutive years a long-term part-time worker must provide services to gain eligibility for elective deferral purposes in ERISA-covered 401(k) and 403(b) plans (from three years to two). While the SECURE 2.0 reduction does not go into effect until 2025, the SECURE (1.0) provision goes into effect in 2024. Discussion should be happening now (if it hasn’t happened already) on whether to allow part-time workers into the plan immediately for deferral purposes, rather than tracking their hours. Plans in these industries may also want to consider adopting the relief on providing notices to certain unenrolled participants (effective now) and relief aimed at worker reluctance to participate (such as the new emergency distribution provision and Roth-like savings account, known as the PLESA—both effective in 2024).
Although some of the new SECURE 2.0 provisions became effective at the start of 2023, others become effective in 2024 and 2025, making vigilance to compliance issues and attention to detail ever more important for plan sponsors. In fact, national risk management expert Richard Clarke observes:
The litany of new 401(k) and 403(b) benefit plan provisions staggered across multiple years places imposing compliance and reporting pressures upon employers to grasp, implement and plan accordingly. Realistically, even with diligent effort, plan sponsors will make mistakes. 2022 was the second most active year on record for ERISA litigation against plan sponsors, with 24 settlements totaling more than $160 million to date. Unfortunately, plan sponsors bear personal exposure for third-party claims of not meeting fiduciary obligations. Additionally, some plan sponsors think if they outsource administration, oversight, or supervision of employee benefit plans, that they’re also outsourcing the liability. The liability exposure in that instance is the decision that’s made to utilize third party services. Fiduciary liability insurance is an indispensable measure to ensure sponsors and their businesses are protected with defense costs and penalty limits.
For plan sponsors, securing protection is an important action step and with affordable fiduciary liability insurance from Colonial Surety, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be covered for defense costs and penalty limits up to $1,000,000. Uniquely, Colonial even includes Cyber Liability Insurance, locks in multi-year rates and offers installation payments. Conveniently, our Fiduciary With Cyber liability package is now available with a one year commitment. Protect yourself and your business, for a few dollars a day, in minutes, now:
An Ounce of Prevention…
The time honored expression, “An ounce of prevention is worth a pound of cure,” is likely truer then ever in the face of increased compliance pressures for plan sponsors. In fact, although SECURE 2.0 has been widely embraced in the retirement industry, now that experts have had several months to analyze the many provisions it contains, their prediction is that it will be very hard to implement. For example, in Plan Sponsor, Paul Mulholland points out:
Some portions are poorly written, excessively complicated or do not have adequate compliance dates.The clearest example of this is the requirement that enhanced catch-up contributions for HCEs be made into a Roth account, starting in 2024. This process will be so difficult to implement for many sponsors that many are contemplating suspending catch-ups altogether as a temporary fix, especially public sector employers. It would be an unfortunate irony if the headache of this provision ended up causing plan sponsors to suspend features like catch-up provisions, given that the point of the legislation was to improve retirement security.
Some of the more anticipated voluntary provisions due to start in 2024, such as the student loan match, will likely not start immediately due to an absence of regulatory guidance.
Given the great many responsibilities inherent in the role of sponsoring the company retirement plan, mistakes are always a possibility—and so is the risk of being held personally responsible for errors in the administration of the plan. Indeed, litigation under the high standards of ERISA law has been on the rise. Unfortunately a common—and dangerous—mistake plan sponsors make is assuming that contracting with service providers eliminates the sponsor’s liability. As experts remind us, this is simply not true: “Some plan sponsors think if they outsource administration, oversight, or supervision of employee benefit plans, that they’re also outsourcing the liability. The liability exposure in that instance is the decision that’s made to utilize third party services.” Remember, though the risks associated with fiduciary responsibilities can never be fully eliminated, they can be reduced:
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