December 12th, 2023 | By Theresa Conti
The SECURE 2.0 Act of 2022 (SECURE 2.0), signed into law on December 29, 2022, changed and expanded a few rules that are important when we talk about administration of qualified retirement plans and more importantly the impact of these rules when we are running those plans. There are many things that are changed and/or updated under SECURE 2.0 but I am focusing on three key topics.
The first change under SECURE 2.0 that I will discuss is the eligibility rules for long-term, part-time employees (LTPTs). On November 24, 2023, the IRS issued the proposed regulations on how plans are to comply effective January 1, 2024. Let’s explore both the rules and the impact of these updated regulations.
What are the Rules:
- In 2024, an employee that works 500+ hours in 2021, 2022, and 2023, must be allowed to defer to the plan effective January 1, 2024. Hours worked prior to 2021 are not counted.
- Beginning in 2025, these requirements are reduced from 3 years to 2 years for anyone that was not eligible to defer under the 2024 rule.
- Effective January 1, 2025, any employee that works 500+ hours in any 2 consecutive years after 2020 must be allowed to defer to the plan. Employees allowed to defer under this rule that do not otherwise meet the eligibility provisions of the plan are not required to receive employer contributions like safe harbor, matching, or profit-sharing contributions, and are not required to be counted for purposes of any nondiscrimination test.
What’s Impacted:
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Contribution limits continue to apply to LTPTs (cannot defer more than 100% of pay up to $23,000 for 2024) and can exclude LTPTs from catch-up contributions if you wish but may impact non-discrimination testing (see below).
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If you have a plan with a safe harbor contribution and the LTPTs are excluded from all employer contributions, the failure to give them a safe harbor contribution will not cause the plan to lose its top-heavy exemption.
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Non-discrimination testing allows LTPTs to be excluded from ADP/ACP testing, coverage, and all other non-discrimination testing. If you choose to exclude LTPTs from non-discrimination testing, you must exclude them from all non-discrimination testing even if you give them other benefits in the plan.
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When determining top-heavy status for a plan, the accounts of LTPTs are always included in the determination of whether the plan is top-heavy. But a decision may be made as to whether to give LTPTs the top-heavy minimum contribution. The Plan Document will allow the sponsor to elect (presumably each plan year) whether to include LTPTs in testing, safe harbor and top heavy.
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You can exclude LTPTs if they are in an excluded class of employees if the rule is applied consistently. Other than this excluded class rule it is not possible to exclude some LTPT employees and not others.
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You must operate your plan and make these decisions starting with the January 1, 2024, plan year, however, the plan amendments will be required no later than the end of the 2025 plan year.
SECURE 2.0 also changed the ownership attribution rules as it relates to aggregation of businesses. These changes are effective starting January 1, 2024, and apply to attribution rules for determination of both controlled groups and affiliated service groups.
What’s Impacted:
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Starting in 2024, community property laws for purposes of determining ownership are disregarded. Previously in states where community property laws applied, even if spouses owned 100% of their separate businesses, each spouse would be considered to own the other spouse’s separate business and the business would be considered related. This will no longer apply starting in 2024.
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Attribution rules as it relates to minor children (under age 21) are also changed. If two spouses separately owned 100% of their business and had a minor child, they are no longer considered related solely because stock owned by the parents is attributed to a minor child.
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These changes may impact plan operations, non-discrimination testing, and Form 5500’s.
Finally, with SECURE 2.0 the rules were modified for correcting compliance errors and also significantly expanded the Employee Plans Compliance Resolution System (EPCRS). On May 25, 2023, the IRS also issued Notice 2023- 43 which provided interim guidance while the update to EPCRS is pending.
What’s Impacted:
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The Notice authorized the use of the changes effective immediately and provided additional guidance about permissible self-correction failures.
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The Act now permits plan sponsors to correct most eligible inadvertent failures (EIF) through the Self Correction Program (SCP) regardless of the type of failure or the time during which it occurred. This will allow corrections to be more cost effective for plan sponsors.
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Upon self-correction, plan sponsors must have practices and procedures documented and demonstrated to assure that further errors will not occur.
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EIFs may be self-corrected at any time before it is identified by the IRS (and possibly even after the IRS identifies it) and within a reasonable period. The reasonable period has a safe harbor provision that any EIF that is corrected by the last day of the 18th month following when it is identified is presumed to have been completed in a reasonable period.
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Most errors can now be corrected under SCP but a few of the items that cannot be corrected include failure to adopt an initial written plan; failure in a terminated plan; or operational failure that is being corrected by plan amendment that is less favorable than the original provision.
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There are some documentation requirements relating to SCP. In case of IRS audit following self-correction, a plan sponsor should be able to provide identification of the failure, the date the failure was identified, an explanation of how the failure occurred, identification and how the correction was made, and changes to the practices and procedures to avoid future.
