March 3, 2023
The SECURE Act 2.0 was signed into law at the end of last year and makes several important changes to help alleviate the retirement savings crisis. Built on the change made in the SECURE Act of 2019, the latest version offers many benefits to both employees and employers. To facilitate additional savings, several new provisions have been added to expand eligibility, extend RMD requirements, and require auto-enrollment and escalation for eligible employees. To entice employers to offer plans, the legislation provides several new tax incentives for plan startups, eliminates notice requirements for non-participants, and made it easier to resolve plan errors. Most prominent were the correction of plan overpayments and the expansion eligible errors corrected under the Self Correction Program (SCP). To help clients, prospects, and others, Wilson Lewis has provided a summary of the key content below.
Under prior regulations, if a plan accidentally paid more to a participant or beneficiary than permitted the sponsor was required to collect the overpayment with interest. As one can imagine, attempting to recover overpayments can be troublesome and time-consuming. The SECURE Act 2.0 changed this rule allowing plan administrators to decide whether to attempt collection or not. This is a significant change because previously a failure to collect an overpayment would be a violation of IRS rules and could result in the revocation of the plan’s tax-exempt status. Concurrently, it also relieves the plan of the potential breach of fiduciary responsibility concerns.
If a plan decides to recover overpayments there are several important rule changes to consider prior to initiating the collection process. The plan cannot attempt recovery if the first overpayment occurred more than 3 years before the written notification was submitted, no repayments can come from the participants surviving spouse or beneficiary, no interest or collection fees can be charged, repayment is made by reducing annuity payments can not exceed 10% of the overpayment, and recovery efforts may not use litigation threats. Participants must also be allowed to contest recovery efforts in accordance with plan rules. It is important to note that current overpayment recoveries in the form of installment payments or the reduction of future benefit payments may continue.
The changes made to the EPCRS call for a significant expansion of the Self-Correction Program (SCP). Under new rules, a plan sponsor may now correct an “eligible inadvertent failure”. These are failures that occur despite the presence of processes designed to ensure compliance with regulations. A plan can self-correct these issues unless the failure was first identified by the IRS, or the correction was not made within a reasonable timeframe.
These changes provide a lifeline for plans currently under an IRS investigation. The new rules allow a plan to make a self-correction as long as it can be demonstrated that remediation efforts were underway prior to the IRS identifying the issue. Under prior rules, failures could be self-corrected while under an IRS exam, but the rules required efforts to be mostly completed. Under SECURE Act 2.0 a plan only needs to show that remediation is underway, regardless of how long until completion.
Under previous regulations, there was a safe harbor provision that allowed sponsors to correct errors arising from automatic enrollment and escalation issues. The errors were required to be corrected within 9 ½ months after the end of the plan year in which the issue occurred. Unfortunately, the provision expired at the end of last year, but the SECURE Act 2.0 extended the program and made it permanent.
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There are several changes made in the SECURE Act 2.0 which make it easier for administrators to manage complexities. For this reason, it is important to consult with an advisor to determine how you will be impacted. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.