SECURE Act 2.0: Optional Provisions

The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, signed into law in 2022, enacted dozens of changes to federal law governing workplace retirement plans and IRAs. In this article, we discuss some of the optional provisions that plan sponsors may want to consider.

Student Loan Repayment Matching Contributions

One optional provision that seems to have sparked a lot of interest is the student loan repayment contribution matching provision. Under the provision, employers can make matching contributions to a retirement plan based on the employee’s student loan repayments rather than elective deferrals made to the plan.

Although there has been interest in this provision, questions on how to implement it remain, including:

• What constitutes a qualified loan repayment?
• What kind of institution would qualify as eligible for these kinds of payments?
• How do individuals substantiate that they’re making payments to these qualified college loans to be eligible for this matching program?
• What types of documentation do plan sponsors need to keep when implementing this provision?

Penalty-Free Withdrawals: Domestic Abuse

The SECURE 2.0 Act also provides for a new type of penalty-free, in-service withdrawal from defined contribution plans and IRAs for victims of domestic abuse. Plans adopting the provision are permitted to rely on a participant’s self-certification of eligibility. The statute limits eligible distributions by an individual to the lesser of $10,000 (to be adjusted for inflation) or 50% of the account balance. Participants generally are permitted to repay such distributions into an eligible retirement plan within three years.

The IRS recently issued Notice 2024-55, which provides some additional guidance for these domestic abuse distributions.

Penalty-Free Withdrawals—Emergency Personal Expense Distributions

The SECURE 2.0 Act provided a new exception from the 10% early withdrawal penalty for certain distributions from defined contribution plans and IRAs for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Individuals are limited to one distribution per year up to $1,000, with the option to repay the distribution within three years. No additional emergency expense distributions are permitted from a plan during the three-calendar-year period that immediately follows unless the amount of previous distributions is recontributed to such plan.

In Notice 2024-55, the IRS provided clarification on the optional provision.

Hardship Distribution: Natural Disasters

For participants who live in an area impacted by a federally declared disaster, the SECURE 2.0 Act created a new exemption from the 10% penalty tax on early distributions of up to $22,000, provided the distribution is made within 180 days of the disaster.

Involuntary Distributions from the Plan

A discretionary provision that plan sponsors can take action on is related to mandatory cash-outs for former employees. Plan sponsors may consider this discretionary provision to remove former employees from their plans for audit and expense reasons. These mandatory cash-outs are also called involuntary distributions. SECURE 2.0 increased the threshold amount from $5,000 to $7,000, meaning that plan sponsors can remove account balances of between $1,000 and $7,000 and roll those amounts directly into an IRA in the participant’s name.

That allows the plan sponsor to save on costs, whether it’s the cost-per-participant charges by a recordkeeper or the independent audit costs based on the number of participants in the plan with balances. Balances under $1,000 may be paid out in cash.

If you have questions, please contact Mutual of America Account Representative Steven Ortiz at [email protected] or visit our services page to learn more. This article is intended as educational material and should not be construed as or relied upon as legal advice.