Compliance January 10, 2023

Age-Specific Changes Found in SECURE 2.0

SECURE increases the RMD age and expands the amount of catch-up contributions certain participants can make.

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The SECURE 2.0 Act contains at least two key provisions that mandate age-specific changes. The first is that the age for taking required minimum distributions increased from 72 to 73 in 2023 and will again to 75 in 2033.

The second provision is that those aged 60 through 63 will be allowed to make additional catch-up contributions in addition to those available to participants older than 50, in what might be called super catch-up contributions.

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Super Catch-Up

The super catch-up provision takes effect in 2025, and the super catch-up amount will be the greater of $10,000 or 50% more than the ordinary catch-up amount in 2025. Both figures will be indexed to inflation starting in 2026. The ordinary catch-up limit for participants 50 and older is $7,500 for 2023.

In other words, if the super catch-up provision took effect in 2023 (it starts in 2025), it would add a 50% increase to $7,500, which is $11,250, on top of the normal contribution limit of $22,500 for 2023, which would result in a total maximum contribution of $33,750, but only for those aged 60 through 63.

The 60 through 63 age range was the proposal from the Senate Committee on Finance in a bill called the EARN Act. The House version, called the Securing a Strong Retirement Act of 2022, had a similar provision, but with an age range of 62 through 64. It is not clear why the slightly younger age range was chosen, but given the origins of other provisions, such as waiting until 2033 to increase the RMD age to 75, it was likely related to budget scoring concerns.

According to Brigen Winters, the chair of the policy practice at the Groom Law Group, all catch-up contributions made by highly compensated employees, meaning those making $145,000 or more per year, must be into a Roth account. This applies to both normal and super catch-up contributions and is designed to be a “revenue raiser” for the federal government to offset other provisions that cost the Treasury money.

Allison Brecher, the general counsel at Vestwell, says this will be a challenge for recordkeepers, who must now “track age three times” for catch-up contributions: those aged 50 through 59, those 60 through 63 with the super catch-ups, and then those 64 and up. Additionally, all highly compensated employees’ contributions must be to a Roth account. She says tech-savvy recordkeepers with strong access to payroll records will have an enormous advantage.

The ordinary contributions of participants in those age ranges are unaffected and may be put into a pre-tax account, and non-HCEs can contribute all catch-ups pre-tax as well.

Michael Hadley, a partner in the Davis & Harman law firm and a member of the Society of Professional Asset Managers and Recordkeepers (SPARK) Institute’s advocacy team, agrees this will be a major challenge for recordkeepers, perhaps the biggest one coming from the new law. Ensuring compliance with this mandatory change, effective 2024, may even cause some recordkeepers to postpone enactment of optional changes that also have effective dates of 2024, such as creating emergency “sidecar” savings accounts.

Concern over administering this provision is something of a theme in the retirement industry. David Stinnett, the head of strategic retirement consulting at Vanguard, also admits that the Roth provision for HCE catch-up provisions will be administratively complicated.

RMD Age Increase

SECURE 2.0 also increased the RMD age to 73 in 2023 75 starting in 2033.

Congressman Richard Neal (D-Massachusetts), chairman of the House Committee on Ways and Means, remarked in a press call after SECURE 2.0’s passage that the increase in the RMD age was primarily motivated by the reality that Americans’ lifespans are increasing. According to Harvard Medical School, American lifespan actually decreased to 76 in 2021, from a peak of 79 in 2019, mostly due to pandemic deaths and deaths of despair.

Brecher says that the RMD increase is a reflection of people working longer. She adds that the RMD provision also allows surviving spouses to be treated as an employee for the purpose of applying the RMD age to the surviving spouse’s collection of their deceased spouse’s retirement account. She notes that the provision does not change the RMD exemption for most people who continue working past RMD age.

Mark Iwry, a nonresident senior fellow in economic studies at the Brookings Institution and formerly a senior adviser to the Secretary of the Treasury for retirement and health policy, says that increasing the RMD age was long lobbied for by asset managers as a way to keep more assets invested.

Iwry regrets that an alternative proposal was not used instead. He said he would have preferred if those in their 70s with small or midsize tax-preferred retirement accounts were completely exempted from the RMD. He argues that since RMD rules are complex, there is a large penalty for noncompliance, and many seniors are losing mental capacity in their old age, exempting non-wealthy participants would enable them to save on their own terms while still preventing the wealthy from accumulating longer on a tax-deferred basis.

Section 302 of SECURE 2.0 also reduces the penalty for failing to comply with RMD from 50% to 25% on the required amount not withdrawn, reducing it further down to 10% if it is corrected within two years, according to Winters.

Section 325 of SECURE 2.0 will remove the pre-death RMD requirement for Roth 401(k) accounts entirely so that they are like Roth IRAs. This provision takes effect in 2024.

Kristen Carlisle, vice president and general manager of Betterment at Work, says both the RMD and catch-up provisions could make it somewhat easier to adjust to a future in which Social Security benefits are reduced. The catch-up provisions will allow workers to save extra money before retiring and collecting Social Security, and the RMD age increase will give them more time to accumulate more savings.

Compliance January 10, 2023

DOL to Consult Industry on How To “Facilitate” PEP Uptake

Among items on DOL/EBSA's agenda: speaking with retirement plan service providers, employers and employees on what regulators can do to help increase PEP growth.

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The Department of Labor is planning to consult the retirement industry and employers for feedback on pooled employer plans, with the goal of increasing uptake, according to an item on its regulatory agenda posted on January 4.

The DOL’s Employee Benefits Security Administration said it plans to “explore the need for regulatory or other guidance” regarding the implementation of PEPs first made available in the original Setting Every Community Up for Retirement Act of 2019 and expanded to 403(b) plans in SECURE 2.0. The EBSA said it intends to consult with “employers and employees and their representatives and retirement plan service investment providers, to explore areas where regulatory or other guidance would facilitate establishment and operation of pooled employer plans.” According to the web site posting, EBSA intends to have stakeholder meetings in March.

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David Kaleda, a principal with the Groom Law Group specializing in the Employee Retirement Income Security Act, said the agenda item for the DOL signaled that policymakers and possibly the administration of President Joe Biden “believe that not as many PEPs have been formed as may have been expected.”

PEPs came to market with much fanfare as a way for employers of any type—but particularly unrelated smaller businesses—to leverage their combined scale to provide a workplace retirement plan that would be more cost-effective and less administratively burdensome than running it on their own. The model got more discussion at the end of last year, when the passage of SECURE 2.0 gave 403(b) nonprofit retirement plans access to PEPs, along with 401(k)s.

There certainly has been some uptake of PEP offerings from what are known as pooled plan providers. The multinational financial services firm Aon reported more than $1 billion in assets and commitments last year to their PEP, and surveys and reports show increased interest.

As of late 2022, there were about 100 pooled plan providers registered with the Department of Labor and about 300 PEPs offered by these plan providers, according to research done last year by Robb Smith, president of RS Fiduciary Solutions and one of the founders of PEP-Hub. 

But despite growth in the market, there are still lingering questions about management and fiduciary obligations that need to be addressed as the industry evolves, says Terry Power, president of The Platinum 401k, a third-party administrator specializing in PEPs.

One area where Power identifies lack of direction is the annual auditing requirement for retirement plans within a PEP. At the moment, he says, there is still uncertainty as to whether small employers within a PEP are covered to the same extent as a large employer. Secure 2.0 offered some clarification on defined contribution groups, but there still is a need for clarification in the PEP world.

“We’re trying to do the right thing and not trying to make this overly complicated,” Power says. “But it’s a case where you would have large, pooled employer plans with small companies that would be subject to audit.”

The DOL did not respond to a request for comment about the audit issue or the agenda item in general. According to registration requirements for a PEP published by EBSA, a “pooled employer plan arrangement allows most of the administrative and fiduciary responsibilities of sponsoring a retirement plan to be transferred to a pooled plan provider.”

EBSA to Consider

Power wrote a letter to EBSA in November 2022 that he posted on his LinkedIn page seeking clarification on the auditing question. He wrote: “In an abundance of caution and without guidance to the contrary, it appears that Pooled Employer Plan auditors are including each adopting employer—regardless of the size of their group—as part of their audit review, thereby driving up the cost of the annual PEP audit and thereby losing many of the benefits and efficiencies anticipated by the Secure Act legislation.”

Power said the regulatory agency responded with a “productive” 30-minute phone call, but those on the call said deciding on the auditing question was not in their mandate, and that they would take the input under consideration.

Attorney Kaleda says another question for some industry participants is whether prohibited transactions could arise if the pooled plan provider uses outside entities as service providers or asset managers. So far, the industry “has moved ahead using existing, non-PEP guidance in order to address these issues.”

He also notes that there has been some confusion about who is responsible for assuring that a participating employer sends their contributions to the trust of a PEP, leaving it in some cases to the employer, which would create added burden. Under SECURE 2.0, however, the DOL makes it clear that a named fiduciary can ensure the contributions on behalf of the plan and all the employers, Kaleda said.

Smith of PEP-Hub.com said in an emailed response that his firm is concerned that most employers are joining a PEP without conducting a prudent search and vetting process to make sure they choose the best option. With more than 300 registered PEPs in the marketplace, it is “almost impossible for employers and their advisers to properly vet potential P3 [pooled plan providers] and PEP candidates without expertise from third-party professionals,” Smith wrote.

“PEP-HUB regards conducting a request for proposal as an important step in prudently vetting possible PEP candidates,” Smith said. “We would like to see the DOL ‘encourage’ advisers and sponsors to conduct a proper vetting process when selecting a PEP option.”

Long Process

The PEP focus is “positive overall,” says Patrick Rieck, vice president of product, retirement and private wealth with HUB International. “There are several items that could use clarity, albeit primarily from a Pooled Plan Provider (PPP), recordkeeping, and administration standpoint. As an ERISA 3(38) Investment Manager, there is not significant guidance needed on our role.”

Rieck says it would be helpful for EBSA to provide clarity on how they view a PPP that is outsourcing a “material PEP function” to a subsidiary or affiliate.

“Shall this be considered a conflict of interest or a continuation of the PPP’s function and respective fees?” Rieck asks. “In addition, if permitted, how should this structure be disclosed?” 

As rules around the PEP continue to be developed, Power and his firm were quick to get into the 403(b) PEP space, registering two 403(b) PEPs with the DOL just after SECURE 2.0 passed.

“Overall, we’re pleased that the DOL, and EBSA, is listening and engaged,” Power says. “I’m very positive and hopeful that this [review] gives the grease it needs. We all want to get to the same place and just need to decide how we’re going to get there and what it’s going to look like.”

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