Ask the Experts February 14, 2023

How Frequently Can Emergency Withdrawals Be Taken Under SECURE 2.0?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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Q: Though I know the provision to allow for emergency distributions from retirement plans is not available until 2024, I’m a bit confused as to how frequently such distributions can be taken. Can the Experts clarify?

Kimberly Boberg, Taylor Costanzo, Kelly Geloneck and David Levine, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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A: Of course! You are correct that, beginning in 2024, there will be a new type of retirement plan distribution for emergency personal expenses, which is defined as any distribution to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses (participants may self-certify that they meet the definition). This distribution (which can generally be up to $1,000) will be exempt from the 10% early-distribution penalty and can be repaid within three years. Plan sponsors will need to decide whether to add this provision to their plan. If you do not amend your plan documents to include it, the normal plan distribution rules will apply, with no special category for emergency personal expenses.

There are two separate rules in Section 115 of SECURE 2.0 that would apply to distributions for emergency personal expenses. The first rule, toward the beginning of the provision, states that only one distribution per calendar year is permitted under any circumstance. Thus, if I take an emergency personal expense distribution in 2024, I must wait at least until 2025 to take another, regardless of circumstance.

However, there are circumstances in which a participant will have to wait much longer to take an additional distribution. That is because there is a second rule toward the end of the provision that states that a participant will have to wait until the fourth calendar year following the year of distribution (2028, in the case of a 2024 distribution), UNLESS either of the following two events occurs:

Total amount of elective deferrals/after-tax contributions since the distribution date equals or exceeds the distribution amount that has not been repaid; or
The distribution is repaid.

If one of these events occurred prior to the beginning of the fourth calendar year, then another emergency personal expense distribution would be permitted.

So if I took an emergency personal expense distribution in 2024, and my elective deferrals for the remainder of the year exceeded the distribution amount, I would be able to take another emergency personal expense distribution in 2025 (but not in 2024, due to the one-distribution-per-calendar-year rule).

NOTE: This feature is to provide general information only, does not constitute legal advice and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Amy.Resnick@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future column.

Administration February 13, 2023

Empower Joins Fidelity, Vanguard and Alight in Portability Consortium

Growing recordkeeper clearinghouse will help participants with balances of $5,000 or less move accounts when they change jobs.

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Alex Ortolani

Empower Retirement is the latest recordkeeper to sign on with Portability Services Network LLC, an entity using its technology to automatically locate a participant’s retirement account in their former employer’s plan and transfer accounts under $5,000 into an active account.

Empower, the country’s second-largest 401(k) recordkeeper by assets, will join Retirement Clearinghouse LLC’s consortium of recordkeepers set up to automatically move small 401(k), 401(a), 403(b) or 457 accounts to a worker’s new provider when they change jobs. The company is majority owned by Retirement Clearinghouse.

The clearinghouse is designed to reduce cash-outs, in which employees take an immediate tax hit and often times reduce their overall retirement assets, by cashing out their plans instead of going through the rollover process. This retirement plan “leakage” tends to happen disproportionality among lower-income and minority workers, and results in tens of billions of dollars leaving retirement plans, according to industry-backed research firm EBRI.

“Advancing auto-portability adoption across the retirement system provides workers with the best chance to harness the power of all the assets they have earned through their workplace savings plans,” Empower President and CEO Edmund F. Murphy III said in a statement on Monday.

Empower joins the consortium announced in October 2022 alongside the country’s three other largest recordkeepers by assets: Fidelity Investment, Vanguard and Alight Solutions. The Greeenwood Village, Colorado-based Empower announced that it will make the service live for plan sponsor clients in the first quarter of 2025.

The consortium is the brainchild of business owner and entrepreneur Robert L. Johnson, whose Retirement Clearinghouse has been working for years with recordkeepers and policymakers to get both industry participation and regulatory approval for a national auto-portability network. With the passage of the SECURE 2.0 Act of 2022, a plan provider can now transfer a participant’s retirement savings from a previous employer to a new one, unless the participant says otherwise.

With the addition of Empower, the consortium will represent about 60 million participants and more than $5 trillion in assets, based on data published by PLANSPONSOR. The Retirement Clearinghouse currently works with more than 34,000 retirement plans and has guided 1.8 million plan participants with more than $28 billion in retirement savings, according to the Charlotte, North Carolina-based firm.

PSN is majority-owned by Retirement Clearinghouse, with the recordkeepers providing the other ownership stakes. There are still two open spots for recordkeepers to join the venture, according to the announcement. The Retirement Clearinghouse and the recordkeeper owners will govern the network as an “industry utility” and allow all recordkeepers to connect to the network, though the providers will not receive any compensation for joining.

The system of automatic transfer between retirement plans was devised in part to mimic auto-enrollment, which has shown to be extremely effective in getting people to save within workplace retirement plans, according to Spencer Williams, who was brought on by Johnson to run the Retirement Clearinghouse and has been working closely with him on the consortium.

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“Retirement Clearinghouse brings all of the technology, the intellectual property, the know-how,” says Williams, who is president and CEO of Retirement Clearinghouse. The recordkeepers bring “that customer base in aggregate—the critical mass.”

Working Together?

Although the recordkeepers compete amongst themselves, Williams says, they are also focused on the mission to preserve retirement savings for minorities, women and low-income earners. There is also, he emphasizes, a business case for the consortium and auto-portability. One advantage is that servicing these smaller, inactive accounts carries an administrative cost. Another is the longer-term impact of cash-outs to the retirement business.

“When we stop leakage, we get more dollars in the system, and we get better customers in the system,” Williams says. “Instead of letting the $2,500 account disappear, that $2,500 becomes $5,000 in a retirement plan, and we’ve not only changed behavior from a savings mentality, but we’ve created better customers for the whole system.”