Industry Groups Urge Congress to Finalize SECURE 2.0 Technical Corrections

The retirement industry is still waiting for Congress to pass the SECURE 2.0 Technical Corrections Act of 2023 to address issues arising from the 2022 retirement system law, and eight major industry groups have written to Congress urging it pass the bill as soon as possible to ensure the affected provisions can be implemented on a timely basis. 

The groups’ letter highlights several provisions they believe Congress needs to address quickly, including special tax treatment for distributions to terminally ill plan participants and automatic enrollment as it relates to multiple employer plans and pooled employer plans. 

The industry groups responsible for the letter are: the American Benefits Council, the American Council of Life Insurers, the ERISA Industry Committee, the Insured Retirement Institute, the Investment Company Institute, the Securities Industry and Financial Markets Association, the SPARK Institute and the U.S. Chamber of Commerce.  

Terminal Illness Distributions 

First, the groups urge Congress to address Section 326 of the SECURE 2.0 Act of 2022, the section which provides for a special tax treatment for distributions to terminally ill plan participants beginning on or after December 29, 2022. However, the groups argue the provision does not create a new distribution trigger and, as a result, a terminally ill individual could not receive a distribution from a plan solely because of their terminal illness. 

Currently, an individual must otherwise be eligible for a plan distribution, such as by terminating their employment or by being age 59.5 or older.  

“This undermines the purpose of the new provision and could prevent a terminally ill individual from accessing assets critical to their medical and other care during this time,” according to the letter.  

This lack of a distribution trigger is also “inconsistent with other penalty-free distribution provisions added by SECURE 2.0,” such as distributions for emergency expenses, domestic abuse victims and qualified disasters, according to the industry groups. As a result, they argue that the passage of the corrections package is needed to override conflicting guidance from the Department of the Treasury and from the IRS. 

Auto-Enrollment and PEPs 

In addition, the groups point out inconsistencies with the provision that requires 401(k) plans established after the enactment of the SECURE 2.0 Act of 2022 to implement automatic enrollment and escalation. This provision is effective for plan years beginning after December 31, 2024. 

The groups are seeking clarity as to whether plans established before the enactment of SECURE 2.0, which would be exempt from the automatic enrollment and automatic escalation rules, would lose that exemption if they merged into certain multiple or pooled employer plans, which could make them subject to the requirement to offer automatic enrollment and escalation.  

According to the trade organizations, if guidance were implemented as is, it would establish two different “classes” of PEPs—those created before SECURE 2.0 was enacted and those created after enactment.  

Chris West, managing director and head of the U.S. LifeSight PEP at Willis Towers Watson, says she does not believe Congress intended this provision to cause confusion and argues that whether or not a plan offers automatic enrollment should depend on when the individual plan was created, not on when it joined a PEP. She says if the provision is kept as is, it could deter plan sponsors from joining PEPs, as it would add costs if they are required to offer automatic enrollment and escalation. 

“When we think about organizations who may not be able to offer the bells and whistles and all the flexibility of a 401(k) plan because they’re smaller [and] don’t have a large amount of assets, … if they are able to join [a] PEP, then they’d be able to take advantage of scale and really be able to provide that employee experience,” says West. “If you’re treating PEPs different because [the rule] hasn’t been clarified, it’s possible that employers and their employees aren’t making the best decision because they just don’t have access.” 

West adds that Congress intended to develop a “vibrant PEP marketplace,” but a lack of IRS guidance could hinder progress toward the broader goals of increasing access to retirement savings and innovation in the retirement marketplace. 

Student Loan Matching, Catch-Ups 

The industry groups also note in their letter the need to clarify that the limit on student loan payments which qualify for an employer match includes the catch-up contribution limit. This clarification is needed to give certainty to plan service providers so they can implement the provision, the groups argue. 

Additionally, without the passage of the corrections bill, SIMPLE and SEP contributions would reduce the limit for a Roth individual retirement account, which according to the letter, has no effect on high-income individuals but can adversely affect many middle-income individuals. The corrections bill would also confirm that traditional over-50 catch-up contributions were not eliminated by SECURE 2.0 and fix a still unaddressed catch-up contribution issue for state and local government employees.  

Congressional leaders previously wrote a letter to Secretary of the Treasury Janet Yellen and IRS Commissioner Daniel Werfel in May 2023, saying they intended to correct the technical errors in SECURE 2.0, but the letter did not spell out a timetable. 

The letter written by the industry groups was addressed to Senate Committee on Finance members Mike Crapo, R-Idaho, and Ron Wyden, D-Oregon, and House Committee on Ways and Means members Richard Neal, D-Massachusetts, and Jason Smith, R-Missouri.