IRS Issues Implementation Guidance on Certain SECURE 2.0 Act Provisions

On December 20, 2023, the IRS released Notice 2024-2, which provides guidance in the form of questions and answers regarding certain mandatory and discretionary SECURE 2.0 Act provisions. The notice is not intended to provide comprehensive guidance but to address specific implementation issues.

Notice 2024-2 focuses on twelve SECURE 2.0 Act provisions that either are effective or will be soon. As explained further below, the notice provides clarity with respect to several important SECURE 2.0 provisions (referenced by section number), including mandatory automatic enrollment, de minimis incentives, terminal illness withdrawals, self-correction of eligibility failures, and employer Roth contributions.

Under Section 101 of the SECURE 2.0 Act, effective January 1, 2025, cash or deferral arrangements (CODAs), such as Section 401(k) plans, established after the law’s December 29, 2022 enactment date must have automatic enrollment and escalation features satisfying certain conditions. The notice clarifies that a plan is generally considered “established” for this purpose when the initial plan document is adopted, even if the plan’s effective date is later. Additionally, several questions address how mergers and acquisitions can affect whether a plan is subject to Section 101. Generally, if a plan subject to Section 101 is merged with a plan established prior to December 29, 2022 (i.e., a “grandfathered” plan), mandatory automatic enrollment applies to the ongoing plan. However, an exception applies for mergers occurring within the 410(b)(6)(C) transition period, which normally extends from the transaction date to the end of the following plan year.

Section 113 allows plan sponsors to provide “de minimis” financial incentives (not paid from plan assets) to employees to encourage participation in CODAs without violating the otherwise applicable contingent benefit rule. The notice indicates that the value of such incentives cannot exceed $250 and could be in the form of cash or gift cards (but not a matching contribution), which would be considered taxable income. Furthermore, the incentives can only be offered to those not already participating but could be structured as installments, so a portion of the incentive is paid upon the initial deferral election and an additional amount conditioned upon continued plan participation for a period.

Under Section 326, an eligible terminally ill individual is permitted to take an in-service distribution without being subject to a 10% early withdrawal penalty. The notice clarifies that on or before the distribution date, a terminally ill individual must be certified by a physician as having an illness or physical condition that can reasonably be expected to result in death 84 months or less after the date of the certification. The individual must be otherwise eligible for a plan in-service withdrawal (e.g., a hardship or disability distribution). Plan sponsors are not required to offer this option but should update their plan documents and procedures if they elect to do so.

Section 350 allows plans to correct administrative failures to implement automatic enrollment and escalation features or offer an eligible employee an affirmative election opportunity. The notice indicates the corrections will generally follow the previous safe harbor methods and can be applied to both active and terminated participants. The notice also addresses the required timing for corrective contributions.

Under Section 604, plans can allow employees to elect to receive employer contributions, such as matching and non-elective contributions, as designated Roth contributions. The notice confirms the election only applies to fully vested employer contributions. The questions and answers include detailed guidance regarding the applicable tax, reporting, and rollover treatment of such contributions.

Notice 2024-2 also addresses aspects of numerous other SECURE 2.0 provisions related to cash balance plans, small employer start-up costs and military spouse credits, and SIMPLE IRAs, among other items. Accordingly, plan sponsors should be aware of this notice and consult with their advisors for further information regarding provisions applicable to their retirement benefits.

The IRS intends to issue future guidance and invites public comments on the matters discussed in Notice 2024-2. Comments must be submitted on or before February 20, 2024.

Notice 2024-2