Of the 90-plus provisions in the SECURE 2.0 Act (Div. T of Pub. L. No. 117-328), just a fraction apply to defined benefit (DB) plans, and only eight of those focus solely on DB issues. Nonetheless, employers need to understand the implications of this relatively small batch of provisions, which have widely differing degrees of applicability. Some changes — such as the modifications to the single-employer annual funding notice (AFN) — affect many plans, while others — like the Section 415 limit change for rural electric cooperative plans — will only affect a small number of plans. This GRIST provides an overview of the DB changes, though other articles have covered or will cover some items in more depth.

PBGC variable-rate premium (VRP) inflationary indexing

SECURE 2.0 freezes Pension Benefit Guaranty Corp. (PBGC) VRPs for single-employer DB plans at the 2023 level of 5.2% ($52 per $1,000 of unfunded vested benefits). The retirement plan community had long criticized inflationary indexing of the VRP as theoretically unsound and lobbied to end the practice. Although this effort ultimately proved successful, similar efforts to drop the VRP rate back to an earlier level so far have failed. (The VRP was 0.9% from 1988 until the Moving Ahead for Progress in the 21st Century Act (MAP-21) increased the rate to 1.4% in 2014 and added inflationary indexing, while the Bipartisan Budget Acts of 2013 and 2015 added another 2.6% to the rate by 2019.)
 

The VRP cap ($652 per participant for 2023) and the flat-rate premium ($96 per participant for 2023) will continue to receive inflationary increases in 2024 and beyond. Because the VRP rate will stay constant while the cap will continue to increase, fewer plans will reach the cap over time.

New disclosures for lump-sum windows

Pension plan sponsors offering a lump-sum window will have to provide information to help participants understand the financial trade-offs of choosing a lump sum over an annuity. Plan administrators must provide:
 

• Notice to window-eligible participants and beneficiaries at least 90 days before the election period begins giving detailed information about the offer and cautionary statements, including a recommendation to consult with a financial advisor
  
  
• Notice to the Department of Labor (DOL) and PBGC at least 30 days before the window opens giving information about the offer and a copy of the participant notice
  
  
• A post-window report to DOL and PBGC within 90 days after the window closes containing information about participants electing the window and other information DOL may require

When proposed, the advance notice requirement raised concern among some plan sponsors and practitioners who considered the 90-day time frame excessive and likely to complicate and lengthen the process of offering lump-sum windows. However, despite pushback from the retirement plan community, the 90-day period remains intact in the final law.
 

The new requirements won’t take effect before DOL issues final regulations, which the act delays until at least Dec. 29, 2023. See Bill seeks new lump-sum buyout disclosures to participants, agencies for a complete discussion of the new requirements, which are substantively identical to those proposed in the Information Needed for Financial Options Risk Mitigation Act of 2022 (S 4087).

Review of fiduciary standards for pension risk transfers

DOL has to review its current guidance on how ERISA’s fiduciary standards apply when a DB plan sponsor outsources some or all of its pension risk by purchasing annuities from an insurance company or another annuity provider. Some policymakers are concerned that participants’ benefits are potentially at risk if the annuity provider goes out of business. DOL has until Dec. 29, 2023, to review Interpretive Bulletin (IB) 95-1 (29 CFR § 2509.95-1) in consultation with the ERISA Advisory Council and report to Congress on whether the IB needs amending and the extent to which participants’ benefits are at risk. Although the anticipated report is unlikely to lead to immediate action, DB sponsors interested in future pension risk transfers should keep an eye out for eventual changes in guidance prompted by the review.

Changes to required minimum distribution (RMD) rules

Under Internal Revenue Code (IRC) Section 401(a)(9), participants in employer-sponsored DB and defined contribution (DC) plans must begin receiving RMDs by the required beginning date (RBD). SECURE 2.0 increases the RBD triggering age from 72 to 73 in 2023 and then to 75 in 2033. This change may be inconsequential for many DB plans if they continue to use age 70-1/2 as the RBD triggering age, although depending on plan language, these plans may still require amendments to comply with the statutory changes. The act contains an apparent drafting error affecting participants born in 1959, who have a triggering age of both 73 and 75. A technical correction would resolve this ambiguity. SECURE 2.0 also reduces the excise tax on missed RMDs from 50% to 25%, and in some cases as low as 10%, for taxable years starting after Dec. 29, 2022. See SECURE 2.0 brings more changes to required minimum distribution rules for a complete discussion of the RMD changes.

Annual funding notices

SECURE 2.0 makes the first significant changes to the single-employer annual funding notice (AFN) since MAP-21 added the special interest-rate stabilization supplement. Starting with 2024 plan-year AFNs (due April 30, 2025 for calendar-year plans), the AFN will provide most information as of the end of the notice year rather than the beginning of the year (which could be up to 16 months before the date the participants receive the AFN). As part of this shift, the AFN must provide financial information on a market-value basis rather than a valuation basis.
 

As modified, the AFN will show the following plan-specific information:
 

• Financial information at year-end on a market-value basis for three years (currently one year of year-end market-value information is shown, along with three years of beginning-of-year information on a valuation basis)
  
  
• Participant counts at year-end for three years (currently beginning-of-year counts are shown for one year)
  
  
• Average return on assets for the notice year

The AFN will also provide more information on the PBGC guarantee and may have to include a statement that PBGC termination liabilities might exceed the liabilities shown in the notice. Plans that have to include the interest-rate stabilization supplement will also continue to provide three years of beginning-of-year financial information on a valuation basis.

Update to involuntary cashout limit

The maximum that a retirement plan can distribute without a participant’s consent will increase from $5,000 to $7,000, effective for distributions after Dec. 31, 2023. Adopting this increase is entirely voluntary, as plans aren’t obligated to have cashout provisions at all, and sponsors with lower cashout limits aren’t obligated to increase them as a result of the SECURE 2.0 change.
 

The increase in the cashout limit doesn’t affect the requirement to roll over benefits of $1,000 or more into an individual retirement account (IRA). Many plan sponsors choose not to cash out amounts between $1,000 and the statutory maximum so as to avoid the extra administration. However, DB plans that routinely pay small lump sums to reduce PBGC premiums may welcome the opportunity to cash out terminated vested participants whose accounts previously exceeded the limit but now fall below it — this population may be large if interest rates remain elevated in 2024 (higher interest rates generally produce smaller lump sums).

Changes to Section 420 transfers

Employers’ ability under IRC Section 420 to fund retiree health and life insurance benefits with surplus DB plan assets is extended from the end of 2025 to 2032.
 

SECURE 2.0 also relaxes the minimum overfunding requirement for certain de minimis transfers. Normally, an employer can only make a 420 transfer if the plan’s net assets (equal to the lesser of market or actuarial value, reduced by any credit balance) exceed 125% of the sum of the plan’s funding target plus target normal cost. Under SECURE 2.0’s de minimis provision, however, an employer can transfer up to 1.75% of the plan’s net assets as long as the funded level exceeds 110%. This lower threshold is only available if the plan’s net assets at any valuation date in each of the two plan years immediately preceding the year of the transfer also exceeded 110% of the sum of the plan’s funding target plus target normal cost.
 

Plans relying on the de minimis rule must meet Section 420’s cost-maintenance requirements for seven years instead of the usual five. The rule is also available for qualified future transfers (transfers for two to 10 years), although the 1.75% limit applies to the total amount of the transfer and so may effectively limit the number of year available under this option. The de minimis rule does not apply to collectively bargained transfers under Section 420(f)(2)(E).
 

These rules took effect for transfers made after Dec. 29, 2022.

Recovery of retirement plan overpayments

Retirement plan fiduciaries can decide not to recoup certain inadvertent overpayments and may consider the likely hardship imposed on retirees and their beneficiaries when deciding whether and how much to recoup. If plan fiduciaries choose to recover overpayments, limitations and protections apply to safeguard retirees and their beneficiaries, including caps on the maximum permissible reduction in future benefits, a prohibition on charging interest, and curbs on threatening litigation and using collection agencies.
 

Fiduciaries generally can’t recoup overpayments that occurred more than three years before the participants received written notice about the error. Fiduciaries also can’t recoup inadvertent overpayments from a spouse or other beneficiary of the individual who received the overpayments. (These protections don’t apply to individuals culpable for the overpayment, including those who knew or should have known a payment materially exceeded the correct amount.)
 

The law also gives new protections so fiduciaries won’t be considered to have failed their fiduciary duties by choosing not to recoup under certain circumstances. For DB plans subject to ERISA’s minimum funding rules, fiduciaries don’t need to recoup overpayments unless the plan’s ability to pay benefits would be materially affected by a failure to recover the overpayment faster than the funding rules require (i.e., as part of the ordinarily determined minimum required contribution).
 

These changes took effect on Dec. 29, 2022, but the statute provides reasonable, good-faith reliance on prior administrative guidance for recoupments that began (or were forgone) before that date.

Expansion of EPCRS

The law significantly expands the Self-Correction Program (SCP) under IRS’s Employee Plans Compliance Resolution System (EPCRS). Although the provision appears to target mainly individual account plans, DB plans will also benefit from the ability to self-correct any eligible inadvertent failure within a reasonable time after the mistake is identified and before Treasury identifies the error. (Under the current SCP, only insignificant operational errors have an indefinite correction period.) Eligible inadvertent failures include ones occurring despite practices and procedures reasonably designed to promote and facilitate overall compliance with applicable IRC requirements.
 

The statute doesn’t provide any effective date, so plan sponsors apparently may immediately take advantage of the more flexible rules, although Treasury has until Dec. 29, 2024, to update EPCRS. Clarification on this point would be helpful.

Retirement savings lost and found

By Dec. 29, 2024, DOL, in consultation with Treasury, will have to establish an online searchable database of information about retirement benefits. Individuals will be able to search the database to get contact information for the administrator of any plan in which the individual was or is a participant. Retirement plan administrators will be responsible — starting with the 2026 plan year — for submitting contact information to DOL so the agency can keep the registry up to date.
 

Administrators will have to submit participant information similar to what is reported on IRS Form 8955-SSA (though apparently not benefit amounts). The report will also have to provide information about any IRA to which funds were transferred in an involuntary cashout or any insurance company from which a deferred annuity was purchased.

Hybrid plan interest-crediting rate for accrual rules

To demonstrate compliance with the anti-backloading accrual rules in Section 411(b), cash balance and other statutory hybrid plans that credit interest at a variable rate (e.g., the 30-year Treasury rate or the return on plan assets) will be able to use a reasonable projection of the actual interest-crediting rate, not to exceed 6%. The accrual rules prevent pension plans from skirting minimum vesting standards by delaying accrual of a disproportionate share of total plan benefits until late in a participant’s career.
 

To comply with these rules, most cash balance plans rely on the 133-1/3% test of Section 411(b)(1)(B), which requires that the rate of benefit accrual in any later year can’t exceed 133-1/3% of the rate of benefit accrual in any earlier year. For cash balance plans, IRS guidance permits using the value of pay credits with interest to normal retirement date (NRD) as the rate of benefit accrual. For this purpose, previous IRS guidance said to use the current year’s interest-crediting rate for all future pay credits. This made providing a significantly age-graded schedule of pay credits more difficult, since applying a low interest-crediting rate in certain years to low credits at young ages would produce smaller amounts at NRD than would accumulate with a higher interest rate. Even plans with moderately graded schedules often needed to adopt a minimum interest-crediting rate to ensure the design passed the test.
 

The previous rules were particularly challenging for plans that set the interest credit equal to the rate of return on plan assets. These plans are not permitted to have a minimum annual interest credit, so IRS required projecting benefits using a 0% interest credit rate. As a result, pay credits at later ages could be no more than one-third higher than pay credits at younger ages to ensure passing the backloading test.
 

SECURE 2.0’s changes mean plans with variable interest-crediting rates can more easily pass the 133-1/3% test. Plans can provide age-graded pay credits using a reasonable projection of the plan’s interest-crediting rate and won’t need a minimum interest credit for years when the reference rate is low. Plans therefore should be able to provide larger benefits to older participants than the current rules would permit.
 

Previous versions of this provision were more expansive and would have permitted plans to use a projected interest-crediting rate for other purposes, such as Section 415’s benefit limitations. But the final statutory language applies the provision only to the accrual rules’ test. Some practitioners believe that the definition of accrued benefit for purposes of the backloading test will automatically carry over to these other purposes. However, IRS will have the final say. The change took effect for plan years beginning after Dec. 29, 2022.

Mortality tables

An actuarial provision in SECURE 2.0 limits the amount of anticipated mortality improvement IRS can incorporate into the tables DB plans use for determining minimum required contributions. The IRC Section 430 tables can’t reflect an annual improvement factor of more than 0.78% for any age in any year, effective for valuation dates starting Jan. 1, 2024. DB plans use the Section 430 tables for several other purposes, including maximum tax-deductible contributions, funded status certifications under IRC Section 436 (for benefit restriction purposes), PBGC variable-rate premiums and the need to submit a PBGC 4010 filing.
 

The Section 430 tables also form the basis of the unisex tables used to determine minimum present values and lump sums under IRC Section 417(e). However, the statute permits IRS to modify the tables “as appropriate,” so IRS could possibly choose to ignore the limitation or work around it for these tables.
 

The limitation’s effect is expected to be minimal in most cases, and many plan sponsors will see only a small reduction in their minimum required contributions. But the provision may further delay final Section 430 regulations, which IRS originally hoped to publish by the end of 2022.

Retroactive amendments for increases in benefit accruals

Starting in 2024, sponsors making optional plan changes to increase accrued benefits will have more time to adopt conforming amendments. The deadline for adopting these discretionary amendments will be the employer’s tax filing deadline (including extensions) for the tax year that includes the date when the amendment took effect. Other optional changes will be subject to the usual deadline for discretionary amendments — i.e., the end of the plan year in which the change took effect. The act doesn’t define amendments to “increase accrued benefits.” This term presumably includes amendments for benefit improvements like increased early retirement benefits and improvements to the underlying benefit formula, but clarification would be helpful.

Paper benefit statements

Starting with the 2026 plan year, DB plans will have to deliver at least one paper benefit statement every three years (once per year for DC plans), unless a participant affirmatively requests electronic delivery or the plan uses DOL’s 2002 safe harbor e-delivery rules (which allow electronic delivery to employees with computer access and other participants who give their consent). However, plans that use the 2002 rule will need to provide a one-time paper notice informing employees who first become participants after Dec. 31, 2025 (or beneficiaries who first become eligible for benefits after that date) that they can request paper copies of the benefit statement.
 

For DB plans that provide benefit statements every three years, this change effectively makes the safe harbor e-delivery methods under DOL’s 2020 final rules unavailable for those statements. The 2020 rules permit e-delivery of many retirement plan notices by default to all participants, unless they affirmatively opt out. DB plans that provide annual notices that benefit statements are available can rely on the 2020 rules for those notices, but presumably still must supply the triennial paper statement unless a participant consents to e-delivery. The 2020 rules remain available for other eligible notices. See DOL finalizes electronic delivery rule for retirement plan notices for more information on those regulations.

Section 415 limit for rural electric cooperative plans

IRC Section 415(b) limits the amount of benefits that a DB plan can pay to a participant to the lesser of the annual limit ($265,000 in 2023) or the participant’s average compensation for the three highest-paid years of employment. The highest three-year average compensation limit no longer applies to some participants in eligible rural electric cooperative plans, effective for limitation years ending after Dec. 29, 2022. The high-three limit can sometimes severely restrict benefits in plans with long-service, low-paid participants or participants who retire after normal retirement age with actuarial increases, so eliminating this component will let these plans pay more generous benefits to affected participants.
 

A plan is eligible for this exception if:
 

• It’s maintained by more than one employer
• At least 85% of the employers maintaining the plan are rural cooperatives providing electric service, as described in Section 401(k)(7)(B)(i) or (ii)

Plans can elect to ignore the statutory change and continue to apply the high-three limit for all participants. For plans that don’t opt out, the limit will apply only to participants who were highly compensated employees under Section 414(q) in the earlier of:
 

• The plan year the participant terminated
• The plan year distributions commenced
  or
• Any of the five plan years preceding the plan year determined above

Premiums for long-term care and health insurance

IRC Section 402(l) allows certain retired public safety officers to use governmental retirement plan benefits to pay the premiums on a pretax basis for accident, health or qualified long-term care insurance for themselves, their spouses or dependents. These benefits may now be paid to the employee or directly to the insurer, whereas they previously were excluded from income only if paid directly to the insurer. This change took effect for distributions made on or after Dec. 29, 2022.

Plan amendments

Most of the SECURE 2.0 DB plan changes won’t require amendments, but some plans may need amendments for changes in the RBD and the mandatory cashout limit. Rural electric cooperative plans that want to disregard the high-three average for Section 415 purposes will likely also need amending. Governmental sponsors that want to adopt the change for long-term care and health insurance may also need to amend their plans. The plan amendment deadline for all SECURE 2.0 changes is the end of the first plan year beginning on or after Jan. 1, 2025 (2027 for governmental and collectively bargained plans). This date applies to sponsors implementing any of the act’s changes before the amendment deadline. For sponsors that first implement any optional changes after the amendment deadline, the usual discretionary timing rule will apply (i.e., amendments will be due by the end of the plan year in which the sponsor makes the change).

Related resources

Non-Mercer resources

• Div. T of Pub. L. No. 117-328, the SECURE 2.0 Act (Congress, Dec. 29, 2022)
• Summary of SECURE 2.0 Act (Senate Finance Committee, Dec. 19, 2022)

 Mercer Law & Policy resources

• User’s guide to SECURE 2.0 (Jan. 18, 2023)