SECURE 2.0 Corrections Act Holdup Leaves Employers Feeling Insecure

When the U.S. Congress passed the SECURE 2.0 Act of 2022, the idea was to expand the automatic enrollment of American workers into retirement plans. That projected outcome was driven by the fact that many Americans reach retirement age with little or no savings, as too few workers are offered an opportunity to save for retirement through their employers.

Unfortunately, the original Act didn’t quite go far enough.

Enter the SECURE 2.0 Technical Corrections Act of 2023, which, while offering much-needed changes to the 2022 Act, has languished in Congress. The delay has resulted in eight major employer associations — including the American Benefits Council, the ERISA Industry Committee and the United States Chamber of Commerce — submitting a letter to Congress, urging it to finalize and pass the Corrections Act as soon as possible.

Examples Call Out How Passage Would Address Needs

In their letter, the employer groups outlined several issues they believe Congress needs to quickly address. One example is a line item (Section 326) in the amended Act that offers special treatment for distributions to terminally ill plan participants. This adjustment was slated to begin on or after Dec. 29, 2022.

The letter noted the existing provision does not create a new distribution “trigger”; thus, a terminally ill person cannot receive a distribution from a plan solely because of their terminal illness.

According to the letter, “The individual must otherwise be eligible for a plan distribution [e.g., termination of service or at age 59.5]. 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.”

The letter highlights other necessary corrections, including those related to automatic enrollment for multiple employer plans (MEPs) and pooled employer plans (PEPs).

“It is unclear whether plans that were established before the enactment of SECURE 2.0 and are thus exempt from the new automatic enrollment rules would lose their exemption upon merging into certain MEPs/PEPs,” the group stated. “We understand that Congress intended for the exemption to be based on the date of establishment of the adopting employer’s plan, not the date of establishment of the MEP/PEP.”

However, the letter also explained, “Treasury/IRS guidance might be read as basing the exemption on the MEP/PEP establishment date. This is currently causing unintended disruption and reduced choice in the MEP/PEP market. We are hopeful that the updated SECURE 2.0 Technical’s package will resolve this outstanding question from the Treasury guidance.”

How ‘Grandfathering’ Would Impact Employers

Chris West, the U.S. LifeSight PEP leader at WTW, said the SECURE 2.0 Technical Corrections Act likely will deliver much-needed clarification and certainty.

For example, she stated that if Congress does not provide the necessary clarifications, employers looking to join a post-enactment PEP may be discouraged from doing so because of the potential cost of automatic enrollment and escalation.

“Congress should clarify that grandfathering applies to when the sponsor’s plan was established rather than when the PEP was established,” West said.

In terms of what it generally means for employers regarding retirement plans, West explained smaller organizations may not be able to offer the bells and whistles and the flexibility of a 401(k) plan because they don’t have the assets that larger employers have in their 401(k) plans.

“If these organizations join a PEP, however, they would be able to take advantage of scale and provide an enhanced employee experience. That is a very positive step for employers and employees and was, we believe, Congressional intent,” she said.

With respect to the grandfathering issue, West noted that without Congressional clarification, grandfathered plans may be forced to look only at a small class of pre-enactment PEPs for their employee retirement solutions because of the potential costs of joining a post-enactment PEP.

“We don’t believe Congress intended to create a bifurcated PEP marketplace where employers could not avail themselves to a PEP that offers a worthy employee experience because the PEP was established after the enactment of SECURE 2.0,” West explained.

For now, she added, the outlook around enacting the Technical bill is uncertain, but WTW has advocated throughout this year for Congress to address the outstanding SECURE 2.0 issues, including grandfathering.

“Congress is going to obviously do what they do but we, and many others in the retirement industry, are pushing for Congress to pass the Technical bill as soon as possible,” West said. “Being in an election year definitely makes that timing interesting.”

The Holdup Is Holding Up Agencies and Plan Sponsors

Because the original bill was developed on a bipartisan basis, there aren’t any real areas of contention with the SECURE 2.0 Technical Corrections Act, according to Diann Howland, vice president for legislative affairs at the American Business Council.

“Business groups are not pressing Congress on specific elements of the Act,” she said. Instead, she noted, technical corrections are needed to clarify Congressional intent and enable regulatory agencies to draft clear guidance for plan sponsors to implement and comply with the law.

“Passing technical corrections can be challenging because they are revenue-neutral and require agreement from the relevant committees,” Howland said. “While not a high-profile issue, the corrections are essential for effective governance and implementation.”

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