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SECURE 2.0 for Defined Benefit plans
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. I figured it was time I spent some time reviewing a few of those that have already come into effect as of December 29, 2022 when the legislation was passed. 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
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. 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.
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 will be able to use a reasonable projection of the actual interest-crediting rate that cannot 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.
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. The change took effect for plan years beginning after Dec. 29, 2022.
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 which is $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.
Government Defined Contribution Summary
The National Association of Government Defined Contribution Administrators (NAGDCA) has released a SECURE 2.0 summary that reviews the provisions impacting governmental defined contribution (DC) plans.
The summary highlights 38 out of the 90 provisions in the legislation dedicated to governmental plans such as the saver’s match, rules on multiple employer 403(b) plans, withdrawals for emergency expenses, hardship withdrawal rules for 403(b) plans, and more.
Taking a look at SECURE 2.0’s defined benefit plan provisions | Mercer
Commentary by: Raylea Stelmach
Edited by:
