Article
SECURE 2.0: Mandatory changes for 401(k) plans
March 14, 2023 · Authored by Christine Faris, Matt Marcellino
Summary of required provisions
Explanation of required provisions
1. Provisions effective immediately
Required minimum distributions
Generally, former employees and retirees will withdraw their vested account balances in a 401(k) plan or transfer it to another qualified plan or an IRA. For these individuals, employers do not need to be concerned with required minimum distributions (RMDs).
If, however, an employer has former employees in their early 70s with vested account balances in the 401(k) plan, this change will be important for employers to consider as the former employees will need to begin taking RMDs. SECURE 2.0 increased the RMD age to age 73 for individuals who attain age 72 in 2023 or later. For example, an individual who attains age 72 in 2023 does not have an RMD requirement until the individual turns age 73 in 2024. In addition, the individual has until April 1, 2025, to take the first RMD. The RMD age will increase to age 75 for individuals who attain age 74 on or after Jan. 1, 2033. In this case, an individual who is 74 years old in 2033 has until April 1, 2035, to take the first RMD. This provision requires a plan amendment.
The “still working” exception continues to apply to the RMD rules. An individual still employed and does not own more than 5% of the company may delay taking the RMD until actual retirement.
Early distribution rules when terminally ill
A distribution from a 401(k) plan to a participant prior to age 59 ½ is subject to a 10% early withdrawal penalty unless an exception applies. Pursuant to SECURE 2.0, distributions to a terminally ill participant made after Dec. 29, 2022, are not subject to the 10% penalty. A physician’s certification as to the participant having a terminal illness is required. Since this is not a distributable event in many 401(k) plans, IRS guidance is anticipated.
