In this month’s Fiduciary Corner, we are taking a behind the scenes look into 5 provisions of SECURE 2.0 Act that went into effect in 2024, and what this new legislation may mean for your retirement plan and plan participants. The SECURE 2.0 Act builds on retirement savings regulations of the original Secure Act of 2019 which was written to expand coverage and increase retirement savings for millions of Americans.
SECURE 2.0 Act includes over 90 provisions focused on modernizing the retirement system, promoting additional savings, easing administrative requirements, and changing the rules around U.S. retirement plans and the benefits plan sponsors can or must provide. Some of the provisions of the law are mandated; while many are optional changes or benefits that plan sponsors can choose to adopt.
As a retirement plan sponsor you may be asking what provisions do I need to be most immediately aware of and what information should I be sharing with plan participants?
We are highlighting just 5 of the key provisions effective immediately that plan sponsors need to know about:
1. Mandatory Cash Out Limits. This is the threshold or small balance limit that allows employers to transfer former employees’ balances into an IRA outside the plan without consent. This limit has increased from $5,000 to $7,000 effective in 2024.
Because former employees with balances in the plan adds to plan administrative work, it’s important to limit these balances where possible. This increased amount will allow plan sponsors more flexibility in managing the balances of former employees.
2. Eligibility for part-time employees to participate in retirement plans. This provision allows Long Term Part-Time Employees (LTPT), employees that have completed 500 hours of service in each year during three consecutive years of employment (2021, 2022 and 2023), to participate in retirement plans. For employers, specifically those with LTPT or temporary employees, this means tracking hours and looking at a broader employee base when determining who is eligible for their plan and needs to be given the opportunity to enroll in the plan.
3. Catch-Up Contributions. These are additional contributions that employees who will reach age 50 by the end of the calendar year may elect after meeting the annual 401(k) Limit. SECURE 2.0 Act legislation stipulates that eligible participants whose prior year wages exceed $145,000 will only be allowed to make these catch-up contributions on a Roth after tax basis. This provision was delayed two years, until 2026, due to industry concerns and to allow time for plan providers and sponsors to address the administrative complexities of this provision. The delay also provides time for employees to think about potential tax planning needs. Despite the delay, it’s important to make your employees aware of this coming change.
4. Matching Student Loan payments with 401k contributions. This is an optional plan provision, for which those of us in the industry are still waiting on additional guidance from the IRS.
There’s a bit of confusion around this provision, as some employers may think it means the company is paying off employees’ student loans (or a portion of those loans). In reality, the employee makes their own student loan payments, and SECURE 2.0 Act gives employers the option to make matching contributions to the employee’s 401(k) according to the terms of their current plan, even if the employee is not contributing to it. This is a huge advantage for employees who may not be saving for retirement because they are focused on paying down their current student loan debt obligations. This option can be an enticing benefit that helps to attract and retain talent.
5. Emergency Funds. Last year, one in five employees borrowed or withdrew from their retirement savings to cover current expenses, which can have a significant impact on their future retirement savings. Some employers have begun offering emergency savings accounts (“ESAs”) both inside and outside qualified plans. The “in plan” approach is complicated by a lack of clarity with respect to certain ERISA and Code issues for which further guidance is expected. A new SECURE 2.0 Act provision would allow those employers wishing to adopt this provision the ability to allow employees to make pre-tax payments into an emergency savings account linked to their retirement plan. Employees can accrue up to $2,500 tax-free in the account for an emergency and withdraw up to $1,000 without penalty. Any amount over $2,500 that accumulates in the account automatically rolls over into their retirement plan. There are additional implications and considerations to be addressed here, but this may be one way to help employees bridge the gap between short-term needs and long-term goals using plan balances.
As previously stated, there are over 90 provisions linked to the Secure 2.0 Act and this list is not intended to be all inclusive for 2024. Fortunately, with expertise and experience as a leader in Qualified and Non-Qualified Retirement plans, the team at Clearwater Capital Partners is ready to help. Please reach out with any questions or if we can be of assistance with your 401k plan and participant needs.