The SECURE 2.0 Act, enacted in December 2022, brings significant modifications aimed at expanding retirement savings opportunities and accessibility for your employees. Our Compliance Team has reviewed this significant piece of legislation and outlined the key provisions taking effect in 2024, empowering you to make informed decisions regarding your retirement plan offerings and ensure continued compliance with these updates.
Background
There have been two SECURE Acts – one signed by President Trump in 2019 and the more recent signed by President Biden in 2022. Both laws are efforts to increase retirement savings opportunities for US employees. The SECURE 2.0 Act contains dozens of provisions of note to both workers and employers that take effect in 2024.
Part of what spurred this legislation are worries that Americans are not saving enough for retirement. In fact, a 2023 Federal Reserve study found that 28% of working Americans have no form of retirement savings at all.
Key Provisions of the SECURE 2.0 Act
Expanded Eligibility for Long-Term Part-Time Workers
Effective for all plan years beginning on or after January 1, 2021, long-term part-time workers who worked between 500 and 999 hours for three consecutive years are eligible for employer-sponsored retirement plans.
Section 125 of Secure 2.0 lowers this requirement to permit part-time workers who have worked at least 500 hours for two consecutive years to participate. This provision is only applicable for plan years commencing after December 31, 2024. Therefore, for plan years beginning on January 1, 2021, there may be long-term part-time employees eligible to participate as of January 1, 2024. Industries especially affected by this provision could include retail, hospitality and quick service restaurants which feature significant populations of part-time workers. Employers in these industries may face additional administrative responsibilities associated with increased participation in their retirement plan as a result of reduced eligibility requirements, and should plan accordingly. Employers should review their employee census to ensure that all long-term part-time employees have been properly identified and provided an opportunity to defer compensation to the 401(k). The IRS has issued action items for employers to accomplish this and avoid errors including:
- Review the census data for all employees who are not eligible to participate in the 401(k) plan because they have not completed a year of service under the terms of the plan.
- Identify whether any of those employees are age 21 and have completed more than 500 hours of service in three consecutive 12-month periods since 2021.
- Note that if the employee is in a class of employees that is not based on service and is excluded under the plan, the employee is not required to be included in the plan as a long-term part-time employee until they are in an eligible class.
- Excluding “part-time” and “seasonal” employees generally are service-based conditions that are impermissible exclusions. Those employees must be included if they meet the eligibility requirements to be a long-term part-time employee.
- Ensure each long-term part-time employee has been timely offered the ability to make salary deferrals to the plan.
Small Immediate Financial Incentives for Contributing to a Plan
Effective for plan years beginning after December 31, 2022, employers are permitted, but not required, to offer their employees de minimis financial incentives (not paid for with plan assets) for participation in 401(k) and 403(b) plans.
While this provision is already in effect, IRS Notice 2024-2 which was released on December 20, 2023, provides significant guidance for employers in implementing this practice including several Q and A’s addressing various scenarios. This guidance includes the following:
- Employers may offer de minimis financial incentives, which cannot exceed $250 in value, and must not come from plan assets.
- Incentives may only be offered to employees that do not have a deferral election in place, and must be offered to all nonparticipating employees, as opposed to specific individuals or groups.
- The incentives may be distributed in installments contingent on the employee continuing to defer.
- Incentives constitute remuneration that is includible in the employee’s gross income and wages and will be subject to applicable withholding and reporting requirements for employment tax purposes unless an exception applies. Note: gift cards are not excludable from the employee’s gross income as a de minimis fringe benefit because they are considered a cash equivalent.
Matching Contributions on Student Loan Payments
Effective for plan years beginning after December 31, 2023, employer matching contributions under 401(k), 403(b), 457(b) plans and SIMPLE IRAs may be based on an employee’s qualified student loan payment (QSLP) (up to contribution limits). A qualified student loan payment is defined generally as a payment made by an employee in repayment of a qualified education loan which was incurred to pay qualified higher education expenses. Such expenses are amounts which are required to be paid for enrollment or attendance at an eligible educational institution such as tuition, fees and related expenses.
Employers are not required to offer student loan payment matching. However, all employees who are eligible for matching contributions are also eligible for the match on the QSLP.
The matching contributions are treated the same as elective deferrals and so matching rates and vesting rules apply. Employees may make a combination of elective deferrals (pre-tax and Roth) and QSLPs, or one or the other if they choose so long as the combined total does not exceed the Elective Deferral Limit for the employer match.
Employees are required to certify to their employer that they have made the QSLPs, and employers are entitled to rely on such certification from their employees.
Employers who choose to amend their plans to account for this new provision should anticipate initial added administrative responsibilities in tracking employee QSLPs, especially for those industries that typically hire large numbers of recent college graduates such as healthcare, K-12 education and technology. For these industries that actively seek out new graduates, including a QSLP match as part of their retirement planning benefits could be an attractive recruiting and retention tool.
IRS guidance has not yet been issued on this topic.
Emergency Savings Accounts (ESAs)
Employers may now offer pension-linked emergency savings accounts. This provision is effective for plan years beginning after December 31, 2023, and applies to non-highly compensated employees.
Employers are permitted to automatically opt-in employees into these accounts at no more than 3% of their salary. Employee contributions are capped at $2,500.00 or a lower amount as set by the employer. Contributions are made on a Roth-like basis (after tax) and treated as elective deferrals for matching contribution purposes. An annual matching cap is set at the maximum account balance of $2,500.00 or a lower threshold as set by the employer.
No fees or charges may be assessed against the first four (4) withdrawals from the emergency savings account each plan year. Upon separation from service, employees may cash out their savings plan or roll the funds into a Roth defined contribution plan or IRA.
Penalty-Free Withdrawals for Certain Emergencies
Generally, early distributions from tax-advantage retirement accounts incur a 10% penalty unless an exception applies. For certain distributions made after December 31, 2023, there is now an exception from this penalty for an “emergency personal expense” under the Act.
Pursuant to Section 115, participants may be permitted to make a one-time withdrawal up to $1,000.00 (or the participant’s total vested benefit under the plan, whichever is less) for an emergency personal expense which is not subject to the 10% early distribution penalty.
An “emergency personal expense distribution” is defined as “any distribution from an applicable eligible retirement plan to an individual for purposes of meeting unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”
A plan administrator may generally rely on a certification from a participant that s/he has satisfied the conditions entitling him/her to such distribution. The participant has the option to repay the funds within 3 calendar years, however, the participant will not be permitted to take another distribution during the 3-year repayment period, unless the funds are fully repaid or the aggregate of the elective deferrals and employee contributions to the plan (the total amounts contributed to the plan in the case of an individual retirement plan) following such distribution is at least equal to the amount of the distribution which has not been repaid.
Disclaimer: The information contained herein is not intended to be construed as legal advice, nor should it be relied on as such. Employers should closely monitor the rules and regulations specific to their jurisdiction(s) and should seek advice from counsel relative to their rights and responsibilities.