Continuing with our series of posts about SECURE 2.0, some portions of the new law will significantly increase the flexibility of 401(k) plans to encourage more workers to participate in workplace savings programs. In each case, workers can make better use of their plans to save for near-term and other non-retirement needs. These benefits should be popular with employees and employers, alike. Although some provisions aren’t effective until 2024, it may take some time to for employers and platform providers to ramp-up technology and establish employee education programs so participants can hit the ground running.
Allowing Matching Contributions on Student Loan Repayments.
In order to help employees who may not be able to save for retirement because they’re still paying off student loans and missing out on matching contributions in their retirement plans, for plan years after December 31, 2023, SECURE 2.0 allows 401(k) and 403(b) plans to match an employee’s qualified higher education student loan expenses without the employee having to contribute to the plan. SECURE 2.0 expands on a 2018 IRS private letter ruling to provide a statutory basis for matching student loan repayments. The student loan repayment accounts are subject to existing overall plan limits but are tested separately from other contributions and deferrals for non-discrimination testing purposes, essentially creating an easy way for younger workplace savers to get more bang for their buck. And to limit administrative burdens, the plan can rely on the employee’s annual written certification that they have made the loan repayments.
Emergency Withdrawals.
To also encourage employee savings for non-retirement expenses through tax preferred retirement plans, beginning in 2024, SECURE 2.0 will allow retirement plans such as 401(k)s to permit one distribution per year for unforeseeable or immediate financial needs for personal or family emergency expenses up to the lesser of $1,000 or the participant’s non-forfeitable accrued benefit without incurring a 10% penalty tax for early distributions under Internal Revenue Code Section 72(t). The participant also has the option to repay the distribution within 3 years. No additional emergency financial need distributions are allowed during those 3 years without corresponding repayments. And as with student loan repayments, the plan can rely on the participant’s written certification of immediate financial need. IRA withdrawals can be made at any time without the need to demonstrate a reason, but the exemption from the 10% penalty tax also applies to qualifying IRA distributions.
Separate Pension-Linked Emergency Savings Accounts.
In addition to allowing emergency plan withdrawals, beginning in 2024, employers may also auto-enroll non-highly compensated employees into (or just allow them to contribute to) emergency savings accounts linked to their retirement plans at up to 3% of compensation up to $2,500 (as indexed) per year on an after-tax basis. Employers may match these contributions up to $2500. Participants will be able to withdraw from these accounts at least once per month with no charges applied to the first four withdrawals per year. Contributions must be held in an interest-bearing deposit account or another “safe” investment but are otherwise subject to plan limits. And upon separation from service or the employer’s elimination of the accounts, the participants can transfer their accounts to the linked-plan’s Roth account, if any, or take a distribution.
Participants’ Optional Treatment of Employer Matching and Non-elective Contributions as Roth Contributions.
Beginning immediately, 401(k) and 403(b)s are permitted to allow participants to elect whether any employer matching or non-elective contributions are to be made on a pre-tax or an after-tax Roth basis. This contrasts with pre-SECURE 2.0 law, where all matching contributions and non-elective contributions were required to be made on a pre-tax basis.
Word to the wary, however, is that the new law makes this optional treatment available only for employer contributions that are nonforfeitable when received. This should not be an issue for those safe harbor plans that already have immediate vesting of employer contributions. However, it doesn’t apply to plans that use a time-based vesting schedule for employer contributions, at least until Congress or the IRS says, for instance, the treatment is available when the contributions do become nonforfeitable or that a partial election can be made for contributions to the extent they’re vested when made.
Roth IRAs are currently an estate planning tool, and with SECURE 2.0 eliminating the requirement that lifetime distributions be made from Roth designated accounts in employer retirement plans, we can expect that Roth employer contribution accounts will also play a role in estate planning.
Of course, implementation will also have to wait for payroll and recordkeeping enhancements, if needed, to administer this provision as well as mechanically providing the election to participants. And if the plan doesn’t yet allow for Roth contributions, amendments will be in order. However, plans that provide for catch-up contributions will be required to provide them on a Roth basis if participants earn more than $145,000, so there will be independent reasons for adding Roth provisions to plans going forward.