SECURE 2.0 introduced a wide range of retirement plan provisions that can be both beneficial yet challenging, particularly in terms of implementation. The following are some important considerations for five SECURE 2.0 provisions that are currently top of mind at Sentinel.
Roth Only Catch-Up Contributions
Originally effective in 2024 but delayed until 2026, employee catch-up contributions for those 50 years or older who earned $145,000 or more the previous year can only be made to Roth 401(k), 403(b), or governmental 457(b) plan accounts, regardless of if the employee is currently contributing to a non-Roth 401(k), 403(b), or governmental 457(b) plan account.
Key Considerations:
Preparing for Implementation Requires Time
- Systems need to be built to coordinate payroll systems with plan recordkeeping systems to ensure the smooth implementation and compliance with this Roth-only catch-up provision, allowing catch-up contributions to be made on an after-tax basis to a qualified retirement plan Roth account. This requires careful coordination between the plan sponsor, their payroll provider, and the retirement plan provider.
- The retirement plan community’s response has been vigorous. The American Retirement Association and over 100 organizations, including major corporations, retirement plan recordkeepers, and advocacy organizations, asked the House Ways & Means Committee for a two-year delay (to 2026) of this requirement stating that the retooling of systems to implement this provision cannot be accomplished by 2024. This delay was granted on August 25th, 2023.
- Plan sponsors will need to evaluate their plan design to add Roth contributions in their plan document as well as make the necessary changes within payroll.
Tax Treatment of these Roth Catch-Up Contributions
- Making catch-up contributions on an after-tax Roth basis means paying taxes on retirement savings during working years when employees may be in higher tax brackets. These employees won’t enjoy tax deductions on catch-up contributions, as they would with typical non-Roth contributions, but will be able to withdraw the funds tax-free when they retire.
Another SECURE 2.0 Catch-Up Change is on the Horizon
- Effective 2025, there will be higher catch-up contribution limits for employees aged 60 to 63 participating in 401(k), 403(b), governmental 457(b), and SIMPLE plans. This annual higher catch-up contribution limit is the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the regular catch-up amount and will be indexed for inflation starting in 2026. Retirement plan updates will need to incorporate this change.
Employee Election of Employer Contributions as Roth
SECURE 2.0 also introduced a provision effective in 2023 wherein employees can elect to have their employer contribution made as Roth contributions if permitted by the plan, with the requirement that Roth contributions must be 100% vested when made. This is a complicated issue that requires additional governmental guidance and retirement plan system retooling.
Key Considerations:
Timing
- Many employers don't make their contribution until several months or more after the close of the year, so questions have arisen around how that contribution should be taxed at the payroll level, in particular.
Guidance
- Additional government guidance and language are needed to create the election process to implement this feature in retirement plans.
Matching Contributions on Student Loan Repayments
Effective 2024, employees may begin receiving matching contributions on their student loan repayments. Additionally, for purposes of the nondiscrimination test, these contributions may be tested separately from standard matching contributions.
Key Considerations:
Administrative Complexity
- The challenge is to obtain data from student loan companies to calculate an applicable match, coordinating a more efficient and less manual way of accomplishing this provision.
Guidance
- Further governmental guidance is expected regarding facilitating these types of contributions.
Systems updates and coordination between plan sponsors, plan providers, and payroll providers, among others, is required to implement many of the SECURE 2.0 provisions, including these. In addition, the IRS and DOL must provide further guidance. Sentinel will keep you posted on future developments as we move forward in 2023.
