You have likely already heard and read plenty about SECURE 2.0, signed into law on December 29, 2022. Rather than write yet another recitation of what’s in the new law in chronological order, we are going to share our initial thoughts here and go into further detail on some of the more interesting provisions in future posts.
Overview
Just about everything coming out of Hollywood these days is a sequel, and now it appears the same is true about Washington, D.C. Then again, considering some of the ridiculous acronyms of laws past (like SBJPA), maybe going the sequel route wasn’t such a bad idea.
SECURE 2.0 was passed with lightning speed…at least by legislative standards. It took 13 years to get the OG SECURE (passed at the end of 2019). Even with all that time, it was a bit of a yawner in terms of new provisions. Just three years later, we now have SECURE 2.0, and we’ve gone from yawner to head-scratcher in many ways – not so much in what the bill attempts to accomplish but more in how it attempts to accomplish those things.
Don’t get us wrong, there are definitely some things to like, including:
- Company tax credits for plan startup costs. Who can argue with making it less expensive for companies to add retirement plans for their employees?
- Employee tax credits for deferrals. Taking away some of the financial bite for saving is definitely a good thing.
- Facilitation of participation by military spouses. Recognizing the detrimental impact that frequent moves and employer changes can have on military spouses is overdue.
- Ability to increase benefits via post-plan-year-end amendment. Why not allow companies to give participants more once they know what their actual year-end financials look like?
- Starter 401(k) plan option. What’s not to like about an option for employers without plans to offer employees the ability to save without the risk of unanticipated company contribution requirements?
- Expanded self-correction for inadvertent errors. Why not fix a mistake if it’s cheap(er) and easy(er) to do so?
With that as our starting point, let’s wade a little further into the shallow end of this pool.
Two of the key objectives for SECURE 2.0 (S2 – because why not make an acronym out of an acronym) are to expand coverage to more workers and simplify plan compliance. Both are great goals, but the reality is that S2 attempts to do the first at the expense of the second. Here are a few examples.
Company Contributions As Roth
Plans can choose to offer participants the option to have matching and/or profit sharing contributions deposited as Roth. Of course, there is precious little guidance on things like taxation (the year deposited or the year to which it relates) or tax-reporting. The participant must be fully vested in the contribution in order to make the election.
This provision begs the question…why would a plan sponsor voluntarily choose to take on this added responsibility when they’ve already been able to offer participants the option to achieve the same result by initiating an in-plan Roth transfer for more than 10 years?
Long-Term, Part-Time Employees
S2 expands on OG SECURE in this area by shortening the waiting period for employees who work at least 500 hours per year from 3 years to only 2. Thankfully, they also pushed back the effective date by a year. The catch is that the new law creates a new determination period for vesting that could actually result in a 500-hour per year worker becoming fully vested a whole year earlier than another employee hired on the same date and who works 2,000 hours per year. And an employee who goes from part-time to full-time retains the accelerated vesting, but one who goes from full-time to part-time is stuck with the slower vesting. I’m sure no one will ever get that confused. And this is hard-coded into the text of S2, which means it will literally take an act of Congress to change/fix it.
In-Plan Emergency Savings Accounts
Another great idea in concept with a bit of a flawed implementation. These accounts, which are only available for non-highly compensated employees, are capped when the balance from contributions (which must be Roth) reaches $2,500 and must allow distributions at least monthly. Each distribution must be split between basis and earnings in order to track the account balance from contributions to know whether a given participant can make any additional contributions. Participants cannot be charged any fees for their first 4 distributions, and there is a required annual notice that must be customized to show the account balance of and amount contributed by each participant.
Never mind the fact that plans have already been allowed to offer after-tax savings accounts, for decades (something we highlighted 3 years ago). The only limit for these accounts is annual and it’s the overall plan contribution limit ($66,000 for 2023), and there are no notices, distribution restrictions, or fee limitations.
Company Match Based On Student Loan Payments
S2 allows companies to treat student loan payments as 401(k) deferrals for purposes of calculating the matching contribution. The company can rely on each participant’s self-certification of the amount of their loan payments. Of course, no participants will ever mis-represent that in order to get an extra match. Participants who do receive a student loan match can be tested separately from the rest of the participants.
When taking into account changes that S2 makes to the top heavy rules as well as groups that can already be tested separately, this “convenience” means that a straight-forward 401(k) plan with relaxed eligibility and student loan matching contributions could now have upwards of 4 different groups to be tested, each of which has different sets of rules.
Increasing Retirement Savings By Adding New Withdrawal Options
Pundits and investment advisors have long lamented the relatively low levels of retirement savings. Financial professionals have gone to great lengths to encourage more savings and minimize leakage from retirement accounts. Congress and the IRS have been strong advocates for automatic enrollment and escalation.
What better way to supplement that than to create 5 new penalty-free distribution options, 4 of which allow plan sponsors to simply take participants’ words for it that they meet the distribution requirements. And complete participant self-certification as to eligibility to take a withdrawal has been extended to other existing types of distributions.
While certainly a boon to plan sponsors to no longer have to conduct a subjective review of such requests, this laissez faire posture towards accessing retirement accounts certainly seems counter to the idea of increasing retirement savings. After all, if participants are willing to go through fake divorces to get penalty-free withdrawals via QDRO, bending the truth a little by self-certifying that they meet the new distribution requirements doesn’t exactly seem far-fetched.
Mandatory Auto Enrollment/Escalation In New Plans
S2 says that any new plans established after the law was enacted must include automatic enrollment and automatic escalation beginning in 2025. Enactment was December 29, 2022, but the plan establishment date is a bit murky. Is that the effective date of the plan or is it the date the plan document was signed? Either way, plans that are established in 2023 must be prepared to add automatic enrollment just two years later, in 2025.
What’s Next
If you’ve followed DWC for any amount of time, you know that we are not ones to take headlines or conventional wisdom at face value without a more critical look. That’s what we plan to do here. Future posts will take a more in-depth look at some of these new provisions to highlight the positives and identify some of the potential traps for the unwary. If there is an easier way to accomplish a similar result, we will point that out also. Our goal is to provide truly practical analysis to help you understand which of these provisions might make sense for you.
As is the case with any new legislation, there are certainly parts of S2 that present unanswered questions and gray areas that the IRS or DOL will eventually have to clarify in future regulatory guidance (never mind the fact that we are still awaiting guidance on certain provisions from the Pension Protection Act of 2006 – yes, you read that correctly).
Although plan amendments are not required until the end of 2025, it is still important to make a good-faith effort to comply with the rules of any of these new provisions you may wish to implement. So, if you have any questions, hit us up, and we’d be glad to talk through it with you.
More to come…stay tuned!
For more information, please visit our SECURE 2.0 Act Resource Page.
