SECURE 2.0: Mandatory and optional provisions for employers

A recent webinar from the Georgetown University Center for Retirement Initiatives tackled how SECURE 2.0 could help to expand retirement plan coverage and participation while reshaping the retirement plan market.

The webinar in part highlighted key provisions in SECURE 2.0, the federal law signed in December 2022 that strives to expand retirement coverage and increase retirement savings. Angela Antonelli, research professor and executive director, Center for Retirement Initiatives, said SECURE 2.0 features ingredients that will “provide tools to industry to design and offer products that will meet the needs of employers who today do not offer plans as well as help to reduce the costs of starting a new plan.”

Will Hansen, chief government affairs officer for the American Retirement Association, noted that there are several themes that shape SECURE 2.0, and one of the prominent ones is, “How do we increase coverage/? How do we get more people saving for retirement?” That has included paying attention to part-time employees, he said.

Related: SECURE 2.0: A compliance starter checklist for plan sponsors

SECURE 1.0, which was passed in 2019, included a mandatory provision for plan sponsors that part-time workers who worked 500 hours or more for three consecutive years would be made eligible to defer into a retirement plan. SECURE 2.0 lowered that threshold to two consecutive years of 500 hours or more, Hansen said.

“Plan sponsors are again looking at their design, looking at who they make eligible now with respect to part-time work and what is the simplest way for them to ensure that they’re capturing and enabling these individuals to start saving for retirement,” Hansen said. “It’s a really great provision to get more individuals signed up and saving for retirement.”

Hansen said SECURE 2.0 also contains multiple provisions “moving us in the direction of increasing the number of Roth contributions that will be made to retirement plans.” Among them was a mandatory provision on catch-up contributions, which are contributions made in excess of regular deferral limits and allowed only to those over the age of 50 and over. The provision, which is effective for plans starting Jan. 1, 2024, dictates that those catch-up contributions have to be Roth contributions, though individuals who made less than $145,000 in the previous year are not subject to the requirement.

“It’s a big shift, mainly because not every plan has Roth as an option,” Hansen said. “So it’s something that plan sponsors … we’re going to have to work with their service providers and figure out how they add that to their plan. And it just opens up a lot of questions about plan design with respect to pension contributions and Roth contributions that a lot of plan sponsors are asking themselves right now.”

In addition to the mandatory provisions, Hansen noted that there is “a lot more chatter going on around some of the optional design features that were included in SECURE 2.0.” For instance, an optional provision for plan sponsors to consider is a student loan matching program, he said. That provision allows employers to make matching contributions to an employee’s 401(k) plan, 403(b) plan or SIMPLE IRA based on what the employee has to repay in student loans.

Starter 401(k) for small businesses

Another optional provision is designed to address the critical challenge that “you can’t save as an employee if your employer doesn’t provide a plan,” a particular challenge among small businesses, Hansen said. That led to a new design feature in SECURE 2.0 called the starter 401(k), he said.

The starter 401(k) plan “looks like a 401(k) plan with some key differences,” he said. One is that employees are auto-enrolled at a 3% contribution rate, and another difference is that there are no employer contributions – “it’s just strictly employee contributions,” Hansen said. Employers do not have to do the “complicated compliance work” that accompany standard 401(k) plans, he said.

”It’s super simple, and we do think that this is going to be a great product that a lot of small businesses are going to take up,” Hansen said.

Hansen said most people following SECURE 2.0 are currently in the process of simply digesting its many provisions rather than rushing to address them

“We’re going through the process of figuring out if there were any errors in the legislation, which are called technical corrections, and we’re mapping those out and trying to figure out next steps,” Hansen said. “I get asked a lot of questions by folks that are service providers or even plan sponsors about what they need to be focused on with respect to SECURE 2.0 immediately, or if there’s anything they need to be doing immediately, and thankfully, there’s not a whole lot that they need to be doing yet. But what they do need to start to do is think about some of the changes that are going to be taking effect come 2024.”