New SECURE 2.0 regulations now in effect in 2024: Is your 401(k) in compliance?

2024 is a big year for the SECURE 2.0 Act, with many new regulations coming into effect, some touching on hot button issues that are important across the generational divide.  Signed into law on December 23, 2022, this second-generation retirement legislation provided a multi-year phase-in of some of the most comprehensive changes to the ERISA landscape since its enactment in 1974.  With so much happening in the new year, communication and compliance are especially important to navigate the changes and successfully implement this next phase of the Act.

Student loan matching contributions

One of the most noteworthy changes is the ability for employers to voluntarily amend their retirement plan design to allow employee student loan payments to count toward employer matching contributions.  This lets employers match an employee’s student loan payment within a tax-qualified retirement plan for the first time, giving credit to the payment as if it was a retirement plan contribution. In 2024, employees will be able to have their student loan payments matched, even if they aren’t currently contributing to a defined contribution retirement plan.  Eligible plans include 401(k), 403(b), 457(b) and SIMPLE plans.  From a plan design perspective, it is important to note that the employer matching contributions for these student loan payments must vest under the same schedule as other traditional matching contributions.

Created by Congress to increase the American worker’s ability to save for retirement, it has many benefits for employers and employees.  For employers who were already offering student loan assistance, the new regulations create a pathway that makes the administrative process easier and clearer.  It’s also an incentive to attract and keep younger workers, which remains valuable in a tight hiring market.

For employees saddled with student loan debt, this new matching incentive can expedite their ability to pay back their loans and ease the long-term effects of carrying the debt, including compromising their ability to buy a home and plan for retirement.  The emotional benefits can be just as important and impactful for workers, as prolonged financial stress can affect mental health and productivity.

Emergency funds

In 2024 the SECURE 2.0 Act will allow for enhanced hardship withdrawals, as well as the formation of short-term emergency savings accounts (ESAs).  Both of these provisions are optional for employers to adopt into their plan design, and employers should check with their recordkeepers to ensure their systems can accommodate these new provisions prior to amending their plan.

For hardship withdrawals, emergency distributions of up to $1,000 from a retirement account are available for help with unplanned expenses, and won’t be subject to the usual 10% excise tax on early distributions.  Only one hardship withdrawal can be made per year, and while repaying the distribution is optional for the employee, a subsequent hardship withdrawal under this provision cannot be made within three years of the initial withdrawal unless the employee has elected to repay the original distribution.  Employers may rely on an employee’s self-certification of the financial hardship and that the withdrawal amount does not exceed the employee’s financial need.  There are different rules for hardship withdrawals depending on whether the money is pulled from a 401(k) or 403(b) plan due to the disparity in distribution rules between the plans, although the Act has expanded the hardship distribution sources available under 403(b) plan to mirror 401(k) plan rules.

The Act also allows for penalty-free withdrawals from retirement plans in cases of domestic abuse.  Participants can self-certify the abuse and have the ability to withdraw up to $10,000, or half of the funds in their account, without incurring the usual 10% excise tax on early withdrawals.  Participants can repay the amount withdrawn within three years and be eligible for a refund for income taxes paid on the early withdrawal amount.  The withdrawal amounts will be indexed for inflation, so may vary in the future and are limited to a cap of 50% of the participant’s account balance.  Similar excise tax relief has also been permanently granted for participants who are terminally ill, as well as individuals impacted by natural disasters.

The second significant emergency funds provision effective in 2024 allows plan sponsors to offer short-term emergency savings accounts as a “sidecar” to the traditional retirement account with the option of auto-enrollment.  ESAs are part of the defined contribution plan and are funded after-tax through Roth contributions, with a cap of up to $2,500 that will be indexed for inflation.  In addition to these statutory limits, funding of these sidecar accounts is not available to those meeting the IRS definition of a Highly Compensated Employee (HCE)

Plan sponsors can choose to have smaller contribution caps, and auto-enrolled participants will have their contribution top out at 3% of their compensation. ESAs can’t have minimum contributions or balance requirements, and employers must allow at least one withdrawal a month.  Employers offering auto-enrollment are eligible for fiduciary safe harbor provisions, but will have increased administrative duties as plans have to account for contributions and earnings separately and require specific notification and other plan information.  Additionally, employers offering a match in their plan must also match on the funds deferred into the ESA; however, the match must be made into the participant’s retirement account.

The first four ESA withdrawals per year aren’t subject to fees, there are no early withdrawal penalties and the funds are tax-free because they are categorized as qualified distribution. How that money is used does have limitations.  Contributions must be held in an interest-bearing deposit account, or in a regulated investment vehicle designed to protect the principal and give a reasonable rate of return while offering liquidity.

Other notable changes

#1: Required minimum distributions: The age for beginning Required Minimum Distributions (RMDs) has increased by one year, from age 72 to 73.  RMDs from qualified retirement plans can be deferred if a plan participant is still working beyond age 73, but RMDs are required for owners of traditional IRAs, SEP, and SIMPLE IRAs.  For those with qualified employer Roth plan accounts, the rule change in 2024 eliminates RMDs, matching established Roth IRA rules.

#2: Automatic portability: The SECURE 2.0 Act now codifies automatic portability, allowing recordkeepers to build in the automatic transfer of rollover amounts for terminated participants to an established IRA from a former employer’s plan, unless the plan participant chooses to opt-out.  The Act also permanently approves the negative consent of rollovers of small balances to a terminated employee’s new employer through the Retirement Clearinghouse. The threshold for these rollover amounts has been increased from a maximum of $5,000 to $7,000 for 2024.

#3: Self-correction: Perhaps most importantly for employers, in 2024 the SECURE 2.0 Act allows for self-correction for any automatic enrollment mistakes without penalties for up to nine months after the plan year where the mistake occurred.  This is valid only for established automatic enrollment and contribution escalation plans.  This acknowledges the challenges of implementing the many changes that the Act requires, and lets plan sponsors who have gotten off to a rocky start to correct mistakes without incurring penalties.  This forgiveness period make sense as the point of the Act is to make retirement planning easier and more accessible for all parties.  While plan sponsors can’t rely on future leniency, there has been significant regulatory accommodations afforded to businesses who are struggling with the changes.

Takeaways

In many ways, 2024 is a transition year for the SECURE 2.0 Act, and plan sponsors and advisors will need to solidify their data and reporting to meet the demands of these new regulations.  Many of these changes rely on demographics, so maintaining accurate personal information will be key for auto-enrollment, reporting and compliance.  Auditing for key information, including age and employment status, is necessary to avoid compounding errors.

Plan sponsors and advisors will need to work closely with vendors, especially recordkeepers and payroll providers, to update their data and make necessary systems changes for proper compliance and enrollment eligibility. All parties should be working from a compliance calendar that includes key dates for both internal and external reporting and benchmarking.  Employers and advisors will also need to make sure that they are communicating changes effectively and as stipulated by the rules.  This includes updating plan language, educational resources and outreach efforts.

One of the most important, and challenging, elements of the SECURE 2.0 Act is the mandatory automatic enrollment requirement, which goes into effect January 1, 2025.  That means that 2024 is the key time to prepare tech, reporting and compliance systems to be ready to move forward accurately and with the least amount of risk and correction necessary.

Related: 3 key SECURE 2.0 provisions go into effect in 2024: What plan sponsors need to know

The new SECURE 2.0 Act regulations coming into effect in 2024 are significant and touch every generation.  With such wide-ranging changes, some optional and some mandatory, it is important for employers to be informed and prepare for the increased compliance ahead.   Employers should work with their plan advisor and providers to align their employee communication strategy to educate participants on how the new regulations will affect them and how to best take advantage of the opportunities the SECURE 2.0 Act offers. Luckily, IRS forgiveness, increased clarity and many positive changes for employees mean that 2024 can be a very good year for employee benefits.

Jennifer Tanck, Esq. is Executive Vice President of Pensionmark, which has been helping employers for more than 35 years by providing industry-leading financial services via its network of top retirement plan specialists.