The continuing wave of benefit changes: Compliance tips for 2024
Although plan amendments and related changes to summary plan descriptions may be delayed, identifying applicable changes and taking necessary steps is crucial for compliance.
Plans should be clear regarding those changes, such as the cost-sharing requirements for COVID-19 testing and telemedicine benefits. Additionally, extended deadlines for certain plan notices, elections and claim/appeal procedures expired, requiring a reversion back to the standard deadlines. The United States Department of Labor, Department of Health and Human Services and Department of the Treasury issued guidance in March 2023 regarding the changes to assist plans with compliance in the transition. Plan documents, summaries and processes should be clear on the post-pandemic rules.
Welfare benefit plans are impacted by changes that are effective in 2024, including the requirement for most employers to file Affordable Care Act (“ACA”) information returns electronically. An employer also may be required to amend its cafeteria plan in 2024 if it implemented the optional cafeteria plan election change, allowing an employee to prospectively revoke family coverage if family members elect marketplace coverage during the plan year. This optional change relates to the Internal Revenue Service rule correcting the “family glitch” in determining the affordability of ACA coverage, as affordability was previously determined based on the employee-only premium (regardless of the cost of family coverage).
Plan sponsors and administrators also continue to address retirement plan changes made by the SECURE 2.0 Act of 2022. Designed to encourage and optimize retirement savings, the changes affect various aspects of plan operation, including requirements concerning eligibility to participate, contributions, withdrawals, distributions and plan administration. Plans must be administered in compliance with the new rules, despite a delayed amendment date.
With regard to eligibility to participate, the original SECURE Act (the “Setting Every Community Up for Retirement Enhancement Act of 2019”) requires 401(k) plans to allow employees who work at least 500 hours for at least three consecutive years beginning on and after January 1, 2021 and are age 21 at the end of the period (“long-term part-time employees”) to make deferral contributions to the plan. The long-term part-time employees would first be eligible to defer in 2024 under this rule. Plan sponsors are not required to provide employer contributions for the long-term part-time employees (unless they otherwise qualify). SECURE 2.0 expanded the rule to apply to 403(b) plans subject to ERISA for plan years beginning in 2025. The new legislation also provides that the three consecutive year period is dropped to two years beginning in 2025 (counting periods beginning January 1, 2023). Only service on and after 2021 (2023 for 403(b) plans) will count.
To enhance participation, automatic enrollment is expanded for plan years that begin in 2025 or later. New 401(k) and 403(b) plans must automatically enroll participants with a deferral percentage of at least 3% of compensation and with annual increases to at least 10% (although employees may opt out). Additionally, employer incentives to encourage employees to participate provided outside the plan are now allowed. However, incentives must be de minimis and cannot be paid from plan assets. Employers should note that the incentives may be taxable income required to be reported as wages and subject to withholding.
As an additional optional enhancement, the plan contribution rules have now changed to provide that employers may match qualified student loan payments. This applies to a 401(k) plan, 403(b) plan, governmental 457(b) plan or Savings Incentive Match Plan for Employees (SIMPLE) IRA. The student loan must be for debt incurred by an employee solely to pay the employee’s qualified higher education expenses. To provide greater flexibility to participants concerning employer contributions, plans may also allow participants to designate vested employer matching and/or profit-sharing contributions as Roth contributions.
The legislation provides that catch-up contributions must be treated as Roth contributions beginning in 2024 (although the effective date of this change is delayed to 2026) for 401(k), 403(b) and governmental 457(b) plans, with an exception for catch-up contributions for employees who make $145,000 (as adjusted annually for inflation) or less in the prior year. SECURE 2.0 also increased the catch-up limit for those ages 60-63 beginning in 2025 so that participants in that age range may make additional catch-up contributions of the greater of $10,000 or 50% over the general catch-up amount (for SIMPLE plans, the greater of $5,000 or 50% over the general catch-up amount).
Certain rules regarding withdrawals have also changed. SECURE 2.0 provides limited relief from the 10% early withdrawal penalty for withdrawals prior to attainment of age 59.5. The law previously provided exceptions for certain corrective distributions made to highly compensated employees for failed nondiscrimination tests, distributions to individuals who have a terminal illness and certain distributions up to $22,000 due to a federally declared disaster. Beginning in 2024, there are additional exceptions for distributions to victims of domestic abuse from certain plans (excluding money purchase or defined benefit plans) up to an amount that is the lesser of $10,000 or 50% of the participant’s account balance and for distributions of up to $1,000 a year due to unforeseeable or immediate emergency expenses. Effective December 30, 2025, distributions of up to $2,500 per year for payment of premiums for certain long-term care insurance contracts also may be allowed. Plan sponsors must decide whether to include the optional provisions.
Related: Coping with the SECURE Act 2.0: Things employers need to know for 2024
Plan distribution rules are also affected by SECURE 2.0 changes. Effective in 2024, the small balance cash-out limit is raised from $5,000 to $7,000. Additionally, SECURE 2.0 increased the age for required minimum distributions (“RMDs”) to age 73 for a person who attains age 72 after December 31, 2022 and age 73 before January 1, 2033, and age 75 for someone who attains age 74 after December 31, 2032. The 50% excise tax for failure to timely make RMDs (which is payable by the affected participant) is reduced by the new legislation to 25% (and possibly to 10% if certain timely corrective actions are taken). Also, beginning in 2024, RMDs are not required for Roth accounts during the participant’s lifetime.
SECURE 2.0 expanded correction options under the Employee Plans Compliance Resolution System (EPCRS) for plan compliance errors, which is great news for plan sponsors and administrators. The legislation also made numerous other mandatory and optional changes to retirement plan rules. While plans must be administered in compliance with mandatory and optional changes that have been implemented, the amendments for SECURE 2.0 changes must generally be adopted by the last day of the plan year beginning on or after January 1, 2025 (2027 for governmental plans). Plan sponsors, fiduciaries and service providers should review documents, contracts, administrative processes and employee communications. Although plan amendments and related changes to summary plan descriptions may be delayed, identifying applicable changes and taking necessary steps – including communicating changes to employees/participants – is crucial for compliance.
Dana L Thrasher is a partner at Constangy, Brooks, Smith & Prophete and chairs the firm’s employee benefits practice group.