By Anne Tyler Hall and Phil Koehler (March 29, 2023)
The Setting Every Community Up for Retirement Enhancement, or SECURE, Act 2.0, enacted at the end of 2022, ushered in some of the most sweeping changes for retirement plans and individual retirement accounts since the passage of the Employee Retirement Income Security of 1974, as amended.
Some of the changes are immediate while others become effective in 2024 and beyond. Some changes are required, and some changes are optional, requiring plan sponsors to think critically about how and when to implement them, if at all.
This article provides an overview of the salient features, as well as plan sponsor considerations, with respect to impactful areas of change under the act, including: allowing employers who sponsor a 401(k) plan, 403(b) plan or SIMPLE IRA to make contributions that match an employee’s student loan payments; and facilitating new distribution planning options.
The following required and optional provisions can and should serve as attraction and retention tools for those plan sponsors who deliberately and thoughtfully convey the benefits of these provisions to the workforce.
Addressing the Student Loan Crisis
The societal costs of the unprecedented level of average student loan debt carried by recent college graduates affect a wide spectrum of the U.S. economy.
Among those costs is the reduction of the disposable income of college-educated entrants into the labor market each year, and the inability of younger employees to participate in the deferral-based retirement plans characteristic of many public and private sector employers.
Unable to afford student loan payments and the plan’s minimum required salary deferrals, these members of the workforce miss out on their plans’ employer matching contributions. This phenomenon significantly delays the commencement of these employees’ retirement savings and thus reduces future accumulations to fund their replacement income in retirement.
Congress sought to address the retirement income security implications of the student loan debt crisis by including an optional provision in the act.
Effective in 2024, the act permits an employer to amend its 401(k) plan, 403(b) plan or SIMPLE IRA to make matching contributions that match an eligible employee’s qualifying student loan payments, or QSLPs, during the plan year. It also permits governmental employers to amend their 457(b) plans to make matching contributions on the basis of QSLPs.
Qualified Student Loan Payments Defined Broadly
The act defines the term “qualified student loan payment” broadly to mean any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.
New Section 401(m)(4)(D) also provides that QSLPs eligible for matching contributions cannot exceed the lesser of: the applicable annual deferral limit, which is $22,500 in 2023; or the applicable maximum annual addition (for 2023, the lesser of $66,000 or 100% of the employee’s annual compensation).
The new law further provides that the term “qualified higher education expenses” means the cost of attendance at an educational institution reduced by certain amounts excluded from gross income under the code, including the amount of any scholarship as well as educational assistance furnished pursuant to an educational assistance program by an employer.
Contours of the QSLP Under the Act
QSLPs are not treated as deferrals for average deferral percentage testing purposes. For average contribution percentage testing, general nondiscrimination testing, and minimum coverage testing, the act permits employers to evaluate the group of employees receiving QSLP matching contributions separately from the group receiving salary deferral matching contributions.
Important operational considerations in the act include:
• While the employee must certify annually to the employer making the matching contribution that the QSLPs were actually paid to the lender, the plan does not have to require the employee to provide proof of these payments. The plan administrator may rely on the employee’s self-certification of such payments as the basis for QSLP matching contributions.
• The plan is not required to treat QSLPs as the equivalent of salary deferrals or maintain records about the payments other than to verify that they repay a qualified student loan.
• QSLP matching contributions must vest in the same manner as the employer’s salary deferral matching contributions.
• The act authorizes the IRS to issue regulations that permit the employer to make QSLP matching contributions less frequently than salary deferral matching contributions, but not less frequently than annually; and publish model plan amendments to add QSLP matching contributions.
Plan Sponsor Considerations
As a practical matter, employers should understand that adding a QSLP matching contribution increases the administrative complexity of a plan. Not all third-party administrators and record-keepers will have developed the administrative software, staff training processes and online communication materials needed to implement such a plan feature in the immediate future.
Service providers, generally, will be coping with implementing the act’s many mandatory changes, and there may be broad reluctance to make the added investment to accommodate these optional plan designs until the popularity of this feature proves itself in the marketplace.
Plan sponsors seeking to jump on this opportunity in 2024 may face the cost and fiduciary governance issues associated with replacing their plan’s current service providers.
Accordingly, plan sponsors should begin to assess the feasibility of a QSLP matching contribution feature and prioritize this optional change in relation to all the other plan design opportunities and challenges created by the act.
On the other hand, with student loan debt soaring over the past decade, inclusion of a QSLP feature should act as an attraction and retention tool for employers looking to hire recent graduates, millennials and even older workers with remaining outstanding student loan debt.
A student loan matching program is a benefit that is likely to positively affect many employees saddled with debt. Without the QSLP feature, such employees cannot afford to make student loan repayments and the minimum elective deferrals necessary to receive a matching contribution from a company-sponsored retirement plan.
Other Plan Design Change Requirements and Options
In addition to the careful consideration of QSLPs, there are other design changes, both required and optional, that may be used to attract and retain employees.
These design changes affect how and when participants may access their retirement savings, and in the case of emergency savings account provisions, they may even impact the number and types of accounts available to participants, should plan sponsors choose to implement the emergency savings account options.
Required Provisions Affecting Distribution Options
Withdrawals for Individuals With Terminal Illnesses
For distributions after 2022, retirement plan distributions made to a participant who is otherwise eligible for a distribution and is terminally ill, as certified by a physician, will not be subject to the 10% tax on early distributions. The participant must be given the opportunity to repay the withdrawn amount under rules similar to those for qualified birth or adoption withdrawals.
Because this change is effective beginning Jan. 1, 2023, plan sponsors should immediately confirm updates to plan processes and procedures for distributions and repayment, as well as participant distribution/repayment materials and communications. A review of plan documents may be necessary to ensure conformity with the new distribution and repayment rules.
Plan sponsors who properly educate participants on the presence of this required provision will benefit more in the area of employee retention than the plan sponsor who implements the provision in a “set it and forget it” fashion without making a point to educate the workforce on its presence.
Withdrawals for Certain Emergency Expenses
Effective for distributions made after 2023, certain withdrawals from 401(k) plans for emergency expenses will not be subject to the 10% tax on early distributions. Only one emergency expense withdrawal of up to a maximum of $1,000 is permissible each year.
The participant must be given the opportunity to repay the withdrawal within the following three years. Additional emergency expense withdrawals within the three-year period are limited if repayment has not been made or additional contributions have not been made equal to or exceeding the repayment amount.
As with all mandatory changes to plans, the plan sponsor should take particular care to ensure that plan participants understand the emergency expense provision and what it means to them.
If enacted in tandem with optional provisions of the act, e.g., the act’s “Emergency Fund Provision” or Roth elections options, the import of describing the immediate benefit and mechanism of savings to plan participants becomes even more important, as the plan design is suddenly more complicated and could prove to be confusing for less sophisticated participants.
Optional Changes Facilitating Distribution Options
“Rothification” of Employer Matching and Nonelective Contributions
As of Jan. 1, 2023, employers may amend their 401(k) plans to offer participants the ability to elect that some or all of the employer matching contributions or nonelective contributions that were vested at the time they were made by the employer be characterized as Roth contributions.
While “Rothification” of the employer match and nonelective contributions does offer participants an option they did not enjoy previously, the benefits of this provision can be obtained via other methods, e.g., in-plan Roth conversions.
Without further guidance and confirmation of third-party administrators and record-keepers’ ability to properly track Roth matching contributions, plan sponsors may face administrative challenges to effectively putting the provision in place, opening them up to legal compliance challenges.
Plan sponsors should work closely with their entire benefits ecosystem to be sure the organization reaps the intended benefits of implementing this option. As with all enacted provisions, plan participant education should be considered a priority in order to provide any attraction or retention benefit to the employer.
Increase in Small Benefit Cash-Out Limit and Automatic Portability
Under current law, a vested retirement plan benefit of less than $5,000 may be automatically cashed out and transferred to an IRA with a default IRA provider unless the participant elects otherwise. Effective for distributions after 2023, the automatic cash-out limit is increased to $7,000, at which time it becomes mandatory.
In addition, retirement plans and their record-keepers may offer automatic portability provisions for amounts transferred to a default IRA. These automatic portability provisions will enable amounts transferred to the default IRA to be automatically transferred into the retirement plan of the employee’s new employer without the employee needing to take any action.
Prior to SECURE Act 2.0, plan sponsors were left “holding the bag” for employees with small balances sitting in their retirement plan account upon leaving the plan sponsor for another job. The act allows employers to automatically transfer balances up to $7,000 to the employee’s new company-sponsored plan or to a risk-free IRA.
Preventing early cash-outs puts IRS penalties out of play and allows account balances to grow in a plan uninterrupted until retirement. There are also fewer issues, and therefore less risk, created by missing participants and forgotten accounts, which can and do cause massive compliance headaches for those plan sponsors with those dollars sitting unclaimed in their plan.
Emergency Savings Accounts
Effective for plan years beginning after 2023, sponsors of individual account plans such as 401(k) plans may amend their plans to provide emergency savings accounts that permit nonhighly compensated employees to make Roth after-tax contributions to a special savings account within the retirement plan.
An employee’s balance in an emergency savings account must be eligible for distribution at least once per month, and contributions cannot be made to an emergency savings account that would cause the balance to exceed $2,500 (adjusted for inflation after 2024), or a lesser amount established by the plan sponsor.
An employee’s contributions to the emergency savings account must be eligible for matching contributions at the same matching rate established under the plan for elective deferrals, but the matching contributions are made to the regular employer matching contributions account and not to the emergency savings account.
Plan sponsors must understand their workforce and what is important to them. Will employees appreciate the organization that ostensibly is looking out for their best interests, or will such action be seen as paternalistic?
The apparent issue with this provision, and the impact for employers, is that some people simply do not want to save, or if they do they want to do it on their own terms.
Employers should proceed with caution as they consider amending their existing plan or starting a new plan that includes these emergency savings accounts. As with any changes to an existing plan, employee education can prove the difference-maker when it comes to perceived benefits to participants.
Leveraging Required and Optional Retirement Plan Design Changes to Attract and Retain Employees
With the passage of the SECURE Act 1.0 and the Coronavirus Aid, Relief, and Economic Security, or CARES Act, and now including the massive SECURE Act 2.0 provisions, the last four years have ushered in the most significant changes to retirement plans since the Pension Protection Act of 2006.
The act includes additional, significant changes that affect employer plan sponsors and participants alike. With the recent passage of the act, plan sponsors should prepare for immediate compliance with the act’s requirements and avoid penalties associated with IRS and U.S. Department of Labor scrutiny, as well as to leverage these new changes to attract and retain top talent.
Anne Tyler Hall is a managing partner and Phil Koehler is lead ERISA counsel at Hall Benefits Law.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
Hall Benefits Law, LLC
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