This article is part of our Retirement Plan Trends series, which explores issues affecting the retirement space.
The Secure 2.0 Act of 2022 made significant changes to the U.S. retirement landscape. Broadly speaking, the legislation should help more people save more money for the future. While much of the new law aims to encourage small businesses to launch retirement plans, some parts could be game-changers for existing mid-size and larger institutional plans. These provisions could help established plans improve participant outcomes by increasing the number of covered employees, encouraging higher levels of savings, and minimizing leakage of plan assets. Some could also help employers recruit and retain workers. Here are what I consider four particularly meaningful areas, and potential next steps for plan sponsors.
1. “Rothification” of 401(k)s
What is it? Several provisions of the Secure 2.0 legislation direct more workplace savings into Roth accounts. For instance, employers can offer participants the option of receiving employer matching and non-elective contributions on either a Roth after-tax basis or a pretax basis. The act also requires that catch-up contributions for employees earning at least $145,000 a year in taxable income be made on a Roth basis.
When does it go into effect? The Roth option available for employer contributions became effective when Secure 2.0 was enacted in December 2022. The required Roth treatment of catch-up contributions takes effect in tax year 2024. However, these provisions remain subject to further guidance from federal agencies as the industry grapples with implementation challenges. For example, anchoring catch-up contributions to an employee’s taxable income poses operational challenges that will require significant coordination between an employer’s payroll provider and recordkeeping platform. Among the issues to be addressed is whether and how tax withholding will be applied to employers’ Roth contributions. Internal Revenue Service guidance on this option is needed and expected.
What does it mean for plan sponsors? This change will make it possible for employers to offer many workers greater tax efficiency and flexibility in their retirement savings, increasing the appeal of the plan. A bonus for younger workers: in many cases, they will pay less tax on Roth contributions if they are in a lower tax bracket than they expect to be in at retirement. The addition of Roth accounts will also have implications for plan design and documentation.
Potential next steps: Be ready to educate participants on the differences between Roth 401(k)s and regular 401(k)s and ensure that plan administration and design can support the new Roth provisions. Many plan sponsors are discovering that “Rothification,” especially the required Roth treatment of catch-up contributions, involves administrative complexity and may require new participant elections. Plan sponsors should consider working with their payroll provider and recordkeeper sooner than later to put a timeline in place for implementation.
2. Student loan repayment matching
What is it? This provision allows an employer to make retirement plan matching contributions on a participant’s qualified student loan repayments. It is targeted at workers whose student loan burdens are limiting their retirement plan contributions and causing them to miss out on the match offered by their employers.
When does it go into effect? Plan year 2024
What does it mean for plan sponsors? Employers that offer this benefit may gain an edge in attracting and retaining highly educated, younger workers in a tight labor market. However, some sponsors may not be comfortable with participants self-certifying their student loan payments. Secure 2.0 directs the U.S. Treasury Department to develop regulations that would help employers set guidelines for this and other elements of the program.
Potential next steps: While the provision allows a plan sponsor to rely on a participant’s self-certification of loan payments, some plan sponsors may want to consider requiring some documentation to verify participant student loan repayments. Some companies are even offering student loan verification services to take the burden off the plan sponsor. Consideration should also be given to how to handle the likely timing mismatch between regular matching contributions that may be administered via payroll and the student loan payment match that may be made on a different frequency (e.g., annually), follows a loan amortization schedule, and would need to be certified annually by the participant.
3. Emergency savings
What is it? Employers have the option to add an emergency savings account to their plan to provide non-highly compensated employees (NHCEs) easy access to emergency funds with at least four fee-free withdrawal transactions per year. Employees could contribute up to $2,500 to the account on a Roth (after-tax) basis, with the cap for that contribution determined by the employer. Employers could also auto-enroll employees in the Roth emergency savings account at up to 3% of their salary and make matching contributions to the employee’s retirement plan based on their contributions to the emergency savings account.
This is an important change given that nearly four in 10 Americans say they would be unable to cover a $400 emergency expense in cash, according to a recent Federal Reserve survey1.
When does it go into effect? 2024
What does it mean for plan sponsors? This fundamental financial wellness benefit may draw in employees who were avoiding plan participation to prioritize saving for unexpected expenses. The provision may help plan sponsors reduce the leakage of plan assets, expand participation, and reduce absenteeism caused, for example, when employees are unable to travel to work due to costly car repairs they can’t afford. For participants, it could remove a financial barrier to maximizing retirement benefits and help segregate short-term emergency funds from long-term investments meant to finance retirement.
Potential next steps: The industry will need additional time to build out the administrative capabilities to support this provision. Since these contributions must be made on a Roth basis, employers may consider shifting their automatic enrollment arrangements to Roth more generally. They will also need to address the potential for abuses where employees contribute only to receive the match and then quickly withdraw their contributions. Secure 2.0 directs the Treasury Department to issue guidance on preventing such abuse. Plan sponsors should consider if emergency savings accounts are a priority for their participant demographics.
4. Saver’s credit
What is it? Lower income workers will be eligible for a federal matching contribution of up to 50% on up to $2,000 per year of employee contributions to a retirement plan. This provision will replace the saver's tax credit under which employees receive credit for retirement plan contributions through their tax refund. Instead, they will receive a straight government match deposited into the retirement plan.
When does it go into effect? Tax year 2027
What does it mean for plan sponsors? The provision makes more savers eligible for the federal contribution. This could encourage more participation in the plan and create the opportunity for these funds to grow over time. However, many logistical questions remain unanswered.
Potential next steps: Although an attractive benefit for employers to promote to employees, many logistical details need to be determined. It will take time for the industry to determine how to accommodate the flow of the federal matching contribution into the participant’s account. IRS guidance on this change is needed and expected.