Increasing plan participation and plan balances

Two of the most discussed provisions of SECURE 2.0 have been new automatic enrollment requirements and the ability for plans to incorporate employer matching relating to student loan payments. Although neither is a new concept, these provisions are likely to significantly increase the number of plan participants as well as the amount of contributions to plans, by both employees and employers.

Automatic enrollment. Automatic contribution arrangements for defined contribution plans reached prominence with the Pension Protection Act of 2006, which added an alternative design-based "safe harbor" for plans that have certain automatic contribution features. While automatic enrollment features have been shown to greatly improve plan participation, certain plan sponsors may have resisted adopting them so as not to appear paternalistic. By resetting the statutory standard, the new legislation may diminish the strength of that argument. SECURE 2.0 requires each new 401(k) and 403(b) plan established after SECURE 2.0's enactment to include an automatic contribution feature in which employees are automatically enrolled to contribute at a rate of at least 3% but no more than 10% of their compensation during their first year of participation, with the contribution rate to automatically increase by 1% each year until reaching at least 10% but no more than 15% of an employee's compensation. The plan must allow employees the ability to opt-out of the automatic feature as well as to take a withdrawal within 90 days after the date of the first elective contribution. The automatic enrollment feature must be effective no later than the first plan year beginning after December 31, 2024. Among other groups of plans that are exempt from this requirement, an automatic enrollment feature is not required for any plan that was established prior to the enactment of SECURE 2.0. Because automatic enrollment is likely to increase elective deferrals, employers that adopt new plans or that amend legacy plans to incorporate automatic enrollment – where the plan in question has a matching feature – should consider the possible increased cost of employer matching that would result from increased elective deferrals. With lower salaries and higher debt, it's intuitive that garnering retirement plan participation from younger employees is an uphill battle, despite the fact that compounding of returns over time would cause earlier contributions to have a greater impact on total retirement assets in the future.
Student loan match. The concept of providing credit for student loan payments first came to prominence following a 2018 IRS private letter ruling that allowed an employer to make nonelective contributions corresponding to employee's student loan payments. Although the feature of crediting student loan payments is not widespread, SECURE 2.0 could take this budding concept viral. For plan years commencing after December 31, 2023, SECURE 2.0 permits 401(k), 403(b) and 457(b) plans to treat "qualifying student loan payments" – amounts certified by the participant as having been paid to satisfy higher education student loan debt – as elective deferrals for purposes of employer matching contributions. The IRS is charged with developing regulations to implement this provision. The match rate, eligibility and vesting requirements for loan payment matching contributions must be the same as those for elective deferrals, although regulations may permit loan payment matches to be made with a different frequency so long as the student loan payments are matched at least annually. Plan sponsors who wish to adopt loan payment matching contributions should begin discussing with their third-party administrators whether and how this could be implemented for 2024. With employers engaging in fierce competition for talent, this could become a widely-adopted plan feature provided that IRS guidance does not make implementation too onerous.
Catch-up contributions. SECURE 2.0 also provides increased limits for catch up contributions under 401(k) and 403(b) plans for participants aged 60 through 63. The catch-up limit for this group will be the greater of $10,000 and 150% of the general catch-up contribution limit. The catch-up limits will be indexed for inflation, similar to other statutory contribution limits, and may be implemented by plan sponsors for plan years starting after December 31, 2024. In addition, SECURE 2.0 introduces increased limits for employee deferrals and catch-up contributions for SIMPLE IRAs and SIMPLE 401(k)s, albeit on a different scale.

Increasing access to funds for emergency or life events

Lower-wage employees could be deterred from making plan contributions as a result of having those funds "locked up" until they can take penalty-free withdrawals after age 59½. Penalty-free hardship distributions and distributions to pay for a first home have been a longstanding feature of many plans, although some employers may have resisted adopting a hardship distribution feature due to the administrative burden of verifying the hardship. Effective as of its enactment, SECURE 2.0 eliminates this burden by permitting plan administrators to rely upon a participant's self-certification of the hardship.

Instant Insights /

SECURE 2.0: Implementing the mandatory 401(k) plan design changes

More From HR Executive

Related Stories

Recommended For You