Mandatory versus Elective Provisions of the SECURE 2.0 Act for Benefit Plans

The SECURE 2.0 Act and its 92 provisions aim to improve retirement outcomes, encourage savings, increase company incentives, and offer more flexibility to people preparing for retirement. Not all of these provisions are mandatory, but some of them are. In this blog, we will highlight the mandatory requirements that plan sponsors must implement, along with some of those that are elective.

Mandatory Requirements Emergency Fund Withdrawals

Under current law, a 10% tax generally applies to early distributions from tax-qualified plans. The Act provides an exception for certain distributions used for emergency expenses that are unforeseeable or for immediate financial needs relating to personal or family expenses This provision allows one distribution annually of up to $1,000, and an employee may repay the distribution within three years. This change is effective for plan years beginning after December 31,2023.

Treatment of Long-Term Part-Time Employees

For 401(k) and 403(b) plans, long-term part-time employees who complete at least 500 hours of service in each of two consecutive 12-month periods must be eligible to make elective deferrals. This provision is effective for plan years beginning after December 31, 2024. This change is effective for plan years beginning after December 31,2024.

Automatic Enrollment

New 401(k) and 403(b) plans are required to provide automatic enrolment and escalation arrangements. This change is effective for plan years beginning after December 31, 2024.

Catch-Up Contributions

Employees may make catch-up payments on a pre-tax or post-tax basis if their annual salary is equal to or less than $145,000. Participants with income beyond $145,000 will not be able to make catch-up contributions to any retirement plan that solely allows pre-tax contributions. This change is effective for plan years beginning after January 1, 2024.

After January 1, 2025, the act will increase the catch-up contribution to the greater of $10,000 or 50% of the standard catch-up amount if someone taking part falls between the age range of 60 and 63. 

Elective Provisions Roth Contributions

The Act now allows defined contribution plans the option of providing matching and nonelective contributions designated on after-tax Roth contributions. These are included in the participant’s income and must be 100% vested when paid. This change is effective for plan years beginning after December 29, 2022.

Student Loan Repayment

Under the Act, for employees who are paying down student loans, employers can add a provision to their retirement plan to apply the retirement plan’s matching formula to the employee’s repayment and deposit the match into the employer’s retirement savings plan on behalf of the employee.  This change is effective for plan years beginning after December 31, 2023.

Emergency Savings Accounts:

Employers can automatically enroll non-highly compensated participants in an after-tax Roth Emergency Savings Account for up to 3% of compensation, up to a total of $2,500 annually. This change is effective for plan years beginning after December 31, 2023.

Cash Balance Plan Calculations

The Act permits a cash balance plan with variable interest crediting rates to use a projected interest crediting rate that is reasonable, but not in excess of 6%. This change is effective for plan years beginning after December 29, 2022.

Note

Plan sponsors should have proactive discussions with their service providers and ask their payroll provider and custodian/recordkeeper if they have the capability to record and track all changes that are mandatory and elective. Timely plan amendments should be adopted to formally change the plan’s provisions. Additionally, plan sponsors should survey their employees to gauge their interest in any of the elective provisions they are considering.