While Some Requirements Are Delayed, Others Need Attention Now

Plan sponsors and recordkeepers were granted a reprieve when, on August 25th, the Internal Revenue Service announced a two-year administrative transition period on the SECURE 2.0 requirement that any catch-up contributions made by higher-income participants in eligible DC plans be designated as after-tax Roth contributions.  While the delay had been expected, it should allow the industry sufficient time to develop best practices and help avoid negative impacts of unintended consequences from hurried compliance.

Under the guidance released with the extension announcement, catch-up contributions will be treated as satisfying the requirements of Section 414(v)(7)(A) through December 31, 2025, even if the contributions are not designated as Roth contributions. In addition, a plan that does not provide a designated Roth contribution will be treated as satisfying the requirements of Section 404(v)(7)(B).

While the requirement for catch up contributions was the highest profile SECURE 2.0 provision, there are several more to be aware of that become effective for Plan years beginning in 2024.

Some of the more notable provisions include:

Penalty-Free Withdrawals – Optional

  • Under SECURE Act legislation, there will no longer be a 10% early distribution penalty assessed on withdrawals of up to $1,000 if funds are used for unforeseeable, emergency expenses.
  • Taxpayers can take three years to repay the early withdrawal but won’t be able to make any additional emergency withdrawals during this time until the repayment is complete. These matching contributions must be made available to all match-eligible participants.
  • Domestic abuse survivors will be able to take early distributions of up to $10,000 or the equivalent of 50% of the account balance, whichever amount is less. This withdrawal will not be subject to the 10% early distribution tax and participants will need to self-certify that they’ve experienced domestic abuse. The withdrawn amount can be repaid over three years and the income taxes on the repaid amount would be refunded upon repayment.

Matching Student Loan Payments – Optional

  • A new provision involves a new policy permitting employers to make matching contributions to retirement plans based on employees’ student loan payments.
  • Because the matching contributions on student loan payments must follow the same schedule as other matching contributions under the plan, plan sponsors are allowed to treat qualified student loan repayments as employee elective deferrals for the purposes of matching contributions in a retirement plan.
  • These matching contributions must be made available to all match-eligible participants.

Emergency Savings Accounts - Optional

  • Plan sponsors may add an emergency savings account to their retirement plan, which must be designated as an after-tax account.
  • Non-highly compensated employees may be automatically enrolled at up to 3% of their compensation, but no higher than $2,500 annually. The plan can set this limit to a lower amount. Employer matching is limited to up to $2,500 annually.

Involuntary cash out increased – Optional

  • Increases the involuntary cash-out limit to $7,000 from $5,000.

RMD Exemption for Roth contributions – Mandatory

  • Participant money in Roth contribution sources in retirement plans will be exempt from RMD requirements.
  • Participants no longer need to roll Roth contributions to a Roth IRA.

Spousal Beneficiaries treated as participants for RMD purposes – Mandatory

  • Spousal beneficiaries of deceased participants may elect to have RMD rules applied as if the surviving spouse was the owner.
  • May allow surviving spouse to delay initial RMD and potentially use a more favorable RMD calculation.

Top Heavy Rule Modifications – Mandatory

  • Allows for separate testing of excludable employees for certain top-heavy purposes.
  • Only applies to ERISA covered plans.

It’s prudent for plan sponsors to ensure that their plan documents are updated accordingly and that their operational procedures reflect the mandatory provisions right away.

For more information, please reach out to us via our website at www.agilis.llc for an initial consultant as to the state of your plan.

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