Effective 2024 Planning for a 401(k) Plan Sponsor

As 401(k) plan sponsors plan for 2024 and subsequent years, they can take advantage of several improvements to the 2022 SECURE Act (known collectively as SECURE 2.0). These changes simplify plan administration while making retirement plans more accessible and attractive to employees.

Some of the key provisions affecting plan sponsors include:

Plan managers need to understand the SECURE 2.0 changes to 401(k) administration to ensure compliance with the changed regulations and their ability to meet their existing responsibilities.

SECURE 2.0 allows plan sponsors to make discretionary amendments to increase participant benefits for a previous plan year. Effective Dec. 31, 2023, changes will be permitted after the end of a plan year, provided the amendments are adopted by the due date of the sponsor’s next federal tax return. This changes the current requirement that plan amendments be adopted by the end of a plan year in which the amendment is effective.

In late August, the IRS announced a two-year delay in implementing SECURE 2.0 regulations that would have required employees older than 50 and earning more than $145,000 annually to make “catch-up” contributions only via Roth IRA post-tax accounts.

These provisions were delayed until 2026 after feedback from employers and retirement program managers. The employers and managers said they would not be able to implement the provision in time, given the administrative complexities of setting up systems to ensure highly compensated employees would only be making Roth catch-up contributions.

SECURE 2.0 provides a grace period of 9-1/2 months after a plan year ends for sponsors to correct, without penalty, errors associated with the automatic enrollment of employees into a plan. The grace period also applies to errors related to the automatic escalation of contribution amounts or contribution matches for current plan participants.

This safe harbor, which takes effect Dec. 31, 2023, should provide peace of mind for HR professionals who may have been worried about potential penalties under the current regulations.

Starting Jan. 1, 2024, plans will be required to allow employees who have worked more than 500 hours in three consecutive 12-month periods to contribute elective deferrals to the plan.

Employers are not required to make matching contributions on behalf of these employees, but may choose to do so.

This change means employers will have to track employee hire dates and hours worked dating back to Jan. 1, 2021, to determine the eligibility of specific employees. Employers need to consider the implications this broader eligibility may have for plan administration. It may be easier, for instance, to allow all employees to contribute rather than tracking hours to determine eligibility.

Starting in 2025, the three-year threshold for part-time eligibility will decrease to two consecutive 12-month periods.

New SECURE 2.0 provisions allow workers to withdraw up to $1,000 from their savings penalty-free to meet personal or family emergencies. Employees can repay the withdrawal over three years, but are not required to.

Similarly, an employee affected by domestic violence can withdraw up to $10,000, or 50% of their account balance, without incurring a tax penalty. This provision also includes a three-year repayment period.

Participants affected by natural disasters can withdraw up to $22,000 penalty-free. The amount taken must be repaid within three years, or the participant can pay taxes on a non-repaid distribution over three years.

For plan administrators, the penalty-free feature of these provisions reduces the need to calculate and assess the 10% excise tax typically associated with early withdrawals.

To understand potential 401(k) plan audit implications going forward, contact us.