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:

  • Greater flexibility to increase plan benefits.
  • A delay in some provisions affecting “catch-up” contributions for high-income workers.
  • A safe harbor for correcting auto-enrollment errors.
  • Expanding eligibility for some part-time workers.
  • Making employee withdrawals easier.

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.

Flexibility for Discretionary Benefit Increases

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.

Catch-Up Contributions for High-Earning Workers Aged 50+

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.

Higher Catch-Up Limit to Apply at Age 60, 61, 62, and 63

Under current law, employees who have attained age 50 are permitted to make catch-up contributions more than the otherwise applicable limits. Section 109 increases limits to the greater of $10,000 or 50% more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025.

Increased Age for Required Minimum Distributions

Under current law, participants are generally required to begin taking distributions from their retirement plans at age 72. SECURE 2.0 increased the required minimum distribution (RMD) age for participants to 73 starting on Jan. 1, 2023, and increases the age further to 75 starting on Jan. 1, 2033. IRS Notice 2023-54 provides interim transition relief for plan administrators, payors, participants, IRA owners, and beneficiaries in connection with the change in the required beginning date for RMDs.

Safe Harbor for 401(k) Enrollment Errors

Section 350 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.

Section 350 is effective to errors after Dec. 31, 2023, and should provide peace of mind for HR professionals who may have been worried about potential penalties under the current regulations.

Long Term, Part-Time Eligibility Expands

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.

Easier Employee Withdrawals

New SECURE 2.0 provisions allow workers to withdraw up to $1,000 from their savings penalty-free to meet personal or family emergencies. Only one withdrawal is allowed per year and employees have the option to repay the withdrawal over three years, but are not required to.

Similarly, an employee affected by domestic violence can withdraw the lesser of $10,000 or, 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% additional tax typically associated with early withdrawals.

Expanding Automatic Enrollment in Retirement Plans

Section 101 requires 401(k) plans to automatically enroll participants upon becoming eligible (the employees may opt out of participation). All current 401(k) plans are grandfathered. The initial automatic enrollment amount is at least 3% but not more than 10%, and will increase each year by 1% until it reaches at least 10%, but not more than 15%. Section 101 is effective for plan years beginning after Dec. 31, 2024.

Pension-Linked Emergency Savings Accounts

SECURE 2.0 also authorizes, for plan years that began January 1, 2024, the creation of pension-linked emergency savings accounts (PLESAs) by non-highly compensated employees. The U.S. Department of Labor (DOL) defines PLESAs as “short-term savings accounts established and maintained within a defined contribution plan.”

Employers can offer to enroll eligible participants in these accounts beginning in 2024 or can automatically enroll participants.

Some key provisions:

  • Contributions will be made on a Roth basis (included in an employee’s taxable income but participants won’t have to pay tax when they withdraw). Those contributions must be held as cash, in an interest-bearing deposit account, or an investment product.
  • The portion of the account balance attributable to participant contributions can’t exceed $2,500 (or a lower amount determined by the plan sponsor) in 2024. This figure will be adjusted for inflation in future years.
  • PLESA participants don’t need to prove they’ve experienced an emergency before withdrawing from an account. The IRS has released PLESA guidance in Notice 2024-22, and the DOL has published frequently asked questions.

Treatment of Student Loan Payments as Elective Deferrals for Matching Contributions

Section 110 permits an employer to make matching contributions under a 401(k) plan with respect to “qualified student loan payments.” For purposes of the nondiscrimination test applicable to elective contributions, Section 110 permits a plan to test separately the employees who receive matching contributions on student loan repayments.

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