SECURE Act 2.0: What 401(k) Managers Need to Know for 2024
Required for 2024
Luckily, the required changes for 2024 were always minimal, and have recently been further reduced per IRS guidance.
Original Requirement Summary
Long-term, part-time employees become eligible to participate in the 401(k) plan.
Catch-up contributions were required to be Roth if the participant earns more than $145,000 in W-2 compensation.
NOTE: The deadline for this provision was extended on August 25, 2023, as part of IRS Notice 2023-62 until January 1, 2026.
Long-term, Part-time Employees
As part of SECURE 1.0, there is an important provision pertaining to long-term, part-time employees and retirement plan eligibility. In short, effective January 1, 2024, 401(k) plans must allow employees who have worked 500 hours or more in the past three consecutive 12-month periods to contribute elective deferrals to the plan.
Changes for High Earning Pre-Retirees
Eventually employees looking to maximize their retirement savings with catch-up contributions will need to be aware that if they earn more than $145,000 in W-2 wages, said contributions will need to be Roth. However, as noted above, the deadline for this provision has been extended until January of ‘26. If the employee earns less than $145,000, they will be able to choose either pre-tax or Roth contribution type. Note that plans need to allow for Roth contributions for this option to be available.
These required provisions may need additional explanation. Contact us to discuss your specific plan.
Optional for 2024
While this is not a complete list of the optional provisions to consider in 2024, this short list includes several of the most anticipated. We want to focus on the provisions that may reduce your administrative hassle, provide employees relief during compromising situations, and potentially encourage positive savings behaviors.
Reduce Administrative Hassle
Account Transfers for Former Employees
Retaining 401(k) accounts of former employees can be onerous for plan sponsors, particularly if the accounts are small and inactive. However, there is a new solution available that helps facilitate the transfer of accounts to the ex-employees' new employers.
Automatic portability is a transaction process that allows 401(k) accounts with balances between $1,000 and $7,000 to be transferred to the new employer's retirement plan automatically, without involving the former employee. This can save plan sponsors time and resources, while also ensuring that former employees' retirement savings remain safe and intact.
Fortunately, many recordkeepers and service providers can help facilitate smooth 401(k) account transfers. From locating missing plan participants to handling necessary paperwork, the right partner may help reduce costs, improve efficiency and enhance employee satisfaction.
Safe Harbor IRA Upgraded
Previously, plan sponsors could only transfer former employees' 401(k) accounts to a Safe Harbor IRA if the balance was not more than $5,000. The revised provision increased that amount to $7,000. This may help improve plan administration by helping sponsors avoid large plan audits and their associated fees as well as issues stemming from missing participants.
Provide Employees Support
Help Workers Access $1,000 for Emergencies
SECURE Act 2.0 offers a simple solution for employees who need to access retirement savings for personal or family emergencies. This provision allows workers to withdraw up to $1,000 from their retirement savings without incurring the typical 10% excise tax penalty.
Even better, the withdrawal is not a loan and requires little additional paperwork or administrative burden. Only one of these distributions is allowed per plan year, and employees may repay it within three years if they choose. This feature could prove particularly useful for busy HR professionals and 401(k) administrators looking to streamline processes and save time.
Payroll Deducted Emergency Savings
This "sidecar" emergency account can provide employees with further security and peace of mind in the face of financial uncertainty.
Under this provision, employers can automatically enroll their employees in a savings account that allows up to 3% of their wages to be saved for emergencies. Account contributions are made on a Roth-like basis and are capped at $2,500. Once the contribution cap is reached, additional deferrals can be directed into a Roth-defined contribution plan or stopped altogether.
Employers can also match these contributions, mirroring any existing matching formulas in place. However, these employer matching dollars must be deposited into participants’ standard 401(k) accounts, not their sidecar accounts. Additionally, the first four withdrawals from the account each year are not subject to any fees or charges. Final Note: these emergency savings accounts are only for non-highly compensated employees.
Penalty-Free Withdrawals Available for Victims of Domestic Abuse
Domestic abuse survivors can withdraw up to $10,000 (or 50% of their retirement fund, whichever is less) without penalty. This initiative provides much needed financial security for survivors.
Natural Disasters and Financial Response
In the event of a natural disaster, this new measure provides relief for those affected by it. Individuals can withdraw up to $22,000 per disaster from their retirement plan or IRAs without facing the 10% early withdrawal tax penalty. This amount can be paid back over three years, or the recipient can pay taxes on the distribution, if not repaid, spread out over three tax years.
Encourage Positive Savings Behaviors
Auto-Features and Honest Mistakes Are Now Protected
Auto-features have been shown to help workers improve their retirement savings efforts. In that spirit, this provision provides a grace period for correcting certain retirement plan errors. Plan sponsors now have 9 ½ months after the close of each plan year to rectify mistakes related to default enrollment or matching contributions without facing any penalty.
This is beneficial for HR executives, who often deal with many employees and may make innocent mistakes. The extension offers them peace of mind from potential fines and allows them to focus on more important tasks.
Next Steps
As a 401(k) manager or employer, you can take advantage of the SECURE Act 2.0 provisions to reduce administrative hassle, encourage positive savings behaviors, and enhance financial confidence for your employees.
Reach out to us today to learn more about how this new legislation can benefit your plan. Don't miss this chance to make a real impact on your employees' future!