As we get closer to 2024, many of the provisions within the SECURE 2.0 Act will begin taking effect. This new legislation will have a profound impact on plan design with the goal of making saving for retirement easier and more accessible for employees. However, many of these provisions will create significant administrative complexities for plan sponsors and service providers.
Even though the retirement industry is still waiting on guidance from the Internal Revenue Service (IRS) and the Department of Labor (DOL), here are three provisions you should have on your radar as we approach the new year.
Changes Delayed for Catch-up Contributions
One of the more talked about required provisions is the change to catch-up contributions made by higher-income earners. This provision requires those age 50 and older who earn over $145,000 to make their catch-up contributions on a Roth basis.
This provision, originally scheduled to become effective for plan years beginning on or after January 1, 2024, was recently delayed by the IRS. The IRS announced in August that they will be implementing an administrative transition period that extends until January 1, 2026.
This news comes as a relief to not only plan sponsors but also recordkeepers and payroll providers. Now, service providers will have more time to test and implement their administrative processes. This also means that eligible high wage earners may continue to make their catch-up contributions on a pre-tax basis for an additional two years.
Mandatory Auto Enrollment for New Plans
The Act will soon require automatic enrollment for new 401(k) or 403(b) plans beginning in 2025. The initial default rate must be between 3% and 10% and include an annual auto-escalation of 1%, up to at least 10% but not more than 15%. Employees are still given the option to opt out of the plan or change their contribution rate. It is also important to note that companies who have only been in business for less than three years, those with 10 or fewer employees and church or government plans are excluded.
While it has been proven that auto enrollment does boost employee participation, it does come with an increased cost. For example, auto enrollment would cost slightly over $200 per employee when signing up 20 new participants, compared with around $13 per participant if the company uses an active choice strategy. However, those companies with a large workforce can spread out the cost, making it more cost effective for larger firms. This extra cost may discourage small employers from offering a retirement plan.
New Side-Car Savings Account Option
Plan sponsors will soon have the option to offer their non-highly compensated employees (NHCE) pension linked emergency savings accounts, also known as a side-car savings account. These are Roth accounts where employees can save up to $2,500 in after-tax dollars under the plan. Only employees can contribute their money to this account, employer contributions are not allowed.
Recordkeepers are still building out the infrastructure to support these new savings accounts.
The biggest hurdle will be tracking the employee’s compensation status. Rules will need to be implemented by both the recordkeeper and payroll provider. Contributions made to the side-car account do count toward the annual retirement deferral limit for 401(k) and 403(b) accounts, which in 2023 is $22,500. This means if a participant puts $2,000 in their side-car account, they could only contribute $20,500 to their retirement account.
Plan Amendment Deadlines
Plan amendments will need to be made for all SECURE 2.0 provisions by the end of the first plan year beginning on or after January 1, 2025 (2027 for collectively bargained and governmental plans). Service providers are working diligently behind the scenes to ensure their systems and processes are up-to-date and ready for these upcoming changes. With the change delayed for the catch-up contribution, providers can now shift their focus to other impactful provisions.
Even though the deadline is still over a year away, it may be a good idea now to review and evaluate whether any of the SECURE 2.0 optional provisions may be beneficial for the participants in your plan. Your ABG representative is available to help you answer any questions you may have about SECURE 2.0’s optional and mandatory provisions.
 Center for Retirement Research at Boston College, Auto-enrollment is Highly Effective But Often More Costly, June 2023