Significant Changes to a Retirement Plan Near You

John E. Rich, Jr.
Director & Chair, Tax Department
Published: New Hampshire Business Review
June 22, 2023

At the end of 2022, President Biden signed the second major piece of retirement plan legislation in the past three years, the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0), which is generally intended to increase retirement savings for Americans. SECURE 2.0 followed similar 2019 legislation commonly referred to as the SECURE Act or SECURE 1.0.  As is typical with retirement plan legislation, the effective dates for many provisions were delayed to allow employers time to implement the changes. As 2024 is the effective date for several significant changes, employers need to work closely with their plan service providers to implement the mandatory and optional changes described in this article along with other mandatory requirements.

Since March 13, 2020, employees with federal student loan debt have been permitted to stop payments but the pause on payments will expire on August 29th. Starting in 2024, employers have the ability to relieve some the financial burden of student loans through an optional retirement plan provision.  Employers are permitted to treat student loan payments by employees as elective deferrals to 401(k), 403(b) or SIMPLE 401(k) retirement plans so that the employee can still receive a matching contribution without making a salary reduction contribution.

In order to increase retirement savings for a segment of the workforce, both the 2019 and 2022 SECURE Acts liberalized the eligibility rules for part-time employees. The legislation created an exception to the existing rule that an employer may require as much as 1,000 hours of service in a 12-month period in order for an employee to become eligible for a Section 401(k) plan. The 2019 legislation requires Section 401(k) plans to allow employees to make elective deferrals who satisfy the 1,000-hour rule or who are credited with at least 500 hours of service in each of three consecutive 12-month eligibility computation periods (“long-term part-time employees”).  The 2019 legislation only counts periods of service beginning on and after January 1, 2021.  Thus, any long-term part-time employee who worked the required 500 hours in 2021 and the following two years is eligible as early as January 1, 2024.  SECURE 2.0 expands this rule by shortening the required period to two consecutive 12-month periods for plan years beginning after December 31, 2024.  Effective January 1, 2023, Section 403(b) annuity plans commonly used by Schools and other tax-exempt employers are subject to the same rule for service after that date. Employers may still utilize the 1,000-hour eligibility rule, however, to limit employer contributions eligibility.

Employers can easily be caught unware of this new requirement as part-time employees are sometimes viewed as ineligible for all benefits based on expected work schedules of well above 500 hours a year. It is critical that employers track hours worked for all part-time employees even those that are expected to work limited schedules or on limited duration assignment.  Under existing IRS plan correction guidance, employers who fail to timely enroll employees in 401(k) or 403(b) plans are required to correct the error by contributing on the employee’s behalf as though the employee had made the deferral contribution along with any employer matching contribution for which the employee would have been eligible.

Another provision that will require attention in preparation for 2024 is the treatment of the popular additional salary deferral contributions made by employees age 50 or older. For tax years beginning after 2023, these “catch-up contributions” under 401(k) plans, 403(b) plans, or Section 457(b) plans are subject to mandatory after-tax Roth treatment if made by employees whose wages for the preceding calendar year exceed $145,000, as annually indexed for inflation. This will require payroll changes and changes by the retirement plan administrators to account for the current tax recognition and Roth treatment.  Although the catch up contribution change is mandatory starting in 2024, employers also have the option to permit employees the option of receiving matching contributions on a Roth basis.  It is also worth noting that effective for taxable years beginning after December 31, 2024, individuals who are ages 61 to 63 can make even larger catch-up contributions equal to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025

Lastly, employers should be aware that SECURE 2.0 permits employers the option of allowing employees to make limited withdrawals for emergency expenses of up to $1,000 without the withdrawal being subject to the normal 10 percent additional tax for distributions to those under age 59.5.  Only one distribution is permissible per year and an employee has the option to repay the distribution within 3 years. Employers may also permit an employee who is a victim of domestic abuse to withdraw the lesser of $10,000 (indexed for inflation) or 50 percent of the participant’s account for various reasons, such as escaping an unsafe situation.  Although subject to income tax, a distribution under this provision is also not subject to the early distribution tax.  In addition, a participant can repay the withdrawn funds over 3 years and obtain an income tax refund.

The first round of significant retirement plan changes comes on line in 2024 and employers will be well served to start thinking about both how the mandatory changes will affect their plans and whether any of the optional changes will be of interest to their participants.