Plan Sponsor Quarterly Update Spring 2024

Senate Hearing on Retirement Savings: On February28th, the Senate HELP Committee held a hearing titled “Taking a Serious Look at the Retirement Crisis inAmerica: What Can We Do to Expand Defined Benefit Pension Plans for Workers?” While the title suggests the hearing would be focused on pension plans,they heard testimony on the current retirement systemmore broadly. Unsurprisingly, there was debate aboutthe Retirement Savings for Americans Act (RSAA) —a Senate bill that would, among other things, create afederal government retirement plan in which workerswho do not have a plan at work would be automatically enrolled and could receive a match that is moregenerous than the Saver’s Match available to those withan employer plan. Opponents of RSAA argue that thiswould incentivize employers to stop providing retirement plans and shift the cost of employees’ retirementto the federal government. This debate is a preview ofthe continuing discussion on how to expand the number of Americans who can save at work and how to improve the retirement outcomes of all Americans.

These changes haven’t occurred yet — but plenty on the horizon! Now is a great time to take stock of the new legislative changes in SECURE 2.0 to ensure you’re ready when the next big retirement plan legislation passes.

The IRS recently released long-awaited guidance underSECURE 2.0 in the form of a “grab bag” notice — Notice 2024-02. This article summarizes a number of the higher interest items addressed in the notice. Amendment effective dates: Amendments related toSECURE 2.0 — including those related to both requiredand discretionary plan changes—must be adopted bythe following dates.  

Qualified Plans	Nongovernmental plans – December 31, 2026. Applicable collectively bargained plans – December 31, 2028. Governmental plans – December 31, 2029
457(b) Plans	Tax exempt nongovernmental plans haveno extension – December 31, 2025. Governmental plans – generally December 31, 2029.
403(b) Plans	Non-public school plans – December 31, 2026. Applicable collectively bargained plans – December 31, 2028. Public school plans – December 31, 2029.
IRAs	Generally December 31, 2026.

Financial Incentives for Participation: As you may remember from a previous newsletter, SECURE 2.0 permitsplan sponsors to provide de minimis financial incentivesto participants to encourage plan participation. The notice provides some additional guidance. It clarifies thatincentives of $250 or less will be “de minimis.” This isa cumulative limit, and can be provided in installmentscontingent on the employee’s continued deferral (for example, a plan sponsor could provide a $100 incentive atthe time of enrollment and a $50 incentive for each of thefollowing three years if the participant is still deferring).However, the financial incentive may be offered only toemployees that would be new plan participants—meaning, only to employees who do not have an existing election to defer. Therefore, the incentives cannot be usedfor participants who have been automatically enrolled orto incentivize participants to increase existing elections.Finally, the notice confirms the incentives are subject tothe same tax, withholding, and reporting requirementsthat would apply to any other employer-provided fringebenefit.

Terminal Illness Distributions: The notice confirmed thatterminal illness distributions are not separate distribution rights — meaning that a participant who qualifies must also be eligible for another permissible distribution from the plan. When processing distribution requests, plans are not required to determine whether the individual applying for the distribution also qualifies as terminally ill. This means, for example, that if a participant takes a hardship distribution from the plan, the plan administrator does not have the duty to inquire as to whether the participant is terminally ill and therefore exempt from the 10% tax on that distribution. The individual may claim the exemption from the 10% penalty by reporting their distribution as a terminally ill distribution on their Form 1040.

Small Business Tax Credit: The notice confirms that thenew employer contributions credit is separate from thestartup costs credit — and, good news, an employermay be eligible for both! An employer that is eligiblefor credits before 2023 may be eligible for the increasedstartup costs credit and/or the employer contributionscredit for any remaining time in the applicable credit period. The notice also confirms that individuals who haveearned income instead of wages — typically individualslike sole proprietors and partners — can be consideredfor the employer contributions credit, even if they haveearned income or other remuneration in excess of thewage limit.

The notice clarifies that eligibility for both of the creditsrequires the employer to be eligible in the year of planadoption. This means that a reduction in the number ofemployees will not make an employer eligible for credits if the employer was ineligible for credits in the plan’sfirst year. Additionally, for the employer contributionscredit, employer contributions are taken into accountin the taxable year in which a deduction under CodeSection 404(a) would apply (not the year in which thecontribution is made).

Military Spouse Credit: SECURE 2.0 provided an additional tax credit for certain employers that provide military spouses with retirement benefits. The notice clarifiesthat an employer may only claim the credit for years inwhich it qualifies as a small employer. Employers thatqualify may claim credit for a military spouse whosethree-year credit period began before enactment ofSECURE 2.0.

Now is a great time to update processes and ensure all relevant team members are aware of these changes and ready for any potential issues and/or opportunities.

SECURE 2.0 continues to be a hot topic as the provisionsbecome effective and we get additional insights and guidance from the regulating agencies. Our focus on SECURE 2.0 continues with a look at SECURE 2.0’s automatic enrollment provisions.

Brief Refresher: SECURE 2.0 provides that 401(k) and 403(b) plans established after December 29, 2022 must automatically enroll employees who satisfy the plan’s eligibility provisions. Participants must be automatically enrolled at a contribution rate of at least 3% — but no more than 10% — of their pay. Plans must then provide for automatic escalation of the deferral percentage by one percentage point each year, up to at least 10% (and no more than 15%). Employees must be given the opportunity to opt out, of course, and also must be given the ability to withdraw those automatic deferrals in the 90-day period after deferrals begin. Automatic enrollment is required for these new plans beginning with the 2025 plan year. The rule applies only to new plans (i.e., not to plans established before December 29, 2022) and does not apply to: (1) businesses with fewer than 10 employees, (2) businesses that are less than three years old, (3)church plans, and (4) governmental plans.

The New Insights: Notice 2024-02, the IRS’s “SECURE 2.0 Grab Bag” provided new insights into the working of this rule. It provided the following clarifications regarding the automatic enrollment mandate:

• 401(k) Plans are considered “established” when the planterms providing for 401(k) deferrals are initially adopted — even if the effective date of the 401(k) feature islater. For example, if an employer adopted a new planon December 1, 2022, with the 401(k) feature effectiveon January 1, 2023, that plan was “established” beforeDecember 29, 2022 and therefore is exempt from themandate.
• For Section 403(b) plans, on the other hand, a plan isexempt from the automatic enrollment mandate if theplan itself was established before December 29, 2022,regardless of when the deferral feature was added.
• If a plan that is subject to the new automatic enrollmentrule merges with a 401(k) plan that is not subject to thenew rule, the entire post-merger plan will be subject tothe new rule unless certain requirements are met (generally that the merger meet certain requirements andoccur shortly after a corporate transaction (merger, acquisition, etc.)).
• Plans that are spun-off from other plans will retain thecharacteristic of the original plan — meaning that aspin-off will not be treated as a plan established afterDecember 29, 2022 if the original plan was establishedbefore that date.

How to Correct Mistakes? The notice also provided insights regarding how to correct deferral errors for plans with automatic enrollment features. SECURE 2.0 expanded the favorable correction method already available under EPCRS for correcting deferrals in plans with automatic enrollment to permit the 0% QNEC for deferrals to apply for terminated employees as well (recall that 100% of any associated match would still be owed, of course). The notice provides several clarifications:

• This expansion applies to errors for which the deadlinefor correction is after 2023 (which generally means itgenerally is available for errors that occur in 2023 orlater).
• Deposit of any missed matching contribution generallymust be made by the last day of the 6th month aftercorrect deferrals begin.

Now is a great time to consider how automatic enrollment will be implemented and to update procedures for those plans that already use automatic enrollment. Your TPA partner can help you understand and analyze these provisions and how they will impact plan operations.