As the retirement plan regulatory landscape evolves over the next few years, new provisions will impact plan sponsors and participants. These changes are designed to enhance plan administration and provide additional flexibility. TRI-AD analyzes the required and optional provisions in detail and weighs the pros and cons. Understanding these changes will help employers and plan sponsors prepare and adapt their plans accordingly.
SubscribeRequired Provision: Catch-Up Contributions as Roth for Highly Compensated Employees January 1, 2026
Starting January 1, 2026, employees earning over $145,000 in the prior year will be required to make their catch-up contributions as Roth contributions the following year. This change enhances tax benefits for higher earners, allowing them to pay taxes on these contributions upfront rather than at retirement. It’s important for those affected to plan accordingly to maximize the potential benefits of this new requirement. TRI-AD will support this required provision.
Optional Provision: Increase Minimum Automatic Rollover Amount January 1, 2024
Effective January 1, 2024, the minimum automatic rollover amount increased from $5,000 to $7,000. This optional provision allows employers to force out more small-balance accounts for terminated participants, potentially reducing plan fees and overhead. TRI-AD has already implemented and supports this change, recognizing that it simplifies plan management and reduces employers’ administrative burden.
Optional Provision: Exclusion of Certain Employees from Top-Heavy Minimum Contributions January 1, 2024
Employers can now exclude employees with less than one year of service and 1,000 hours worked from receiving top-heavy minimum contributions. Effective January 1, 2024, this change can significantly reduce costs for top-heavy plans, especially those with high turnover. TRI-AD considers this a beneficial update and encourages its adoption to decrease employer expenses.
Optional Provision: Terminally Ill Employee Exception on Distributions January 1, 2024
This new provision allows participants who are certified as terminally ill to withdraw from their accounts without incurring the 10% early withdrawal penalty. Effective January 1, 2024, this exception permits a distribution of up to the vested balance, with the option to repay it within three years. TRI-AD recommends adopting this provision as it offers critical financial flexibility for those in dire circumstances.
Optional Provision: Qualified Disaster Distributions and Loans January 1, 2026
This optional provision allows participants affected by a qualified disaster to take up to $22,000 from their retirement plan without a 10% early withdrawal penalty. They also have the option to spread the tax liability over three years and repay the amount within three years. Effective in 2026, TRI-AD will include this in the SECURE 2.0 amendment. For those needing it sooner, TRI-AD will amend those plans accordingly.
Optional Provision: Eligibility, Vesting, and Entry for Military Spouses January 1, 2024
Effective January 1, 2024, employers with fewer than 100 employees may offer military spouses immediate plan eligibility, employer contributions, and full vesting, with a tax credit of up to $500 per spouse. While this provision supports military families, TRI-AD does not recommend it for most employers due to its administrative requirements and potential perception issues. It can be implemented if needed, but it’s generally considered an optional benefit.
Optional Provision: Matching on Qualified Student Loan Payments January 1, 2024
Starting January 1, 2024, employers can offer a valuable new benefit by matching employees’ student loan payments as if they were retirement contributions. This provision is an excellent opportunity to support employees managing student debt and may strengthen recruitment and retention efforts. TRI-AD is partnering with SavvyFi and interested clients and employers should prepare administrative considerations to make the most of this benefit. (Additional fees will apply).
Optional Provision: Domestic Abuse Victim Distributions (DAVDs) January 1, 2026
This This provision allows distributions of 50% of the vested balance up to a $10,000 maximum distribution, without a penalty for participants who are domestic abuse victims. Participants who take this distribution can repay this amount within three years. TRI-AD supports this provision, acknowledging the potential for critical access to funds.
Optional Provision: Personal Expense Distributions (EPEDs) January 1, 2024
EPEDs, effective January 1, 2024, allow one distribution per year of up to $1,000 or the vested balance minus $1,000. This provision provides flexibility for covering personal expenses but introduces new administrative processes and potential issues with distribution fees. TRI-AD is cautious about adopting EPEDs due to pending IRS guidance and concerns about plan complexity.
Optional Provision: Contingent Benefit Rule – Incent Participation January 1, 2024
Plan Sponsors can offer a one-time incentive of up to $250 to encourage plan enrollment starting January 1, 2024. TRI-AD believes automatic enrollment is a more effective and less cumbersome strategy. Automatic enrollment has proven to be successful at dramatically increasing contribution rates for plans struggling with participation – without the overhead of managing an incentive program. Employers should consider other methods to increase participation rates without adding administrative burdens.
Optional Provision: Allow Long-Term Part-Time (LTPT) Employees to Receive Match January 1, 2024
This optional provision includes LTPT employees in all the regular terms of the Plan, allowing them to receive matching contributions and participate in plan testing, effective January 1, 2024. TRI-AD does not recommend adopting this provision as it complicates plan design and could be better managed by extending benefits to all eligible employees instead of creating separate classifications.
Optional Provision: Allow Employees to Elect Their Matching Contribution as Roth January 1, 2024
Starting January 1, 2024, participants can choose to have their matching contributions as Roth or pre-tax. Although this offers flexibility, TRI-AD advises against it due to potential participant confusion and complexity in tracking contributions. It introduces significant complexity to the payroll, enrollment, and recordkeeping processes to track pre-tax and Roth matches and ensure that the match is appropriately managed and taxed. Plans with Roth allow for in-plan Roth conversions. Participants can choose which source to convert, so they can already convert their matching contribution to Roth. The in-plan Roth conversion can be done once per year and has a $1,000 minimum, and the 5-year Roth clock provision starts when that conversion takes place.
Optional Provision: Employee Pension-Linked Emergency Savings Accounts (PLESAs) January 1, 2025
Effective January 1, 2025, PLESAs allow employers to set up a source in the Plan that provides a mechanism for non-highly compensated employees to put aside after-tax contributions up to $2,500 into a PLESA, from which they can take up to four distributions a year. Although TRI-AD can support this provision, we do not recommend adoption. There are better options that will achieve the same result, such as setting up a split deposit in payroll. TRI-AD awaits additional IRS guidance regarding PLESAs.
Optional Provision: Increased Catch-Up Between Ages 60 and 63 January 1, 2025
This upcoming provision, available January 1, 2025, permits a higher catch-up contribution for participants aged 60 to 63. The catch-up is $10,000 or 50% more than the regular catch-up contribution limit. The regular catch-up contribution amount applies to those under 60 and those who attain age 64 or older during the year. Administration will be challenging for payroll companies, which will have the primary tracking responsibilities. TRI-AD is taking a wait-and-see approach to this provision and does not recommend adoption in the current state due to technology concerns. The increased contribution amount may not justify the complexity involved.
Optional Provision: Auto-Portability of Rollovers January 1, 2024
The auto-portability feature prevents retirement savings leakage and loss as employees change jobs. This is a beneficial provision, as employees don’t lose track of their money, fewer orphaned assets exist, and cash-outs are reduced because employees don’t have to make a distribution decision. TRI-AD has a solution in place for managing small account rollovers to IRAs.
Final Thoughts
The SECURE 2.0 Act affects all retirement plan types, low to high-income workers, and businesses looking to attract and retain talent through a workplace retirement plan. As a reminder, any plan amendments needed due to this new legislation must be adopted by the last day of the first plan year beginning on or after January 1, 2025. (For example, the deadline for a calendar-year plan is December 31, 2025.) This deadline is extended to two years for certain governmental and collectively bargained plans.
TRI-AD is working diligently to align our operations and service delivery to comply with the mandatory SECURE 2.0 provisions effective within the next 2 years. However, the IRS and the DOL must provide guidance on how to administer some of these provisions.
TRI-AD’s compliance team will provide additional information about the SECURE 2.0 Act in the coming months. If you have questions, please get in touch with your TRI-AD Client Service Manager.
TRI-AD and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice and TRI-AD may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state, or local; and/or its application to the clients’ business activities.