By W. Andrew Larson, CPC – The Retirement Learning Center
SECURE Act 2.0 Overview
SECURE 2.0 makes many changes to 401(k) plans. Overall, these changes enhance the 401(k) experience for millions of participants. Features such as matching student loan payments, emergency savings accounts and Tax Saver Credit contributions will help middle and low income participants augment their retirement savings and ultimately their retirement security. In addition, plan sponsors are given additional flexibility in making plan corrections and increased tax credits for startup plans.
That said, SECURE 2.0 is an enormous piece of legislation and this paper makes no attempt to cover all retirement plan provisions; rather we opine on several key elements we feel are the most impactful to the 401(k) environment overall.
These enhancements come with a price: many features will increase the complexity of 401(k) plans requiring additional effort on plan sponsors and service providers to ensure the plan is operated correctly.
- Provision: Student loan matching – Plan sponsors are permitted to match certain student loan payments. Applicability: this will be a popular feature for plan sponsors with employees carrying student loan debt. Employees receive matching contributions based on student loan payments as though the loan payments were plan deferrals. This feature will likely be popular among participants and plan sponsors will likely use it as a hiring and retention strategy.
- Provision: Emergency savings Accounts – Plans can permit non highly compensated employees to contribute up to $2500 into an emergency savings account within the plan. Employees may access the emergency savings accounts periodically. The emergency savings account are considered a type of Roth contribution. The emergency savings account feature has the potential to enhance the financial wellness of participants and their families. In addition, our view is that such features will ultimately reduce hardship disbursements and even plan loans.
- Provisions: Savers Credit Contributions – The savers credit provision allows low and middle income participants eligible for Federal savers credits to have these amounts deposited directly into the 401(k) as an additional contribution source. The savers credit contribution allows participants to augment retirement accumulations rather than spending an income tax refund. This provision can enhance retirement accumulations for low and middle income participants. This feature will increase the complexity plan operations with additional data feeds and financial linkages between the plan and Federal entities
- Treatment of matching and other employer contributions are Roth amounts – The feature permits participants to treat matching and other employer contributions as Roth contributions. This provision is effective immediately. This provision will be popular among higher income participants with large balances in qualified arrangements pursuing a Roth strategy. Clearly this provision will be a challenge from a recordkeeping perspective but our view is the provision will rapidly gain popularity once the tax community becomes facile with its implications and opportunities.
- Provision: Less stringent controlled group rules – Businesses under common ownership or control are subject to the controlled group rules. The controlled group rules require additional, often complex, testing and aggregation and frequently restrict the plan sponsors flexibility with regard to plan contributions and increased plan costs. SECURE 2.0 relaxes certain controlled group rules particularly for smaller family-owned businesses. This provisions provide more flexibility and planning opportunities for these small business owns.