Contributing Author: Yesha H. Patel, Esq.
The SECURE 2.0 Act will have a significant impact on plan sponsors and retirement plans. While there are several provisions which plan sponsors should be aware of, the provisions identified below are some of the lesser-known but especially important.
Roth provisions allow for contributions of “after-tax” dollars. When those contributions and the investment earnings on those contributions are withdrawn, no tax is due on the distribution. With 88% of plans offering Roth features, it is important that you learn about the impact of the Roth provision. The following SECURE 2.0 Act provisions address Roth contributions:
1. Employer Contributions – Effective now, employers can amend their plans and allow participants to receive employer matching and non-elective contributions as Roth contributions.
2. Catch-up Contributions – Effective as of 2026, all catch-up contributions made by a pre-retiree making more than $145,000 in W-2 compensation must be Roth catch-up contributions. However, employees earning less than $145,000 can continue making pre-tax 401(k) contributions.
3. Side-Car Accounts – Effective as of 2024, employers can also enroll non-highly compensated employees (NCHE) into “side-car accounts,” which are accounts that can be funded with after-tax dollars (up to $2,500) for emergency access.
Another important provision of the SECURE 2.0 Act deals with automatic features. Beginning in 2025, most new plans will be required to auto-enroll participants at a rate of 3% to 10%. According to recent studies, employees are currently enrolled at about 6%. Thus, plan sponsors should prepare for the following: (1) consider auto-enrollment for plans which don't already have it, and (2) reconsider the low deferral rate if a plan auto-enrolls at 3%.
Auto-escalation is another automatic feature by which employees are able to systematically increase their savings over time. Under the SECURE 2.0 Act, plans established after 2025 will be required to auto-enroll and auto-escalate their employees up to 10% to 15% of compensation. Therefore, if you are already considering adding auto-enrollment provisions, it may additionally be advisable to consider adding auto-escalation as well.
Force Outs, Auto-Portability and Locating Participants
Lastly, when employees move from one job to another, employees either cash out their retirement accounts or they leave them with their former employers and forget about them entirely. Recent studies have shown that employees are generally under-saved and that nearly 25 million retirement accounts are missing. The provisions identified below resolve these issues by preventing cash-outs or forgotten small account balances.
1. Force Out Provisions – These provisions are a Safe Harbor option for employers. Essentially, they remove retirement accounts of former employees with up to $5,000 in retirement savings and place them into a Rollover IRA. Effective as of 2024, the amount will increase from $5,000 to $7,000.
2. Auto-Portability – This new section in the SECURE 2.0 Act now permits recordkeepers to transfer former employees' retirement accounts to their new employer's 401(k) plan, thus preventing the exercise of cash-outs by employees.
3. Missing Participants – Although not explicitly addressed in the SECURE 2.0 Act, with the formation of the Lost and Found database, many retirement savers will soon be able to discover where/when they left former retirement plan dollars. Thus, any forgotten small account balances left with former employers will become easily discoverable through the new database system. This is a crucial time to get ahead of the curve and have discussions with your advisor about the Safe Harbor IRA and/or auto-portability provisions and the significant advantages that they can bring to plans.
If you have any questions about the SECURE 2.0 Act law changes and how they can help your business succeed and you and your employees successfully save for retirement, contact the attorneys at Butterfield Schechter LLP for more information. We are San Diego County's largest law firm with a focus on employee benefits law.
*Nothing stated herein is to be construed as legal or tax advice and shall not form any attorney-client relationship. Each individual situation is unique. Please contact us and speak with one of our attorneys regarding your individual situation.