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SECURE 2.0 Discussion Series: Session One

Man and woman sitting on couch with computer and calculator discussing finances

SECURE 2.0 provisions: What we know and what’s still up in the air

The SECURE 2.0 Act, signed into law in late December 2022, has factored heavily in retirement industry discourse since the final legislation was published. As with any legislation of this depth and breadth, there’s a lot to digest and the industry takes time to adjust.

Our team of experienced advisors recently met to discuss some of the more nuanced provisions of the legislation, such as changes to Roth contributions, and what they could mean for plan sponsors. Panel participants included the following HBS team members: Noah Buck, Christina Bauer-Dobias, Sean Bayne, Vincent Bocchinfuso and Kathleen Coonan.

Highlights of our panel’s conversation below should serve to help guide plan sponsor thinking.

On Roth employer contributions

NB – In addition to deferring pre-tax or Roth, plan sponsors can now allow employer contributions to be classified as Roth, is that right?

VB – Correct. This is immediately available to plan sponsors and would permit employees to designate their contributions as Roth individually, including match contributions received for student loan repayments. Of course, there are a lot of considerations; the number one being verifying vesting, as this is only available on fully vested assets. 

NB – So this is an election a participant would make before the contribution happens, as opposed to a Roth conversion that was available prior to SECURE 2.0, right?

VB – We believe so. This is another one of those provisions where we’re going to have to wait for more guidance. Most significantly will be whether the employer contributions are made on a “per-pay” or “annual” basis.

CBD – To me, I would interpret this as a salary deferral change. In the same way a participant would elect a contribution percentage, they would elect pre-tax versus Roth.

VB – That brings up another interesting question about compensation.  If a plan uses W-2 wages as its definition of compensation, would the plan need to exclude employer contributions designated as Roth from its definition? 

CBD – I can foresee certain employees going to HR about this. Plan sponsors who elect not to include this provision may want to be prepared with a rationale.

NB – An alternative could be in-plan Roth conversions, which have been available and have seen relatively low utilization.

SB – And conversions can be done strategically year to-year depending on individual tax considerations.

NB – So far, the existing in-plan Roth conversions have been manual and not widely adopted.

On Roth catch-up contributions

NB – Another key component of SECURE 2.0 is mandatory Roth catch-up contributions for employees who have made $145K in the prior year. Vince, can you level-set us on this?

VB – Yes. For taxable years starting after Dec. 31, 2023, all catch-up contributions will be required to be Roth for participants who made over $145,000 in the prior year. That limit will be indexed, so it can change annually. The first obvious hurdle is to plans that don’t currently allow for Roth contributions. These plans will need to amend to allow for Roth deferrals.

NB – And that will need to be done this year.

VB – Yes, before the end of the year.

CBD – So this will apply to the 2024 catch-up contributions for anyone making over $145K in 2023?

VB – Correct.

NB – One initial conversation we’ve had is how this will work versus how elections are being made right now. In some cases, participants make a single election and have a different limit applied based on their date of birth. From our perspective, this approach has been easier to understand for participants and easier to administer for plan sponsors. Of course, this new provision adds a whole new dimension. Also, how will it functionally work if a limit is hit within a pay period? Who owns the mechanism to make the switch?

VB – Payroll files will need to be adjusted.

CBD – I think it has to start with the payroll/accounting side. They’ll need to set systematic triggers for compensation as well as age.

KC – It might have been nice if all catch-up was required to be designated as Roth, in terms of administrative simplicity.

VB – Hopefully, we’ll have additional guidance by this summer, and I’m looking to payroll providers to lead that charge.

SB – One thing that just occurred to me is that corrections for average deferral percentage testing failures have historically been resourced to catch up – will that function differently now? There is likely going to be some overlap between the highly-compensated employee population and the over-$145K population, so does the catch-up that’s mandated by testing failure also have to be Roth?

VB – Yes, I think a strict interpretation would say even those assets would need to be classified as Roth.

SB – Another way this could have been simplified is by using the same limit for highly-compensated employees and these contributions.

The “super catch-up”

NB – Moving on. Historically, catch-up contributions have applied to employees age 50 or above, but SECURE 2.0 introduced additional catch-up for employees ages 60 to 63. That doesn’t go into effect for a while, right?

VB – Correct. This goes into effect beginning in taxable years after Dec. 31, 2024, and is only applicable to people aged 60, 61, 62 and 63. The additional limit is the greater of $10,000 or 150% of the regular catch-up. There’s no official term for the “extra” catch-up.

CBD – I heard one plan sponsor call it the “super catch-up.”

SB – I’m always in support of more opportunities for participants to save. Our retirement educators who meet with participants often hear that they wish they had more time to defer, so this would help to address that, but limiting to ages 60 to 63 seems needlessly complicated. It doesn’t feel all the way thought through, and I wouldn’t be surprised if there was revision in the near future.

Financial incentives to encourage participation

NB – Switching gears. SECURE 2.0 also allows plan sponsors to offer financial incentives for plan participation. Vince, can you elaborate?

VB – Previously, any financial incentive was considered a prohibited transaction. Now, plan sponsors can offer a financial incentive as long as it is de minimis. 

SB – I think this opens up a lot of creative ways to incentivize participation. I’ve seen suggestions of a free lunch for all employees who enroll in a certain timeframe, but there’s a lot of potential approaches. Generally, I support any initiative that encourages participation.

KC – On the flipside, incentives such as this might cause resentment for those participants who enrolled before incentives were available.

CBD – Maybe it can be opportunistically used within employee populations that have historically low participation.

NB – Great point. Thanks everyone for your thoughts!

This is part 1 of our series on the SECURE 2.0 Act.  Stay tuned for more analysis and discussion on the key components of this landmark legislation.

HANYS Benefit Services is a marketing name of Healthcare Community Securities Corp., member FINRA/SIPC, and an SEC Registered Investment Advisor. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.

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