Enhancing the Attractiveness of Retirement Plans

The SECURE Act 2.0 introduced several optional provisions that employers can add to their retirement plans; they are designed to provide more flexibility and potential benefits for both employers and employees. This article explores some of these provisions and their implications for retirees and retirement plan administrators. The Roth enhancements can result in significant tax-advantaged savings, allowing retirees to optimize their retirement income strategies and tax efficiency.

Optional provisions that plan sponsors may consider implementing:

Roth Treatment of Employer Contributions: Defined contribution plans can now allow participants to designate matching and/or nonelective employer contributions as Roth contributions. This option is available only if the employee is fully vested in the contribution at the time of allocation. This gives participants more flexibility in managing their tax situation and potentially reducing future tax liability. Before the enactment of SECURE Act 2.0, employer contributions to a 401(k)/403(b) plan were required to be made on a pretax basis. Employer Contributions designated as Roth are taxable to the employee when made, and they are reported on a Form 1099R*, rather than a W-2 (*prepared annually by Greenleaf Trust for plans where we provide administration services).

At Greenleaf Trust, we believe In-Plan Roth Transfers (IRTs) are a good alternative and offer very similar results as amending a retirement plan to allow for the Roth treatment of employer contributions, with less ongoing employer administration. IRTs have become an increasingly valuable feature for retirement plans, offering participants greater flexibility and potential tax advantages. Participants drive the IRT process by designating the amount and timing of the Roth conversion transactions; the participant can customize their conversion amount to be higher or lower than the employer contribution. While Roth contributions don’t provide immediate tax benefits, they offer the potential for tax-free growth and tax-free withdrawals in retirement. Roth contributions provide retirees more flexibility to manage their income streams and future tax liabilities; allowing them to take distributions when it is most tax efficient for their situation.

Roth treatment of employer contributions works best in plans where the employer’s contribution is made on an annual basis instead of on a pay-to-pay basis. Software providers for payroll companies and retirement investment platforms are actively working on solutions to allow for the more frequent tracking of Roth employer contributions. Until technology catches up to the pace of the recent governmental legislation, we recommend allowing IRTs within retirement plans.

Penalty-Free Distributions for Specific Circumstances: These provisions expand the accessibility of retirement savings during critical life events such as birth, adoption, illness, disaster recovery, and other challenging circumstances. While still taxed as income for the year, these penalty-free distributions reflect a more empathetic approach to retirement planning.

• Terminal Illness: A physician must certify that the individual has a condition that is reasonably expected to result in death within 84 months (seven years). There is no limit to the amount that can be withdrawn under this provision; it ensures those facing severe health challenges can access their savings without incurring additional penalties.
• Federal Disaster Relief: Participants can withdraw up to $22,000 per disaster. The distribution must occur within 180 days of the disaster declaration and the participant’s principal place of residence must have been in the disaster area. To potentially ease the immediate tax burden, the distribution amount is included in the participant’s income over a period of three years, and the amount may be repaid to the plan during the same three years. In addition, SECURE Act 2.0 increases participant loan limits in connection with a federally declared disaster to the lesser of $100,000 or 50% of the participant’s vested account balance and extends the repayment terms.
   As an aside, on May 7, 2024, tornadoes and severe storms caused significant damage in Southwest Michigan, particularly in the city of Portage in Kalamazoo County, negatively impacting numerous of our clients, teammates, and friends. The aftermath of these storms has left the affected areas in a state of ongoing recovery and cleanup. The Federal Emergency Management Agency (FEMA) representatives began their assessment in May; these assessments are crucial for determining the level of federal assistance needed. While the damage is significant, a federal disaster declaration depends on various factors beyond just the extent of the damage; it is a complex process and not guaranteed. At the end of July 2024, the FEMA declaration was denied for the city of Portage. City officials have requested that Governor Whitmer appeal the results of the FEMA assessment and potential disaster declaration, which can be a lengthy process.
• Survivors of Domestic Abuse: Participants can withdraw the lesser of $10,000 or 50% of their vested account balance. Participants may repay the distribution within three years. The distribution must occur within one year of the abuse by a spouse or domestic partner; it helps the victim address their immediate needs and support their escape from an abusive situation.
• Birth or Adoption: Participants can withdraw up to $5,000 per child, and both parents can withdraw from their respective accounts if they each have retirement savings. The distribution must occur within one year of the birth or adoption; it aims to help new parents cover the immediate costs associated with welcoming a new child into their family.
• Long-term Care Insurance Premiums: Starting in 2026, distributions of up to $2,500 per year can be made for paying only policies that provide “high-quality coverage”. However, the specific definition of “high-quality coverage” has not yet been clearly defined. The provision aims to make long-term care insurance more accessible.

Employer Matching for Student Loan Payments: Employers can make matching contributions to an employee’s retirement plan based on the employee’s qualified student loan payments; it aims to help employees who might struggle to contribute to their retirement plans due to student loan obligations. These include payments made by an employee to repay a qualified higher education loan taken out by the employee, their spouse, or dependents. It allows them to receive employer matching contributions even if they can’t afford to make individual deferrals into the retirement plan. Items of note:

• Matching contribution rules: The matching contributions must be treated the same as matching contributions for elective deferrals in terms of percentage, eligibility, and vesting rules. However, the frequency of matching can differ. Employers can make the student loan match more frequently than annually, but employees must have at least three months after the close of the plan year to claim the match.
• Self-certification: Employers are permitted to rely on an employee’s annual self-certification of qualified student loan payments.
• Nondiscrimination testing: Qualified student loan payments are treated as available to all participants for purposes of nondiscrimination testing requirements. For the Actual Deferral Percentage (ADP) test, plan sponsors may separately test participants who receive matching contributions on account of qualified student loan payments.

Self-Certification of Hardship Distributions: Plan administrators can rely on participants’ self-certification (unless the plan administrator has knowledge to the contrary) of deemed hardship events. The distribution is limited to the amount required to satisfy the need and must be made on account of one of the seven hardship withdrawal reasons. Collecting source documents is not required for plan sponsors when the provision is elected. Before self-certification, the employer still had risk in an audit; this provision shifts the risk to the participant in an audit. The streamlined provisions alleviate the administrative burdens for plan sponsors and participants benefit from a more accessible and efficient process. The new self-certification process helps to eliminate unnecessary hurdles in times of financial need.

Cash-out Limit for Small Account Balances: Increases the involuntary cash-out limit to $7,000 from $5,000 for former employees. By distributing accounts of former employees with small balances, administrative costs may be reduced, and the employer does not have to continue to track the former employees. Greenleaf Trust has solutions available for terminated participants with vested account balances of $7,000 and under.

Increased Catch-up Contribution Limits for Those Aged 60-63: Starting in 2025, participants aged 60-63 during the tax year will be eligible for larger catch-up contributions. The aim is to help these participants boost their retirement savings in the critical years preceding retirement. The new limit will be the greater of $10,000 or 150% of the standard catch-up limit for that year. Beginning in 2026, these increased catch-up contribution amounts will be indexed for inflation. The complexity of the rules and the temporary nature of the increase mean careful planning and understanding of one’s specific situation will be important to maximize the benefit of this provision.

Potential Roth Requirement for High Earners: Originally scheduled for 2024, but now delayed until 2026, participants aged 50 or older, earning over $145,000 in the previous year (from one employer), will be required to make all catch-up contributions on a Roth basis in certain employer-sponsored plans.

The deadline for plan amendments has been extended to December 31, 2026 (with later dates for certain plan types); however, plans must be operationally compliant with any implemented provision changes. Some implementation details are still pending further guidance from the Treasury Department and IRS. While these new provisions provide a multitude of opportunities to enhance retirement security, they also add complexity to retirement plan administration.

In conclusion, SECURE Act 2.0 represents a significant step forward in enhancing the flexibility and security of retirement savings. The provisions offer retirees more control over their financial futures and provide plan administrators with new tools to support their participants. The changes can demonstrate a commitment to providing comprehensive retirement planning options and can be a valuable addition to an employer’s overall benefits package. Our retirement plan team will continue to navigate the complex legislation and collaborate on the design and implementation of the new optional provisions. Contact the relationship managers team at Greenleaf Trust if we can be of assistance in strategizing with you on your retirement plan design.