SECURE 2.0 for 2024: What you really need to know

SECURE 2.0 was enacted on December 29, 2022, as a part of a larger omnibus spending bill. Building off SECURE Act of 2019, SECURE 2.0 includes the “bigger and better” provisions to expand coverage and encourage savings for Americans. With 92 provisions impacting retirement plans, it might have seemed overwhelming at first, but as 2023 went on, have you heard so much about SECURE 2.0 that you stopped paying attention? Or perhaps you haven’t heard enough? This update will cover what you really need to know for 2024.

Let’s Dive In…

Structurally, SECURE 2.0 is bipartisan legislation, which is the compilation of three bills from the House and Senate. There are three key things to consider when reviewing the legislation:

1. Effective dates: The effective dates of the provisions are staggered. There are some provisions in SECURE 2.0 that started as soon as the legislation was signed into law on December 29, 2022, and there are other provisions that don’t commence until a future effective date.
2. Plan types and limited circumstances: There are some provisions that only apply to certain plan types or only apply in very limited circumstances; for example, start-up plans only or 457(b) plans only.
3. Required versus permissive: Provisions are either required or permissive, meaning that the provision only applies if the plan elects that provision and many provisions in SECURE 2.0 are simply optional. However, if the plan decides to implement an optional provision, then the plan needs to ensure that the operations and the plan document align. This all requires coordination with those involved in running the plan.

For 2024, it is important to consider the following as it relates to recent guidance for SECURE 2.0, required provisions and optional provisions:

Technical Corrections

There were undoubtably errors in combining the three bills that came together to form SECURE 2.0. One of the errors was the elimination of catch-up contributions starting in 2024. When Congress drafted Section 603 for the Roth catch-up provision, they eliminated a sub-paragraph of the Internal Revenue Code (the Code) that would have removed all catch-up contributions. Additional legislation was required to correct the “glitch,” so this technical correction as well as others have been drafted and put into proposed legislation that Congress is now considering. Most likely this will get attached to a funding bill early in 2024 or otherwise may be passed at the end of 2023 given the urgency of the issue. Until then, the IRS did include the intent to maintain catch-up contributions as part of its guidance in August 2023 related to Roth catch-ups.

LPTP Employee Guidance

Think seasonal workers, hospitality, retail, and similar positions. SECURE Act of 2019 changed the eligibility requirements for 401(k) plans. With a few certain exceptions, starting in 2024, plans no longer can have a service condition that prevents employees from making their own salary deferrals if they have worked at least 500 hours for an employer for three consecutive years. Fast-forward to SECURE 2.0 which changed that requirement to cover employees that have worked at least 500 hours for an employer for just two consecutive years. On November 24, 2023, the IRS issued guidance related to when someone qualifies as a LTPT employee and if so, this proposed regulation outlines the special rules for vesting, testing and other items for when someone is a LTPT employee.

Roth Catch-up Guidance

In August 2023, the IRS gave plan sponsors a surprise gift, which was a reprieve from implementing what is known as the “Roth Catch-up” provision. Section 603 of SECURE 2.0 requires that all catch-up contributions for qualified retirement plans are subject to Roth tax treatment, except for participants with Social Security tax wages of $145,000 or less (indexed for inflation). This provision was effective starting January 1, 2024. The IRS’s announcement meant that, practically speaking, the provision will now be effective January 1, 2026.

Roth Employer Contribution

Speaking of Roth provisions, there was an optional provision that started at the date of enactment in Section 604, which would allow employer matching or nonelective contributions to be Roth contributions. This optional provision is not widely used at this time for a few reasons. First, there are outstanding tax questions as to how this should be captured on either a W2 or 1099R at the end of the year. Second, there are questions as to how payroll providers and recordkeepers will update their systems to accommodate this provision. Until there is additional guidance from the IRS on this provision, it is not anticipated to be widely utilized (at least not at this point given the circumstances), though it is technically an available provision plans can add.

Optional Provisions for 2024

As mentioned above, there are many provisions of SECURE 2.0 that are optional provisions. For example, the following optional provisions become available starting January 1, 2024: student loan payments as elective deferrals for matching (Section 110); emergency withdrawals (Section 115); emergency savings account (Section 127); updating dollar limit for mandatory distributions to $7,000 (Section 304); and domestic abuse withdrawals (Section 314).

From the practical perspective, one plan sponsor recently asked, “But what if a participant knows about a provision and demands we add it to our plan?” Great question, but just like the participant that demands the gold fund or a 10% matching contribution, these are all decisions that the organization/business can make, and then the fiduciaries to the plan can implement those provisions, but only if it is in the best interest of the participants overall. The plan is not obligated to implement any optional provision. Consider these provisions and determine if they might be a benefit to your participant population and document those decisions, but optional provisions are just that – optional.