Mark Foster, AIF, is a retirement plan consultant for SageView Advisory Group in Boston.
A number of significant changes are on the horizon for retirement plans, thanks to the Consolidated Appropriations Act of 2023. A look at how the new provisions will affect both associations and their staff members.
The $1.7 trillion Consolidated Appropriations Act of 2023 (CAA-22) includes several significant changes for retirement plans. Commonly referred to as SECURE 2.0 [PDF], there are provisions relevant to associations and nonprofits, including expanding access and incentives, making it easier for employees to join retirement plans and recognizing that workers are living and working longer.
Among the new provisions, organizations that have matching contributions will be allowed to recognize their employees’ student loan repayment amounts, in lieu of deferrals, to receive employer contributions. In addition, with American workers having a notable lack of emergency savings, organizations could offer a savings account linked to the retirement plan. Lastly, an increase to the required minimum distribution (RMD) age and new catch-up contribution rules may prove to be a heavy lift for payroll and benefits teams to implement and communicate before January 1, 2024.
Here are some additional details for employers and employees to keep in mind as they plan for these changes moving forward:
Ability to incentivize retirement plan participation. Small dollar value items, such as gift cards, could be used to incentivize employees to participate in the retirement plan. The dollar value maximum was not defined, so additional guidance is expected. This provision is optional and is effective as of the date the plan sponsor chooses to enact it.
Keep retirement money invested longer. Recognizing that people are working later in life, this required provision, effective January 1, 2024, increases the RMD age—when participants must begin taking distributions from their retirement plans—to 73. Here are the RMD age requirements:
One additional note is that the excise tax was lowered from 50 percent to 25 percent for missed or late RMDs.
Trade student loan repayments for matching contributions. This optional provision is effective on January 1, 2024, and allows employers to make matching contributions on qualified student loan repayments. The matching formula is the same as normal deferrals, and participants may self-certify they are making the loan repayments. If employees make qualified student loan repayments and contribute to their retirement plan, the match would be calculated on the aggregate amount. Further guidance is needed with regard to average deferral percentage (ADP) testing.
Emergency savings account. This “sidecar” savings account—an optional provision that goes into effect on January 1, 2024—would be linked to a retirement plan. Contributions to this account must be in Roth form and count toward your annual deferral limit ($22,500, or $30,000 if over 50, for 2023). Employees can contribute up to a maximum of $2,500 to the emergency savings account, and those contributions need to be invested in a capital preservation vehicle with a reasonable rate of return consistent with the need for liquidity. Withdrawals can be made monthly with no cost for the first four withdrawals. Highly compensated employees (HCEs) are not eligible to participate in this emergency savings account. Contributions to the emergency savings account are also eligible for the employer match, and employers may elect to automatically enroll participants up to 3 percent. One thing to note is that emergency savings account withdrawals cannot be paid back. Additional guidance on the tax reporting for these withdrawals is also anticipated.
Roth treatment for catch-up contributions. This required provision is effective January 1, 2024, and may cause an administrative burden for plan sponsors, payroll providers, and recordkeepers. The provision mandates that catch-up contributions be in Roth form for anyone making more than $145,000 in the prior year. If employees make $145,000 or less, they will still have the option to contribute catch-up contributions as pre-tax or Roth (given the organization’s plan allows Roth). If a plan does not currently offer Roth, then no one who made more than $145,000 in the prior year can contribute catch-up contributions. This provision does not include special catch-up contributions for 403(b) and 457(b) plans. They can still be made with pre-tax dollars. Employers do not need to track any income received by the employee from an unrelated employer.
This provision does bring to light a potential issue if your plan allows participants to elect both a deferral and catch-up contribution amount at the same time. What if the participant leaves prior to hitting the 402(g) limit? Technically, only eligible contributions made in excess of the 402(g) limit are considered catch-up contributions. Further guidance will be needed. It is unlikely that provision will change as this is a revenue generator to fund other parts of the bill. If you are asking why $145,000 and not just HCEs was chosen as the breakpoint, it is because $145,000 creates a revenue-neutral position for the bill.