Among the many provisions of the SECURE 2.0 legislation are a number of provisions designed to encourage employees to participate in and contribute to their employer provided retirement plan. Still other provisions provide more access to money in such plans under certain circumstances. This article will address provisions that encourage participation. A subsequent article will cover accessing retirement plan money.
Financial Incentives For Contributing. Effective for plan years after December 29, 2022, employers sponsoring 401(k) and 403(b) plans can offer de minimis financial incentives such as low-dollar gift cards for participating in the plan. The incentives cannot be paid for by plan assets. Guidance will be needed as to what constitutes a “de minimis” financial incentive.
Auto-Enrollment and Auto-Escalation For New Plans. I’ve already addressed the required automatic enrollment and automatic escalation provisions of SECURE 2.0 for new 401(k) or 403(b) plans beginning in 2025 in a prior post. See, SECURE 2.0 Requires Auto-Enrollment, Auto-Escalation For Most New Plans.
Permitting Long Term Part-Time Employees To Contribute. In 2019, the original SECURE Act required 401(k) plans to begin permitting any part-time employee that worked more than 500 hours for three consecutive years to be able to make elective deferrals to the plan beginning in 2024. SECURE 2.0 expands this requirement to 403(b) plans effective for plan years beginning after 2024. It also reduces the number of consecutive years of 500 or more hours to two for both types of plans.
Student Loan Payments As Elective Deferrals. To encourage employees saddled with student loan debt from college that may otherwise not be able to save for retirement and share in corresponding employer matching contributions, SECURE 2.0 permits 401(k), 403(b), SIMPLE IRA, and governmental 457(b) plans to be designed to allow employer matching contributions to be made for “qualified student loan payments.” Essentially, the plan can treat the loan payments as elective deferrals under the plan. This provision is effective for plan years beginning after 2023.
Higher Catch-Up Contributions For Older Participants. For tax years after 2024 the limits on catch-up contributions are increased for participants age 60-63. The current catch-up limit is $6,500 for participants age 50 or older ($3,000 for SIMPLE IRAs). The increased limit is the greater of $10,000 or 1.5 times the regular catch-up limit for 2025. The amount is indexed for inflation after 2025. However, it must also be noted that after 2023, catch-up contributions by employees whose wages exceed $145,000 under 401(k), 403(b) or governmental 457(b) plans must be made on an after-tax Roth basis.
Saver’s Match Replacing Saver’s Credit. Tor tax years beginning after 2026, the current Saver’s credit for certain lower-earning participants is replaced by a Saver’s matching contribution from the Federal government to the retirement plan. The match is 50% of the employee’s contribution to an IRA or retirement plan up to a maximum of $2,000 per individual. The match phases out at certain income levels and becomes unavailable when the individual earns too much ($35,500 for single taxpayers, $71,000 for married filing joint). The match replaces the current non-refundable credit which is not valuable to many eligible employees because they have little or no tax liability for the credit to reduce to zero and the excess credit amount cannot be refunded.
Conclusion. These provisions all attempt to encourage employees to participate in, or to contribute more to, their employer’s retirement plan. Of course, some of these provisions are up to the discretion of the employer, such as whether to offer de minimis financial incentives or permitting student loan payments to be matched. Others are mandatory such as the automatic enrollment and escalation for new plans or permitting long term part-time employees to contribute.
My next blog will address some provisions of SECURE 2.0 that allow participants access to their money in the plan. These too can be seen as incentives to participate as they allow access to retirement money before retirement.