Plan Contribution Overview

This overview provides information about major SECURE 2.0 provisions impacting retirement plan contributions in the near term. While it is possible that regulations and guidance may change some of this information, this overview provides a breakdown of the key provisions as they stand now, and incorporates guidance from IRS Notice 2024-2.

For all SECURE 2.0 provisions, plans will have until December 31, 2026, to adopt a compliant plan amendment (as extended by Notice 2024-2). This date is extended further for governmental and collectively bargained plans.


Roth Employer Matching and Non-elective Contributions

Effective for: Contributions made after 12.29.2022
Applies to: 401(k) plans, 403(b) plans, and governmental 457(b) plans

Under prior law, employer matching and non-elective contributions were required to be made on a pre-tax basis. SECURE 2.0 allows (but does not require) plans to give participants the option to elect these contributions made on a Roth basis. Plans can offer some, but not all, Roth options if they so choose.

If the plan allows Roth elections for employer contributions, they may only be made by employees that are fully vested in the relevant type of contribution.

Roth employer contributions are not considered wages for purposes of withholding or, except for certain governmental plans, employment taxes. Therefore, employees who elect Roth employer contributions may have to increase withholding or make estimated tax payments to avoid an underpayment penalty.

The reporting obligations that apply to a Roth employer contribution are the same as if: (1) the contribution had been the only contribution made to an individual’s account under the plan, and (2) the contribution, upon allocation to that account, had been directly rolled over to a designated Roth account in the plan as an in-plan Roth rollover. These contributions are taxable to employees and must be reported using Form 1099-R for the year in which they are allocated.

Roth Catch-up Contributions for High Earners

Effective for: Taxable years beginning after 12.31.2023 (extended to 12.31.2025 under IRS guidance)
Applies to: 401(k) plans, 403(b) plans, and governmental 457(b) plans

In general, the Tax Code permits a plan to allow participants ages 50 and over the ability to make elective salary deferrals over and above the normal annual limit. These are referred to as catch-up contributions.

Under SECURE 2.0, if a plan wants to continue to make catch-up contributions available, it must comply with the following:

  1. Any catch-up contributions made by a participant whose wages (for FICA tax purposes) from the employer sponsoring the plan exceed $145,000 (as adjusted for inflation) in the preceding calendar year must be made on a Roth basis.
  2. If the preceding rule applies to any participant for a plan year, the plan must allow (but does not need to require) all other participants to elect to make catch-up contributions on a Roth basis.

As part of this provision, Congress also made a conforming amendment that eliminated the section of the Tax Code that permits catch-up contributions in the first place. This has been identified by various industry participants. On May 23, 2023, the House Ways and Means Committee and Senate Finance Committee leaders sent a letter to the Department of the Treasury and IRS acknowledging this issue and noting that they intend to introduce a technical correction to address it.

However, other open questions remain around implementing this provision. For example, there are questions about plan sponsors tracking FICA wages, whether the IRS will extend the express requirements of the rule in connection with mid-year hires or Roth deferrals generally, and how the rule will interplay with using re-characterized catch-up contributions to pass non-discrimination testing.

Considering these open questions and other concerns around implementing this provision by January 1, 2024, the IRS published Notice 2023-62 on August 25, 2023. This notice announced a two-year “administrative transition period” during which enforcement of this rule will be delayed. In addition, the IRS noted that participants can continue making catch-up contributions and it will issue additional guidance on the rule to address the open questions before the new effective date.


Mandatory Automatic Enrollment

Effective for: Plan years beginning after 12.31.2024
Applies to: 401(k) plans and 403(b) plans with employer deferral features

Certain plans established on or after December 29, 2022, will be required to add automatic deferral and automatic escalation provisions for participant deferrals. The rule also applies to employers who joined a multiple employer plan (MEP) on or after December 29, 2022.

The automatic deferrals must begin during the first year of participation at a rate between 3% and 10% of the participant’s compensation, increasing 1% per year to at least 10% and no more than 15%. Plans must allow permissible withdrawals by participants within 90 days after the first automatic deferral. In addition, a participant may opt-out of the deferrals or escalations or choose a different deferral percentage.

Amounts automatically contributed must be invested in a qualified default investment arrangement unless the participant elects otherwise.

The requirements do not apply to the following plans:

  1. Governmental plans
  2. Church plans
  3. A plan while the employer maintaining the plan (and any predecessor employer) has been in existence for less than three years. This applies individually to each employer in a MEP.
  4. A plan earlier than the date that is one year after the close of the first taxable year in which the employer maintaining the plan normally employed more than 10 employees. This applies individually to each employer in a MEP.

Student Loan Matching Contributions

Effective for: Plan years beginning after 12.31.2023
Applies to: SIMPLE IRAs, 401(k) plans, 403(b) plans, and governmental 457(b) plans

SECURE 2.0 permits employers to make employer matching contributions on account of “qualified student loan payments.” For this purpose, a “qualified student loan payment” is a payment incurred by an employee in repayment of a qualified education loan obtained by the employee to pay qualified higher education expenses, but only:

  1. To the extent such payments in the aggregate for a year do not exceed the 402(g) deferral limit when added to elective deferrals made during the year, and
  2. If the employee certifies annually to the employer making the matching contribution that such payment has been made on the loan. The employer may rely on this certification.

The IRS has yet to release guidance on this provision.

“Qualified higher education expenses” means the cost of attendance at an eligible educational institution as defined in Tax Code Section 221(d)(2).

Matching contributions on account of qualified student loan payments must generally be made on the same terms as matching contributions on account of elective deferrals, including with respect to eligibility, rate, and vesting.

Plans can treat student loan payments as a deferral or after-tax contribution for purposes of SIMPLE, safe harbor, QACA, or starter 401(k) rules. For all other purposes, the student loan payment is not treated as a plan contribution. Further, plans may apply the requirements of the ADP test separately with respect to all employees who receive student loan payment matching contributions in the plan year.

SECURE 2.0 directs the Secretary of the Treasury to prescribe regulations to implement this rule, including regulations:

  1. Permitting a plan to make matching contributions on student loan contributions at a different frequency than other matching contributions (not less than annual),
  2. Permitting employers to establish reasonable procedures for employees to claim matching contributions, including an annual deadline (not earlier than three months after the close of the plan year), and
  3. Issuing model plan amendments that can be adopted by plans.

Increased Catch-up Contribution Limits

Effective for: Taxable years beginning after 12.31.2024
Applies to: 401(k) plans, 403(b) plans, and governmental 457(b) plans

As described above, the Tax Code permits a plan to allow participants ages 50 and over the ability to make catch-up contributions over and above the normal annual elective deferral limit. Under prior law, the annual catch-up contribution limit was the same for all participants ages 50 and older.

SECURE 2.0 establishes higher catch-up contribution limits for participants ages 60-63, who would not attain age 64 before the close of the relevant taxable year. The increased limit for plans other than SIMPLE plans is the greater of:

  1. $10,000 (as adjusted for inflation), and
  2. 150% of the normal catch-up limit.

Retroactive Benefit Increases Until Employer Tax Return Due

Effective for: Plan years beginning after 12.31.2023
Applies to: Qualified plans

SECURE 2.0 permits sponsors of qualified plans to retroactively amend the plan to increase benefits under the plan (other than increasing the amount of matching contributions). The amendment must be adopted before the deadline for the employer to file its tax return (including extensions) and may not cause the plan to fail to meet any other Tax Code requirements.

If the employer elects, compliant amendments will be treated as having been adopted as of the last day of the plan year in which the amendment is effective.

Elimination of “First Day of the Month” Rule for Governmental 457(b) Plans

Effective for: Taxable years beginning after 12.29.2022
Applies to: Governmental 457(b) plans

Under prior law, for a participant to elect to make deferrals to a 457(b) plan for any month, the participant had to enter into an agreement with the employer providing for the deferral before the beginning of the month.

SECURE 2.0 eliminates this requirement for governmental 457(b) plans and allows deferrals so long as the participant enters into an agreement with the employer providing for the deferral before the compensation is made available.

The “first day of the month” rule remains in place for 457(b) plans sponsored by tax-exempt (non-governmental) entities.

Trust services are offered through Alerus Financial, N.A., which does not provide legal or tax advice. The information and opinions in this communication are for general information only and not intended to provide tax, legal, or investment advice or recommendations for any particular situation or type of retirement plan. Nothing in this communication should be construed as legal, investment, or tax guidance, nor as the sole authority on any regulation, law, or ruling as it applies to a specific plan or situation. Plan sponsors should always consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. All material is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. The opinions presented in this communication are subject to change without notice.