Attention benefits professionals; big changes are coming to your employee retirement readiness and financial wellbeing strategies.
Back in December 2019, the SECURE Act was signed into law, and legislators immediately began crafting additional bills to increase participation in retirement plans.
The outcome of these efforts is SECURE 2.0, which includes 90+ provisions aimed at promoting further retirement savings. The SECURE 2.0 Act of 2022 contains several provisions related to 401(k) plans.
These provisions are designed to encourage more employers to adopt 401(k) plans and to make it easier for employees to save for retirement.
How SECURE 2.0 impacts employee financial wellbeing in the workplace
SECURE stands for Setting Every Community Up for Retirement Enhancement, and it represents wide-reaching efforts to improve retirement savings opportunities for Americans.
What do HR and benefits professionals need to know about SECURE 2.0? Explore this post or download your copy of the guide for a summary of the key provisions and their potential impacts on employee financial wellbeing in the workplace.
Want to take this guide to go?
Download the SECURE 2.0 Guide for employers to explore key provisions, including:
- Automatic enrollment and escalation
- Ability to 401(k) match on student loans
- Emergency savings accounts
- Increased age for required minimum distributions (RMDs)
- Higher catch-up limits
- Emergency withdrawals
- Employee self-certification for hardship distribution
- Lost and found database
- Roth accounts
Automatic enrollment and escalation
Under this provision, which becomes effective on January 1, 2025, new 401(k) plans established after December 31, 2024 must automatically enroll employees at a default contribution rate between 3% and 10% and automatically escalate their contributions by 1% per year until they reach at least 10% (but no more than 15%). This provision is designed to help employees who may be hesitant to enroll in a 401(k) plan on their own, or who may not be contributing enough to their plan. By automatically enrolling employees and gradually increasing their contributions, this provision can help employees build a larger nest egg for retirement. Each employee must individually opt out to avoid automatic enrollment.
Employee impacts: Automatic enrollment may not be the right move for every employee. For example, forcing retirement savings may not be optimal for an employee who has no emergency savings and a lot of debt. Offering a holistic financial wellbeing program that considers each employee’s full financial picture can help support this automatic enrollment transition.
Ability to 401(k) match on student loans
Under this provision, which becomes effective on January 1, 2024, employers will be able to offer 401(k) matching contributions on employee student loan payments. This can be especially beneficial for employees who are struggling to pay off student loans and who may not be able to contribute as much to their 401(k) plan as a result.
Employee impacts: By allowing employers to match employee student loan payments, this provision can help employees navigate their competing goals of paying down debt while saving for retirement. A trusted financial wellbeing program with access to Certified Financial Planner™ professionals can also help employees build a full financial plan that includes debt paydown, retirement readiness, and more.
Emergency Savings Accounts
Effective 2024, this new provision in SECURE 2.0 law allows plan sponsors to amend their plans to include emergency savings accounts (ESAs), which are sidecar accounts sitting next to a regular 401(k) account under a retirement plan. Employee contributions to ESAs must be made on a post-tax basis, and are eligible for matching contributions at the same matching rate established under the retirement plan. Employers may auto-enroll participants into ESAs at a rate of up to 3% of compensation, with a cap of $2,500 (indexed for inflation after 2024) or a lower amount determined by the plan sponsor. The plan can automatically stop contributions once the emergency fund is fully funded, or direct excess contributions over limit to Roth, since it’s post-tax. Withdrawals from ESAs are penalty-free and employees can take up to four withdrawals on a no-fee basis at a frequency of once per month. Highly compensated employees are not eligible to participate.
Employee impacts: This provision will impact employees’ financial wellbeing by providing them with a way to save money specifically for unexpected expenses, without having to withdraw funds from their retirement savings and potentially incurring penalties. Allowing an employer match can encourage employee participation and help them save more money. Whether an employee participates in the new ESA or not, it’s valuable for them to have access to trusted financial guidance that supports them in building strong financial foundations.
Increased age for required minimum distributions (RMDs)
This provision, which becomes effective in stages over the next several years, increases the age at which employees are required to begin taking RMDs from their 401(k) plans. RMDs are required once an employee reaches a certain age, and they are designed to ensure that employees do not hold onto their retirement savings indefinitely. Under this provision,the RMD age increases to 73 for employees born between 1951 - 1959. If an employee is born in 1960 or later, the RMD age is now 75.
Employees will not start RMD's in the year 2023 or 2033, due to the increase in RMD age. Employee impacts: By postponing the age for RMDs, employees may be able to better align the timing of their withdrawals with their retirement income needs. This can help them avoid taking out more money than they need or running out of money later in retirement.
Higher catch-up limits
This provision, which becomes effective on January 1, 2025, increases the catch-up contribution limits for 401(k) plans. Catch-up contributions are additional contributions that employees who are 50 or older can make to their 401(k) plans. This provision will be rolled out in two parts, one effective now and one in 2025. Effective today, if an employee is over the age of 50, the catch up contribution is now $7,500. That together with $22,500 for employee contribution, means the total contribution to a 401(k) for an employee 50 or older is $30,000. Starting in 2025, for participants who are turning 60, 61, 62, or 63 during the year, their catch up contribution goes up to $10,000 or 50% of the dollar amount in effect for 2024, adjusted for inflation.
Employee impacts: By increasing the catch-up limits, this provision can allow older employees to contribute more to their 401(k) plans and potentially save more for retirement. This provision can be beneficial for older employees who may have not been able to save as much for retirement due to various reasons and want to increase their retirement savings.
Effective December 31st, 2023 SECURE 2.0 will allow one 401(k) withdrawal of up to $1,000 per year for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” These withdrawals are not subject to the federal 10% penalty for early withdrawal for individuals under age 59½. The withdrawal must be repaid within three years. Further withdrawals are limited within the three-year repayment period if the first withdrawal has not been repaid.
Employee impacts: This provision can provide employees with a way to access their retirement savings in the event of an emergency without incurring penalties, providing them with a financial safety net to help them through difficult times. Employees that take an emergency withdrawal should have a solid financial plan in place for how they’ll be repaying the withdrawal, which may mean cutting back on expenses or finding additional sources of income.
Employee Self-Certification for Hardship Distribution
The SECURE 2.0 law allows an employee to self-certify for a hardship distribution from a 401(k) plan. The employee must self-certify that they have no alternative means reasonably available to satisfy the financial need, and the distribution must not be in excess of the amount required to satisfy the financial need.
Employee impacts: This change is a relief for employers and employees alike because it will simplify the administrative process for hardship withdrawals and it is a natural extension of self-certification procedures that have been authorized as a result of COVID-19.
Lost and found database
The new SECURE 2.0 law directs the Department of Labor to create a nationwide, online, searchable "Lost and Found" database that maintains information on benefits owed to missing, lost, or non-responsive participants and beneficiaries in retirement plans. This is to help plan participants and beneficiaries locate money that may have been left in accounts under a former employer plan, with reporting requirements for employers to report such information to DOL. The Lost and Found database will be created no later than 2 years after the date of enactment of SECURE 2.0.
Employee impacts: The formation of a nationwide lost and found database can positively impact employees’ financial wellbeing by helping them locate money that may have been left in accounts under a former employer plan. By having a nationwide, online, searchable database, it can make it easier for employees to locate and claim money that they earned and use it to plan for their financial future.
Under the new provisions of SECURE 2.0, employers can now elect to make matching contributions to either the traditional side or Roth side of a 401(k). This is for matching and non-elective contributions, not profit sharing. Employees earning $145,000 or more will have their catch up contributions automatically go into the Roth portion of their 401(k), if available. Unused 529 Plans can be converted to a Roth IRA for the beneficiary. This conversion is limited to $35,000, and the 529 Plan must have been in existence for 15 years prior to rolling into a Roth.
Employee impacts: This provision is helpful for parents who are struggling between saving for retirement and education funding. The Roth IRA beneficiary can be changed before roll over (i.e. back to the parent)
As a benefits professional, it is important to be aware of the provisions of the SECURE 2.0 Act of 2022 and how they may impact employee financial wellbeing in the workplace.
By understanding these provisions, benefits professionals can help educate employees about the benefits of 401(k) plans and how they can contribute to their financial wellbeing. Need a bit more guidance? Our team at LearnLux is here to help.
Legislative References: A summary by section of the actual legislation can be found here: SECURE 2.0.