With nearly 100 retirement plan provisions, the SECURE 2.0 Act of 2022 is teeming with beneficial items for U.S. workers and employers. Although it may be relatively easy for Congress to pass new laws creating retirement savings opportunities, implementing many of these new components may involve much more work than lawmakers could have anticipated.
Many changes are fairly easy to figure out. For example, the 50% penalty tax for missed required minimum distributions (RMDs) has been cut in half (or to 10% if the failure is corrected in a timely manner). The 50% tax credit for plan startup costs has been doubled for employers with 50 or fewer employees, and the RMD age has been raised to age 73.
But while some SECURE 2.0 items are straightforward, others are a little more complicated. Let's take a look at two provisions that have gotten a lot of attention for the benefits that they may offer retirement savers: new Roth contribution options and pension-linked emergency savings accounts.
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What's so hard about Roth contributions?
Roth contributions can create remarkable retirement benefits. And now SECURE 2.0 has expanded Roth savings options in two ways. First, employer contributions can now be made as Roth contributions to most employer-sponsored retirement plans, including SEP and SIMPLE plans. Second, employee deferrals in SIMPLE plans also can now be made as Roth contributions. These two changes have been hailed as a welcome breakthrough by many 2.0 analysts of this landmark legislation.
But as great as these provisions seem, very few (if any) employers have yet to offer them. Why? The simple answer is "implementation." Two examples may help. One is SIMPLE IRA Roth deferrals, which at a passing glance may seem to resemble Roth 401(k) deferrals. However, they are subject to different restrictions. For example, no other contribution types can be moved into or out of a SIMPLE IRA during a two-year period, which starts on the date of the first contribution. It appears that any Roth contributions made through a SIMPLE IRA also would be subject to this two-year restriction.
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There is no combination Roth/SIMPLE IRA document that contains such a restriction. So until the IRS approves this kind of document — or allows employers to take a different approach — it may be difficult for employers to accommodate Roth contributions to SIMPLE IRAs.
Here's a second scenario: employer Roth 401(k) contributions. Until now, all employer contributions have been pretax contributions, which are not added to the participant's taxable income until the year they are distributed. And while there is clear guidance on how to report pretax contributions, as of this writing the IRS had not yet provided direction on how to report employer Roth contributions as taxable income to participants.
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There are a few possible reporting options, including requiring employer Roth contributions to be reported on the participant's Form W-2. If so, would these contributions be subject to Social Security withholding? Perhaps employers could use Form 1099-R to somehow report the contributions as taxable income to the participant — even though this form is currently used to report distributions, not contributions.
What about pension-linked emergency savings accounts (PLESAs)?
Another SECURE 2.0 provision creates a new kind of account that may help address a growing concern. The fact is that many individuals do not have enough savings to cover even a modest emergency expense.
PLESAs, available in 2024, are subject to detailed rules. For example, employee contribution amounts must be made to a PLESA Roth account. Any employer matching contributions made on PLESA contributions must be done at the same rate as other matching contributions to the plan. But they must be made to the participant's non-PLESA account within the plan.
Employers must allow participants to take distributions at least once a month. Participants may take up to four distributions without any fee; after that, a reasonable fee may apply.
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These are just a few of the PLESA rules, which may influence how popular this provision becomes. And because PLESAs are optional, some employers may wait for further guidance before they decide whether (or when) to adopt this provision for their plans.
The Department of Labor and IRS clearly have their work cut out for them. Numerous SECURE 2.0 provisions will require extensive clarification. And while creating final regulations normally takes many months, we remain hopeful that sub-regulatory interim guidance may be released in the nearer term.
The SECURE 2.0 Act is the most significant retirement legislation in decades. It contains many helpful provisions. And many employers and workers are eager to enjoy its benefits. But without sufficient guidance, implementing some of the new options may entail some risk. Many financial organizations and service providers are waiting for definitive federal direction before moving forward. So while certain provisions may be "effective" now, they may not truly be available until there is a clearer pathway to offering them.
