The SECURE 2.0 Act of 2022 enacted a host of changes to the tax rules related to employer-sponsored retirement plans. As part of the omnibus spending bill, the Act included some changes that took effect when the law was passed in December 2022 and others that are being phased in over the next few years. This year, more than 20 new retirement plan rules take effect.

New Participation Incentives and Contribution Alternatives

Several of the SECURE 2.0 provisions that become operative this year are designed to encourage greater participation in employer-sponsored retirement programs. Among these are several features that make contributing to retirement savings easier for employees.

• Student Loan Match: Beginning in 2024, employees can use their student loan payments to qualify for matching employer contributions to their 401(k), 403(b), or SIMPLE retirement plans. Plan sponsors can now make matching contributions based on the amount of each employee’s student loan payments, even if the employees do not contribute to the retirement plan themselves.
• Part-Time Employee Participation: The original SECURE Act of 2019 allowed long-term, part-time employees to begin participating in their employers’ 401(k) plan after three years of consecutive part-time service. This provision has now gone into effect for plan years beginning after Dec. 31, 2023. Starting next year, SECURE 2.0 will reduce the qualification period down to two years of consecutive part-time employment.
• Small Incentives: SECURE 2.0 allows employers to offer de minimis financial incentives (such as gift cards) to encourage employees to enroll in their 401(k) plans. This provision went into effect immediately upon enactment of the law, but the maximum permitted value of these incentives was unclear. At the end of 2023, the IRS provided guidance that sets the maximum value of these incentives at $250 per employee, either as a single incentive or installments over time to encourage continued participation.

More Flexible Account Management

Other SECURE 2.0 provisions taking effect this year are designed to boost participation by providing employees with easier access to their retirement accounts in the event of an emergency.

• Emergency Savings Accounts: Starting on January 1, 2024, employers can now establish pension-linked emergency savings accounts (PLESAs), which are individual accounts within a defined contribution plan designed to help non-highly compensated employees save for financial emergencies. Eligible employees can direct a portion of their salary into the fund, up to a maximum of $2,500. Contributions are made with after-tax dollars, like a Roth 401(k), so there is no immediate tax benefit for contributing. But employees can make withdrawals as often as once per month without incurring the tax penalties they would otherwise encounter when making early withdrawals from the linked retirement account. On Jan. 12, 2024, the IRS issued preliminary guidance (https://www.irs.gov/pub/irs-drop/n-24-22.pdf) that spells out limitations employers can impose on PLESAs in order to prevent abuse of matching contributions or other account features.
• Hardship Withdrawals: In addition to introducing PLESAs, SECURE 2.0 also established a more generous allowance for emergency or hardship withdrawals from retirement accounts. Previously, hardship withdrawals were subject to a 10% early withdrawal fee, but beginning this year, participants can take a penalty-free withdrawal of up to $1,000 annually, with the option of repaying the withdrawal within three years. Furthermore, in cases of domestic abuse, individuals can make penalty-free withdrawals of up to the lesser of $10,000 or 50% of the value of their account.

Employer Incentives

SECURE 2.0 also offers several new incentives to encourage employers who do not offer employee retirement plans to consider doing so now.

• Starter 401(k) Accounts: As of this year, employers can now offer a simple “starter” 401(k) or “deferral-only” plan. Such plans do not include an employer match, so they are exempt from many traditional 401(k) testing requirements and other related regulations. Employees will be automatically enrolled and can contribute between 3% and 15% of their salaries, up to a maximum of $6,000 per year. This compares to the $23,000 limit for employee contributions to a traditional 401(k) in 2024. The $6,000 cap will be adjusted for inflation annually.
• New SIMPLE IRA Rules: Also starting in 2024, employers with SIMPLE IRA plans can make larger contributions to employee accounts. They can contribute a flat 2% of an employee’s pay, regardless of whether the employee contributes. Alternatively, they can match the employee contributions dollar-for-dollar up to 3% of the employee’s pay.

The 2024 changes are in addition to the dozens of previous SECURE 2.0 provisions, such as increasing participants’ annual contribution limits, raising the age at which employees must start taking distributions, and offering more generous employer tax credits to offset some of the administrative costs of setting up a retirement plan. What’s more, there will be several more important changes in 2025, including mandatory automatic enrollment for employees in most 401(k) plans that were launched after SECURE 2.0 was enacted.

Companies that currently offer a sponsored employee retirement plan should work with their plan provider to make sure that they meet the new requirements and consider making additional benefits available. For those companies that don’t provide an employee retirement plan, the new SECURE 2.0 incentives might make it a good time to create a retirement program.

Let the tax professionals at Dembo Jones help you determine what these tax changes mean for your company and how you can take advantage of them.