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Ten Mandatory SECURE 2.0 Changes for 401(k) Plans

The SECURE 2.0 Act of 2022, as enacted on December 29, 2022, contains over 90 provisions affecting retirement plans and IRAs, but of the many provisions only a handful are required changes for 401(k) plans.  This post lists those changes and indicates when the provisions go into effect.  Unless otherwise noted, 401(k) plans (and 403(b) plans, to which these changes also apply) will need to be amended to reflect mandatory SECURE 2.0 changes by the end of their 2025 plan year, unless that deadline is later extended.  Note that some of the changes listed below, such as the paper disclosure requirement, may not require a plan amendment.  Also as noted, two are required changes only if discretionary provisions are first adopted.

One.  Increases In Required Minimum Distribution Age

Effective for required minimum distributions (RMDs) after December 31, 2022 for individuals who attain age 72 after that date, the RMD increases from 72 to 73 for those born between 1951 and 1959, and age 75 for those born in 1960 and subsequent.  A technical glitch needs to be corrected, as the law currently puts those born in 1959 into the age 73 and age 75 distribution categories. 

Two. Removal of RMD Requirement for In-Plan Roth Accounts

RMDs during your lifetime are not required for Roth IRAs, but were required under prior law, to be taken from from in-plan Roth accounts.  SECURE 2.0 eliminates the requirement to take lifetime RMDs from in-plan Roth accounts effective for tax years beginning after December 31, 2023. 

Three.  Roth Catch-Up Contributions for High Earners

Effective for tax years beginning after December 31, 2023, age 50 catch-up contributions under 401(k) plans made by participants whose wages in the prior year exceeded $145,000 must be made in the form of designated Roth contributions.  The $145,000 amount is indexed after 2024.  Catch-up contributions for lower wage earners can continue to be made on a pre-tax basis but must be permitted to be made in the form of designated Roth contributions.  Another technical glitch in the law needs to be corrected, in order to make catch-up contributions permissible at all, beginning in 2024.  Plans that don’t include designated Roth contributions must be amended to do so by the applicable deadline, in order to accommodate the Roth catch-up feature.

Four:  Increased Catch-Up Limit Between Ages 60-63

Effective for tax years beginning after December 31, 2024, the age 50 catch-up limit is increased for participants between the ages of 60 and 63 to the greater of (a) $10,000 or (b) 150% of the 2024 “normal” catch-contribution limit.  150% of the 2023 catch-up contribution limit already exceeds $10,000 ($11,250).  The $10,000 limit will be adjusted for cost-of-living after 2025.

Five.  Coverage of Long-Term, Part-Time Workers

This one is a double whammy because SECURE 1.0, enacted in 2019, requires coverage of long-term, part-time employees for 401(k) plans in 2024, and SECURE 2.0 expanded this rule to ERISA 403(b) plans, in addition to reducing the number of years required to qualify as a long-term part-time employee.   Specifically, beginning in 2025 401(k) and ERISA 403(b) plans must allow employees who complete 500 or more hours of service in two consecutive years to make elective deferrals (but need not make employer contributions on their behalf), taking into account service worked in 2023 and subsequent.  Under SECURE 1.0, 401(k) plans must allow employees who worked 500 or more hours in three consecutive years, beginning in 2021, to make elective deferrals commencing in 2024.  These employees need not be taken into account for nondiscrimination and coverage purposes or for top-heavy purposes.

An example illustrates how this works.  An employee who works at least 500 hours of service in 2021, 2022, and 2023 would be eligible to make elective deferrals in their employer’s 401(k) plan on January 1, 2024, per SECURE 1.0.  But if that same employee were employed by an employer with an ERISA 403(b) plan, the employee would have to work 500 or more hours in both 2023 and 2024, in order to be eligible to make elective deferrals in 2025 under SECURE 2.0  Note that this would be the case even if the employee were a student employee or were hired into a position requiring less than 20 hours per week (categories that were exceptions to the universal availability rule applicable to 403(b) plans).  Service for plan years before January 1, 2023 is disregarded for purposes of SECURE 2.0 eligibility, but service worked since 2021 is counted for vesting purposes under both SECURE Acts. 

Six. Auto-Enrollment and Auto-Escalation for Newly Adopted Plans

Effective for single-employer 401(k) or 403(b) plans adopted on or after December 29, 2022 SECURE 2.0 requires that, starting in 2025, the plan auto-enroll participants, and auto-escalate deferrals.  This rule also applies to employers that adopt multiple employer plans on or after December 29, 2022.  Certain exemptions apply, including employers with 10 or fewer employees, businesses in the first three years of existence, governmental and church pans, and SIMPLE 401(k) plans.  For plans subject to the rule, the automatic enrollment percentage must start at 3% and increase at least 1% on the first day of each successive plan year until the deferral rate reaches at least 10%, but not more than 15%.  For plan years beginning before 2025, non-safe harbor plans may not exceed 10%.  Participants must be permitted to withdraw deferrals, and earnings, within 90 days, without application of the 10% early withdrawal penalty tax.  Qualified default investment alternatives must be used for the automatically contributed amounts, subject to modification by participants.  

Seven.  Repayment Deadline for Qualified Birth or Adoption Distributions (If Offered)

This is a mandatory change to a discretionary provision from SECURE 1.0.  SECURE 1.0 introduced the option of allowing participants to take qualified birth or adoption distributions (QBADs), which are distributions from a 401(k) or 403(b) plan (or IRA) of up to $5,000 per parent that are not subject to the early withdrawal penalty tax and that are taken within one year of the date of a birth or finalization of adoption proceedings.  SECURE 1.0 provided that these amounts may be repaid back to the qualified plan or IRA notwithstanding normal contribution dollar limits, but did not specify a deadline for repayment.  For plan sponsors that did add QBADs to their plans, and for IRA custodians that made them available, SECURE 2.0 now requires that repayment be made within three years.  The repayment period ends December 31, 2025 for QBADs that are currently outstanding.

Eight.  Surviving Spouse Election to be Treated as Employee

Surviving spouses have several special options with regard to a spouse’s retirement accounts, that are not available to non-spouse beneficiaries.  Effective for 2024, SECURE 2.0 adds one more option:  the surviving spouse of the account holder who is the designated beneficiary of the account can irrevocably elect to be treated for RMD purposes as the deceased account holder of the retirement account him or herself.  As a consequence, RMDs will be paid no sooner than when the account holder would have reached his or her required beginning date, and will be paid out according to the account holder’s life expectancy, rather than the spouse’s life expectancy, using the Uniform Life Table rather than the Single Lifetime Table.  Note that this option is different from the surviving spouse electing to treat the account as his or her own, which would also result in use of the Uniform Life Table, but using the spouse’s birthdate.  This new option under SECURE 2.0 would primarily be of interest to an older surviving spouse, as it would permit use of the younger account holder’s life expectancy for RMD purposes. 

Nine.  Required Annual Paper Account Statement

Under a Department of Labor “safe harbor” set forth in final Department of Labor regulations published in 2020, retirement plan sponsors may deliver plan disclosures such as Summary Plan Descriptions, quarterly or annual account statements, and other items, by electronic means, either through email or posting on a company website.  EforERISA posted about the electronic disclosure safe harbor back in 2020.  Effective for plan years beginning after December 31, 2025, SECURE 2.0 requires that defined contribution plans, which include 401(k) and 403(b) plans, provide a paper benefit statement at least once per year.  The other three required quarterly statements may be delivered electronically provided the safe harbor delivery requirements are met.  Participants are permitted to opt-out of paper delivery.   SECURE 2.0 also instructs DOL to revise the electronic delivery regulations by December 31, 2024, to require a one-time initial paper notice to new participants that informs them of their right to receive all required disclosures on paper.  This initial written disclosure would be required to be delivered prior to issuance of any electronic communications about the plan.

Ten.  Annual “Reminder” Notice for Unenrolled Participants (Sec. 320)

This is a required provision for employers who opt to use simplified disclosure procedures for employees who are eligible under their plan, but do not actively participate. This is a discretionary provision under SECURE 2.0 and it is unclear how many employers will adopt it, due to the administrative challenges of segregating the two employee populations for different notice purposes. Currently required ERISA disclosures must be made to employees who have met eligibility requirements under a retirement plan, but do not actively participate, equally to those who are actively participating in a retirement plan. Effective immediately, a plan sponsor may carve unenrolled participants out of normal notification procedures, provided that they supply an annual notice of the employees’ eligibility to participate in the plan, and any applicable election deadlines. Other prerequisites to this simplified annual notice procedure are that (a) the employee is provided any notification they expressly request be supplied; and (b) the employee received a Summary Plan Description and all other required notices upon initially becoming eligible to participate in the plan.

If you are a 401(k) or 403(b) plan sponsor, or advise plan sponsors, and have questions about these required changes under SECURE 2.0, use the Contact form at EforERISA to get more information on next steps.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2023 Christine P. Roberts, all rights reserved.

Photo credit: Ross Findon, Unsplash

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Would You Like a Latte With that 401(k) Deferral?

SECURE 2.0 Permits Small Financial Incentives to Encourage Plan Enrollment

Effective immediately under a provision of the recently-passed SECURE 2.0 retirement reform legislation, employers may offer their employees gift cards or other “de minimis financial incentives” for enrolling in a 401(k) plan.  This post sets forth some compliance points for this new incentive opportunity.

  • Under prior law, matching contributions were the only means by which employers could encourage employees to make elective deferrals. 

Expanding access to retirement plans is one of the overriding goals of SECURE 2.0 (set forth in Division T of the Consolidated Appropriations Act, 2023).  Many employers would like to be able to encourage employees to save for retirement but may not be able to afford an ongoing employer matching contribution.  Section 113 of Division T expands the list of permitted employer incentives by allowing employers to provide a small financial incentive to employees to enroll in a 401(k) plan.  The small incentive may be just enough to get the ball rolling for employees who are otherwise not inclined to take part in a 401(k) plan.

  • The small financial incentive must be paid for by the employer, not the plan itself.

Section 113 makes clear that the employer that sponsors the plan must purchase the gift cards or other small financial incentives.  Plan assets may not be used for this purpose.

  • The gift cards or other small financial incentives will constitute taxable income to employees.

Employer-provided gift cards and other items with a clear cash value are treated as cash for income and employment tax purposes.  The “de minimis fringe” exception that may apply to a water bottle or t-shirt provided to employees does not apply to items with a readily ascertainable cash value.  (See 2023 Publication 15-B, p. 9) If your 401(k) plan’s definition of compensation for contribution purposes does not exclude gift cards, the gift cards are also “compensation” for plan contribution purposes.

  • Keep the dollar amount of the incentive small. 

There is no safe harbor amount for “de minimis” value, and the determination depends upon the facts and circumstances. A gift card of up to $25 probably satisfies the standard and will buy an employee a few cups of coffee or smoothies. Consult a qualified tax advisor if you are considering a more generous incentive.

  • Coordinate with your recordkeeper and third-party administrator on rolling out this feature.

You will need to coordinate with your plan recordkeeper and your third-party administrator to coordinate the small financial incentive with plan enrollment.  Think about how and when you will communicate this benefit to employees and about when and how you will deliver the financial incentive in connection with proof of enrollment in the plan.  It might be a good idea to draft out a timeline for a hypothetical new enrollee, and walk through it with your recordkeeper and third-party administrator before you unveil it to employees.

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2023 Christine P. Roberts, all rights reserved.

Photo credit: Tye Doring, Unsplash

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Five SECURE 2.0 Changes Impacting Non-Profit Employers

On December 29, 2022 President Biden signed into law H.R. 2617, the Consolidated Appropriations Act, 2023, a $1.7 trillion omnibus spending bill that will keep the federal government funded for the 2023 fiscal year.  Of the many provisions in the massive bill, Division T, the SECURE Act of 2022, contains close to 400 pages of far-reaching changes affecting retirement plans and IRAs.  Commonly referred to as SECURE 2.0, it builds upon and adds to retirement plan provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE 1.0) which was passed in 2019, but is more extensive than the earlier law.  This post focuses on five provisions of SECURE 2.0 that specifically impact retirement plans maintained by non-profit employers. In addition to the changes listed below, which affect plans currently in existence, beginning in 2025 newly adopted Section 403(b) plans will be required to auto-enroll participants, with some exceptions.

One: Expansion of Multiple Employer Plan and Pooled Employer Plan Arrangements to Section 403(b) Plans

Effective for plan years beginning after December 31, 2022,  Section 403(b) plan sponsors can participate in multiple employer plan arrangements (MEPs) and pooled employer plan arrangements (PEPs), potentially achieving economies of scale under such arrangements (in terms of recordkeeping and investment expenses) that have previously only been available to for-profit employers.  MEPs and PEPs organized for Section 403(b) plan sponsors will be able to take advantage of relief, extended under SECURE 1.0,  from the “one bad apple” rule so that violation of one employer member of a multiple employer or pooled arrangement does not affect the tax treatment of other, compliant employer members. 

Two: Section 403(b) Plans May Invest in Collective Investment Trusts (CITs)

Since 1974, the only two permitted investment vehicles for 403(b) plans were annuity contracts and mutual funds.  Effective as of its date of enactment, SECURE 2.0 adds a third option, collective investment trusts (CITs), to that short list.  CITs are pooled investment arrangements that are made available only to qualified retirement plans, and that share some features with mutual funds but have different regulatory oversight and may offer some cost efficiencies.  Despite the immediate effective date, there will be some lead time before CITs are available to Section 403(b) plan sponsors due to the need to modify applicable securities laws.

Three: Expanded Investment Sources for Section 403(b) Hardship Withdrawals

Prior to SECURE 2.0, hardship withdrawals from Section 403(b) plans could be drawn only from employee contributions, less earnings.  Effective for plan years after December 31, 2023, SECURE 2.0 will bring Section 403(b) plans into conformity with Section 401(k) plans in this regard, so that QNECs, QMACs , in addition to elective deferrals, and earnings on these amounts, are permitted sources for hardship withdrawals.   SECURE 2.0 also permits hardship withdrawals to be made on the basis of a written certification by the participant as to the need for the withdrawal rather than on the basis of more formal documentation.

Four: Extension to Amend Section 457(b) Plans for SECURE 1.0 Required Minimum Distribution Rules

As we posted recently, December 31, 2022 was the deadline for sponsors of non-governmental Section 457(b) deferred compensation plans to amend their plan documents to incorporate changes to required minimum distribution rules under SECURE 1.0.  For tax-exempt sponsors of these plans who did not act timely, SECURE 2.0 has extended the amendment deadline under SECURE 1.0 to conform to the amendment deadline under applicable provisions of SECURE 2.0.  The new deadline is the last day of the first plan year beginning on or after January 1, 2025 (2027 in the case of governmental plans).  Note in this regard that SECURE 2.0 further modifies RMD rules, including increasing the RMD starting age in stages, first from 72 to 73, then eventually to 75, so additional amendments to RMD provisions will eventually be needed under SECURE 2.0.  Plans must operate in accordance with required provisions, in the interim.

Five: Eligibility for Long-Term, Part-Time Employees

This is a provision of SECURE 2.0 that is not unique to 403(b) plans but applies equally to 401(k) plans.  The original SECURE 1.0 rule required long-term, part-time employees, defined as employees who have worked 500 or more hours of service in three consecutive twelve-month periods, to be able to participate in the deferral-only portion of a 401(k) plan beginning in 2024.  Effective for plan years beginning after December 31, 2024, SECURE 2.0 expands this rule to 403(b) plans that are subject to ERISA and reduces the three consecutive twelve-month requirement to two consecutive periods.  This will be a significant adjustment to 403(b) plan sponsors who are accustomed to the universal availability rule, one exception to which permitted employees who normally work less than 20 hours per week, and who fail to accumulate 1,000 hours of service in an eligibility measurement period, to be excluded from making elective deferrals.  Although universal availability does not apply under 401(k) plans, the 1,000 hour rule operated in a similar way and will now yield to the 500 hour in two consecutive year standard.

SECURE 2.0 will be a topic of discussion at EforERISA in many posts to come.  If you have not subscribed to this blog yet, please take a moment to do so by typing your email address under the prompt at “Continue Reading More Articles.”  And if you are a plan sponsor, or advise plan sponsors, and have questions about provisions of the law or steps to take to get ready for their implementation, don’t hesitate to reach out using the Contact form (under “Posts Worth Revisiting”).

The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2023 Christine P. Roberts, all rights reserved.

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Auto-Portability:  A Guide for Retirement Plan Sponsors

The following Q&A is geared for plan sponsors who are curious about the auto-portability process and how it might prove beneficial to their plan participants.  Auto-portability can prove especially useful in industries with lower wages and high employee turnover, which may include retail, transportation, hospitality, and restaurants, because this can often lead to numerous account balances of $5,000 or less being involuntarily rolled to default IRAs.  Note that SECURE 2.0 proposals could increase the involuntary cash-out threshold to $7,000, which could expand the potential market for auto-portability solutions.

    1. What is auto-portability?

    Auto-portability is a financial technology service that helps consolidate retirement savings accounts for individuals who have changed jobs, and who may have one or more default IRA accounts due to mandatory distribution of low-balance accounts in prior employers’ plans ($5,000 or less), or termination of their employer’s 401(k) plan. 

    2. How does auto-portability work?

      Industry leader Retirement Clearinghouse, LLC (RCH) devised a “locate, match, and transfer” process that coordinates among multiple recordkeeper systems to identify when an individual with a default IRA account has opened a new 401(k) account, and enable a “roll-in” of the IRA to the new employer’s plan.   Auto-portability can even be used by a plan to skip the default IRA step, and postpone distribution of small account balances until the former participant has established an account with a new employer’s plan.  Participant consent is requested at the time their default IRA account or small employer plan account balance is matched with an account under a new employer plan, and roll-in to the new plan becomes possible, but if consent is not provided within 30 days, a default roll-in transaction occurs.

      3. What problems does auto-portability help address?

      RCH flagged three main problems addressed by auto-portability, in a Question & Answer handout it prepared on the Portability Services Network.  [Sign up to obtain the Q&A here.]

      The first is cash out leakage, which is the phenomenon of workers cashing out small retirement account balances when they change jobs.  They cite Employee Benefit Research Institute (EBRI) as estimating that of 14.8 million annual job transitions, 41%, or 6 million, will cash out of their retirement savings completely ($92.4 billion), with two-thirds of the cash outs being for reasons other than a financial emergency.  (This last detail strongly suggests that cash outs are taking place due to the inconvenience and the time required to process the transfer of a relatively small amount.)  The cash out percentage is higher – an estimated 55% – for participants with account balances under $5,000.  Research also points to cash out at the point of job transition as disproportionately impacting minority and low-income workers, thus undermining their ability to establish financial security for retirement. 

      Two other problems that can be addressed by auto-portability are the gradual erosion, through annual account fees and anemic money-market investment returns, of low-balance default IRA accounts, and missing participants.   Auto-portability reduces the first problem by moving money out of the low-balance IRA accounts to be consolidated with future savings under employer-sponsored plans.  Auto-portability reduces the prevalence of missing participants by tracking contact information established under a new employer’s plan, which is likely to be more accurate than old contact information maintained by prior employers.

      4. How does a plan sponsor connect with auto-portability services?

      RCH recently established a consortium with major 401(k) recordkeepers Alight, Fidelity and Vanguard, called the Portability Services Network (PSN).  PSN is expected to be up and running in the first quarter of 2023.  So if your plan uses one of those recordkeepers, auto-portability may be on offer to you in the new year.  The consortium is open to other recordkeepers joining as well.  Although RCH is currently the only direct provider of auto-portability services it is likely that there will be other providers offering these services in the future.  Finally, it is also possible for a plan to work directly with RCH, without going through its recordkeeper relationship, but this may be feasible only for fairly large plans.

      5. What do auto-portability services cost, and who pays for them?

      If you use the PSN consortium, there is no cost to plan sponsors.  Plan participants whose retirement accounts are transferred are charged a one-time transaction fee not exceeding $30.  Fees are disclosed in plan documentation, which will need to be amended to incorporate auto-portability language.  Other fees and disclosures apply if your plan contracts directly with RCH for auto-portability services.  The entry of other auto-portability service providers into the market to compete with RCH will hopefully result in lower transaction costs over time.

      6. Will my company have fiduciary liability in relation to auto-portability services?

      Yes, with respect to choosing to use auto-portability services and electing to work either directly with RCH or a similar vendor, or with the PSN consortium.  Specifically, you would be responsible for ensuring that the auto-portability service is a necessary service, a reasonable arrangement, and that it charges no more than reasonable compensation for the services provided.  You would need to monitor the arrangement and periodically ensure that your plan’s continued participation in the auto-portability program is consistent with ERISA’s standards.  However, your company will not have fiduciary liability with respect to the decision to transfer a default IRA or small balance account into your plan (roll-in).  In the absence of written consent from the account holder, fiduciary liability for that decision lies with RCH.  Your plan will have fiduciary responsibility with respect to determining whether the roll-in to your plan is consistent with plan terms, and in allocating the rolled-in assets to investments under your plan (unless a QDIA is in effect, or subject to ERISA Section 404(a) if the participant has made investment elections under the new plan).  The Department of Labor addressed these issues in Advisory Opinion 2018-01A, dated November 5, 2018.

      7. What else should I be aware of, on the auto-portability front?

      The Advancing Auto-Portability Act of 2022 is a bipartisan Senate bill sponsored by Senators Tim Scot (R-SC) and Sherrod Brown (D-OH) that would provide a $500 tax credit to employers who adopt auto-portability services, to help pay for the costs of implementation.  Representatives of the Department of Labor have also indicated that the Department is concerned about retirement account portability and cash-out leakage and recognize that auto-portability can helps preserve retirement security for many workers.  Thus, the problems that auto-portability is trying to address are apparent to members of Congress as well as to key personnel at the DOL, and plan sponsors should anticipate increased access to auto-portability in the future.

        The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2022 Christine P. Roberts, all rights reserved.

        Photo credit:  Tima Miroshnichenko, Pexels

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        IRS Prioritizes Guidance on Student Loan Repayment Contributions

        On September 9, 2021 the Department of the Treasury issued its 2021-2022 Priority Guidance Plan listing guidance projects that are priorities for the Treasury Department and IRS during the twelve months ending June 30, 2022.  Among the Employee Benefits topics is “[g]uidance on student loan payments and qualified retirement plans and §403(b) plans.” This post reviews the state of the law on student loan repayments through retirement plans and briefly discusses what type of guidance might be forthcoming. 

        Current State of the Law

        The current state of guidance on using student loan repayments as a base for employer contributions to a qualified retirement plan or 403(b) plan is limited to a private letter ruling issued in 2018 to Abbott Labs.  In addition, proposed measures are contained in various pieces of federal legislation including the Securing a Strong Retirement Act of 2021, commonly referred to as SECURE 2.0.

        In the private letter ruling (PLR 201833012), discussed in our earlier post, the employer sought approval of an arrangement under which they made a 5% nonelective contribution on behalf of participants who contributed up to 2% of their compensation towards student loan repayments.  Those participants could still make elective deferral contributions under the plan, but would not receive a matching contribution (also equal to 5% of compensation) for the same pay periods in which they participated in the student loan repayment program.  Both the nonelective and matching contributions were made after the end of the plan year and only on behalf of employees who either were employed on the last day of the plan year or had terminated employment due to death or disability.  The nonelective contributions based on student loan repayments also vested at the same rate as regular matching contributions did.

         The PLR addressed whether the nonelective contribution made on behalf of student loan repayments violated the “contingent benefit rule.”  Under that rule, a 401(k) plan is not qualified if the employer makes any other benefit (with the exception of matching contributions) contingent on whether or not an employee makes elective deferrals.  The IRS concluded that the program did not violate the contingent benefit rule because employees in the program could still make elective deferrals, but simply would not receive the regular employer match on those amounts during pay periods in which they received the nonelective contribution based on student loan repayments.

        Only Abbott Labs has reliance on the terms of the PLR, although the PLR may indicate the approach the IRS will take in any new guidance regarding student loan repayments as a basis for retirement plan contributions.  

        Proposed Legislation

        Congress has noticed the impact that student loan repayment obligations has had on employees’ ability to save for retirement.  As mentioned, the most significant bill that would address this issue is the Securing a Strong Retirement Act of 2021, commonly known as SECURE 2.0.  Specifically, Section 109 of the Bill would treat “qualified student loan payments” equal to elective deferral contributions, for purposes of employer matching contributions under a 401(k) plan, a 403(b) plan, a governmental 457(b) plan, or a SIMPLE IRA plan, and would permit separate nondiscrimination testing of employees who receive the matching contribution based on student loan repayments.  “Qualified student loan payments” would be defined to include any indebtedness incurred by the employee in order to pay their own higher education expenses.   Under SECURE 2.0, total student loan repayments that are matched, plus conventional elective deferrals, would be capped at the dollar limit under Internal Revenue Code (“Code”) Section 402(g) ($19,500 in 2021).   

        What Future IRS Guidance Might Hold

        Based on the Abbott Labs PLR and SECURE 2.0, we might hope or anticipate that any future IRS guidance on programs that condition employer retirement plan contributions on participant student loan repayments would include the following:

        • Guidance on how such programs may comply with the contingent benefit rule, including whether it will suffice simply that program participants may continue making elective salary deferrals (while likely foregoing regular matching contributions while student loan repayments are being matched).
        • Guidance on whether such a program, by nature limited to employees with student loans, is a “benefit, right or feature” that must be made available on a nondiscriminatory manner under Code Section 401(a)(4), and if so how it might satisfy applicable requirements.
        • Guidance on whether, and how, employers can confirm that loan repayments are being made, including whether (as SECURE 2.0 would permit), employers may rely on an employee’s certification of repayment status.
        • Guidance on nondiscrimination testing of contributions under a student loan repayment program, including provision for separate testing, as SECURE 2.0 would permit.

        Additionally, plan sponsors would no doubt appreciate guidance on use of outside vendors for student loan repayment programs and how they might interact with conventional retirement plan record keepers and third party administrators.

        Photo credit:  Mohammad Shahhosseini, Unsplash

        The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and the reader. Readers are encouraged to seek individualized legal advice in regard to any particular factual situation. © 2021 Christine P. Roberts, all rights reserved.