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SECURE 2.0 has changed dozens of benefits plan rules. Among these are changes to when and how Roth accounts are used. Roth account are retirement accounts, in a 401(k) plan or an IRA, to which after-tax money is contributed and no income tax is paid on distributions, including earnings (as opposed to “traditional” 401(k) or IRA accounts, which accept pre-tax contributions, but for which distributions, including earnings, are taxed when received). These changes have increased the required and permitted uses of Roth contributions.
Matching Contributions
Plan sponsors may decide whether to offer participants the option to designate employer matching contributions as Roth contributions, rather than only as a traditional (pre-tax) match. This option also applies to matching qualified student loan payments (if the employer elects to do so) and matching contributions to a 457(b) plan. This is an optional provision. If a plan sponsor decides to offer Roth matching contributions, it will need to amend its plan. If implemented, matching contributions must be fully vested at all times, so employers should carefully consider whether to elect this option. Plan sponsors may elect to implement this provision effective any time on or after December 29, 2022.
Catch-Up Contributions
Catch-up contributions are 401(k) deferrals in excess of the regular elective deferral limits that may be made by participants who are over age 50. Plans must now require participants who made at least $145,000 (adjusted annually after 2024) in the previous year to designate catch-up contributions, if any, as Roth contributions. Plan sponsors may also elect to require participants who made less than $145,000 (as adjusted) make catch-up contributions as Roth contributions. Before SECURE 2.0, catch-up contributions could be made as traditional (pre-tax) contributions or Roth contributions, depending on the plan. This change is effective for plan years beginning on or after January 1, 2024. Plan sponsors will need to coordinate with legal counsel and plan administrators to ensure this change is implemented properly.
Pre-Death Distributions
SECURE 2.0 makes several changes to required minimum distributions (RMDs). Effective January 1, 2024, plans are no longer required to make RMDs for Roth 401(k) accounts before the participant’s death.
Conclusion
For plans that do not currently permit Roth contributions, now may be a good time to reassess whether broad inclusion of Roth contributions should be added to the plan. Roth contributions are essentially required for any plan that offers catch-up contributions, and may be desirable for other plans as well. Employers should also monitor changes in this area, as there are industry groups requesting guidance, relief during the transition and delayed effective dates for implementing the required changes.
Click here to read the original alert by Charles M. Russman and Carolyn M.H. Sullivan of Ally Law member firm Varnum LLP.
