Do your New Year’s resolutions include understanding SECURE 2.0 provisions effective in 2024? You’re in luck! Below is a summary of certain provisions included in SECURE 2.0 that become effective this year.
One key change – the increased force-out threshold – can help lower plan costs and improve operational efficiency. Which is good news, because other SECURE 2.0 provisions, both required and discretionary, may result in increased plan costs and additional burdens on plan administration.
Knowing what changes are in store and how they may impact costs as well as plan design or benefits allows you to implement an effective plan strategy and coordinate participant communications.
Increased Force-Out Threshold
In 2024, the threshold for determining a “small account balance” increases from $5,000 to $7,000. This new limit is effective for any distribution occurring after December 31, 2023. For example, Tim left his employer years ago but has a current account balance of $6,200. The plan sponsor can send a distribution election form back out to Tim in 2024 informing him of a force-out distribution if he does not timely return the election form.
The ability to force-out terminated participants with small account balances reduces plan costs and allows the plan to run more smoothly. To illustrate, force-out distributions:
- Lower service provider fees, whether based on plan headcount or assets. For example, a service provider charges $35/participant. You can reduce the overall cost by forcing out any terminated participants below the threshold limit.
- Reduce the probability of needing an audit for the Form 5500. An annual audit is required if the plan has over 100 account balances. Audits range from $7,000 to $15,000 each year. Removing small account balances of terminated participants may prevent your plan from hitting the 100 account balance threshold.
- Decrease the risk of operational errors. Removing small account balances decreases the probability of an error occurring in administering those accounts, which can cost additional time and money.
The plan document does not need to be amended before using the new $7,000 threshold. However, distribution notices and forms should be revised for the $7,000 threshold to ensure participants are aware of the consequences of not timely submitting distribution elections. The plan amendment for this change, along with other SECURE 2.0 changes, isn’t required until the end of the 2026 calendar year.
The force-out increase is a welcome change as other SECURE 2.0 provisions become effective, which may result in an uptick of small account balances. Using the increased force-out limit can help offset additional plan costs and ease operational disruption in connection with the following SECURE 2.0 provisions.
Long-Term Part-Time (LTPT) Employees
Starting in 2024, an individual who has worked more than 500 hours in three consecutive 12-month periods (i.e., LTPT employee) must be eligible to defer pay into the retirement plan (reduced to two consecutive 12-month periods starting in 2025). This change likely has differing impact depending upon the employer: zero impact for some, total game-changer for a few, and somewhere in between for most.
Unless there is zero impact, employers should have a strategy in place on how they are handling LTPT employees in 2024. Employers should evaluate the following factors:
- Confirm that hours have been tracked since 2021.
- Verify the eligibility computation period (ECP) – continue with the anniversary of hire date or revert to plan year? Consider whether to use a separate ECP for full-time employees as compared to LTPT employees.
- Communicate plan information to the affected LTPT employees.
- Potentially change eligibility for elective deferrals for all employees to avoid operational mistakes with LTPT requirements.
Whether allowing LTPT employees to participate or changing eligibility conditions for all employees, this SECURE 2.0 change will likely result in more small account balances for terminated employees. Employers can use the increased $7,000 threshold to lower plan costs and maintain operational efficiency.
Matching Student Loan Payments
In September 2023, many Americans had student loan payments re-start for the first time since 2020. This added burden may negatively affect whether participants begin or continue to defer pay into the plan. If employees must reduce their deferral level or stop altogether, they are unable to take advantage of potential matching contributions.
In 2024, employers have the option, but are not required, to match student loan payments just as they would for elective deferrals. The match rate, allocation conditions and other features must generally be the same whether being made for deferrals or loan payments. Employers who want to help their employees by matching student loan payments should assess the following:
- Feasibility of funding a matching contribution for employees with student loan debt.
- Process for collecting information about student loan payments.
- Impact of matching contributions for student loan payments on both ADP and ACP tests.
Employers who decide to match student loan payments may have an increase in participants with small account balances of just matching contributions (no elective deferrals). When these participants terminate employment, the increased force-out threshold helps remove these balances from the plan to ease administration and lower plan costs.
Mandatory Automatic Enrollment Feature
Although technically not required until 2025, any plans established after December 29, 2022 (date SECURE 2.0 signed) must include automatic enrollment unless an exception applies. Therefore, plans established in 2023 or 2024 will most likely require automatic enrollment starting in 2025.
Unless they satisfy an exception, employers adopting plans in 2024 should consider:
- Implementation of an auto enroll feature upon plan adoption to alleviate any operational disruption in 2025.
- Waiting to implement auto enroll feature until more agency guidance regarding covered employees. For example, will all employees with a deferral rate below the default be subject to the feature or just employees hired after January 1, 2025?
- Potential default deferral rate. The mandatory auto enroll feature must have an initial deferral rate between 3% and 10% of pay with annual escalation until the deferral rate reaches between 10% and 15% of pay. An initial default deferral rate of 10% of pay eliminates the
mandatory annual escalation provision which may reduce potential operational errors.
Wondering if you’ll meet an exception? The two most common exceptions are employers with no more than 10 employees and employers who have been in existence for no more than three years.
Regardless of when the required auto enroll feature is adopted, it will likely result in more small account balances for terminated employees. Using the increased $7,000 threshold to remove these balances may offset increased plan costs associated with the auto enroll feature, lower plan costs and maintain operational efficiency.
Pension Linked Emergency Savings Accounts (PLESA)
The emergency savings account is a great idea for helping employees. The issue is that it needs to be linked to a retirement plan. It will take time to ensure the proper systems and procedures are in place. Moreover, some service providers may make a business decision not to offer this feature at all.
Employers inquiring about PLESAs should understand the following:
- A PLESA is a Roth account only for non-highly compensated employees.
- The account is limited to $2,500 (indexed for inflation).
- Participants must be allowed to take monthly distributions.
- Participants cannot be charged for the first four distributions.
It will take significant time and resources to build the systems required to handle PLESAs, and operational errors are likely. For example, the $2,500 limit is the balance limit, not an annual contribution limit. Our industry has rarely, if ever, had to monitor such a limit. In addition, monthly distributions are not common practice in this industry.
For employers who add the PLESA feature, there will need to be a mechanism for removing these accounts from the plan when employees terminate. It is likely that the force-out provisions will be used to establish a Roth IRA for the affected participants.
A plan’s force-out provisions have always assisted in reducing plan costs and increasing operational efficiency. The increased threshold up to $7,000 is a great addition to other SECURE 2.0 changes that may increase costs and operational burden.
Wishing you all the best on your New Year’s resolutions (whether plan-related or not)!
Brian Furgala is Senior Director, Retirement Services Strategy for PenChecks, a leader in outsourced retirement plan distribution processing and Automatic Rollover/Missing Participant IRAs and related services. His broad experience as an ERISA attorney and senior executive for several leading retirement plan service providers gives him a unique perspective on the industry.
The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.