New year = New proposed rules impacting retirement plans
New plans required to have automatic enrollment
SECURE 2.0 generally requires a new 401(k) plan to contain an “eligible automatic contribution arrangement” (for example, new plans must include at least a 3% automatic withholding percentage). Employers creating or buying companies need to be particularly mindful of this requirement. There are several exceptions that might apply but this is (and will be) an easy requirement to miss for employers engaged in heavy merger and acquisition activity.
The proposed rules related to automatic enrollment would provide in part that (a) the determination of whether a plan with a cash or deferred arrangement satisfies the automatic-enrollment requirements (and therefore fails to be “qualified”) is made on a plan-year basis; (b) amounts contributed pursuant to the automatic enrollment feature and for which no investment is elected by the employee must be invested in accordance with the qualified default investment alternative regulation; (c) the automatic enrollment requirements do not apply to a plan for a plan year if, as of the beginning of the plan year, the employer maintaining the plan has been in existence for less than three years; and (d) an employer who adopts a multiple employer plan will generally be required to comply with the new automatic enrollment requirements. The proposed rules include a number of other potential changes.
Roth catch-up requirement for those making more than $145,000
Section 414(v)(1) of the Internal Revenue Code allows a 401(k) plan participant who reaches age 50 by the end of the tax year to make “catch-up” contributions. Section 603(a) of SECURE 2.0 set forth a new requirement in Code section 414(v)(7)(A) that catch-up contributions for certain participants must be designated Roth contributions. Specifically, for a catch-up eligible participant whose wages for the preceding calendar year (from the employer sponsoring the plan) exceed $145,000, their catch-up contribution must be a designated Roth contribution. This is the new “Roth Catch-Up Requirement.”
The proposed rules related to the Roth Catch-Up Requirement would permit a plan to provide that a participant who is subject to the requirement is deemed to have irrevocably designated any catch-up contributions as Roth contributions. This allows plan administrators and employers to treat an election by an impacted participant to make catch-up contributions on a pre-tax basis as an election to make catch-up contributions on a Roth basis, assuming certain requirements are satisfied.
Also, under the proposed rules, an individual who did not have any FICA wages from the employer sponsoring the plan for the preceding calendar year would not be subject to the Roth Catch-Up Requirement in the current plan year.
And finally, where mistakes are made executing the Roth Catch-Up Requirement (e.g., deferrals for a participant are made on a pre-tax basis when they should have been made on a Roth basis), the proposed rules provide correction guidance — including deadlines that would apply — to allow for a correction of the error. The proposed rules include other potential changes, beyond those briefly mentioned here.