Over the past couple of weeks, news reporters and political pundits have published hundreds, if not thousands, of articles and analyses explaining the provisions within the SECURE 2.0 Act of 2022. The bill, which is part of President Biden’s larger omnibus spending bill, spans hundreds of pages and includes 92 separate provisions related to both retirement plans and retirement planning.

Even with all the coverage this important legislation has received, a few things may have been lost in the shuffle that advisors and plan sponsors should be aware of as the bill’s numerous effective dates approach.

How will the new “Saver’s Match” mechanics work?

Section 103 of the SECURE 2.0 Act repeals the Saver’s Credit and replaces it with the “Saver’s Match.” Instead of a nonrefundable tax credit paid to taxpayers based on contributions made to their retirement plan and/or IRA account, this would become a federal matching contribution that must be deposited into a taxpayer’s IRA or retirement plan.

Two things advisors and plan sponsors – and the U.S. government, for that matter – need to consider are, how do we ensure that people put these matching funds into a retirement account? Will the Saver’s Match work as an automated deposit into one’s account (a potential administrative nightmare) or will it be a payment sent to taxpayers that they are supposed to deposit into their retirement plan account? My worry with the latter option is that these contributions won’t end up in the intended account and instead just get used like the previous tax refunds.

The other issue SECURE 2.0 attempts to address is overall usage of the credit/match. Surveys have indicated that only half of U.S. employees are aware of the Saver’s Credit, and 2019 data shows that only 6.1% of taxpayers claimed the credit that year.¹

Section 104 of SECURE 2.0 covers promotion of the Saver’s Match, highlighting the need to raise awareness of the match and reminding taxpayers that they could potentially incur penalties if they withdraw the funds. While there clearly needs to be greater awareness of the match, it seems to me that the Treasury Department will need to walk a fine line with their promotion, as highlighting penalties may further dissuade taxpayers from taking advantage of this benefit.

As for plan sponsors, they will need to think about how they want to communicate this change to participants to make sure they take advantage.

Can 403(b) plans use CITs?

Several articles over the past couple weeks have covered section 128 of SECURE 2.0 – specifically the idea of 403(b)s being able to use collective investment trusts (CITs) as an investment option. As you may recall, 403(b)s have only been able to use annuity contracts and mutual funds in the past – and with SECURE 2.0, this is still the case. While many articles have noted that CITs are now available for 403(b)s, SECURE 2.0 only made the necessary Internal Revenue Code changes to permit 403(b) plan investments in CITs; the corresponding security law changes, such as the exemption from registration, have not been made.

At this point, a couple of deterrents still remain. First, Section 3(c)(11) of the Investment Company Act of 1940 needs to be updated to exclude CITs that hold assets of 403(b) plans from the definition of “investment company.” Second, Prohibited Transaction Class Exemption 77-3, which permits a plan to invest in a mutual fund that pays compensation to a plan fiduciary or an affiliate, notwithstanding the potential conflict of interest, would need to be updated to include CITs.²

Many are hoping that these updates can be made via legislation in 2023. But for now, it’s important to understand that the situation with 403(b)s and CITs has not changed.

How long for long-term part-time employees?

The SECURE Act 2.0 – and its predecessor, SECURE 1.0, passed in 2019 – have done and will do a lot more to increase access to retirement savings vehicles for Americans. SECURE 1.0 required that employees who worked at least 1,000 hours in a single year or those who worked over 500 hours in three consecutive years be able to participate in a company’s retirement plan in plan years beginning in 2024. Section 125 of SECURE 2.0 improves on this for long-term, part-time (LTPT) employees, as it updates the 500-hour/three-year rule to two years.

The question plan sponsors may have is, “When do we need to start tracking long-term part-time employees, and when would we then need to make sure they have access to the plan?” (I will admit that I’ve gone over this one in my head several times, trying to sort out the different periods as well as application for different plan years.)

At the end of the day, the important thing to keep in mind is that the three-year rule applies to plan years beginning in 2024, while the new two-year rule will apply for plan years beginning in 2025. Plan sponsors should therefore start the tracking process sooner rather than later to ensure accurate counts and timely access for employees.

Age 50+ catch-ups for employees making $145,000+

SECURE 2.0 did several things to change catch-up contributions and give taxpayers flexibility as to whether they’d like to make pre- or post-tax contributions. Section 603, however, takes that decision out of the hands of those who earn more than $145,000. For these taxpayers, their catch-up contributions can only be in the form of Roth contributions. This is the case for catch-up contributions for those over age 50, but also for the new “enhanced” $10,000 catch-up contribution available for those age 60-63.

This provision is considered a revenue raiser as far as SECURE 2.0 is concerned. And as with any of these types of provisions, it creates a number of tax and financial planning opportunities for financial professionals and their clients. Whether they make more or less than $145,000, all clients should review how they make these catch-up contributions and how it affects their level of tax diversification.

Student loan matching

One final provision that many are excited about, but which may raise several questions, is Section 110, which introduces the optional treatment of student loan payments as elective deferrals for purposes of matching contributions. This would allow employers to provide a matching contribution into a participant’s retirement plan account (401(k), 403(b), 457, or SIMPLE IRA) for payments made toward qualified student loans.

The most common question is, when would the matching contributions be made into a participant’s account? Some have said it could be done as one large contribution at the end of the year, while others have noted that this matching contribution could take place after the plan year.

Further complicating matters is the fact that the definition of “qualified student loan payment” is quite broad, as it includes payments on loans incurred to pay higher education expenses, and employers may choose to rely on employee certification of those payments. It will be interesting to see how employees opt to define loans incurred during their pursuit of higher education and how plan sponsors decide to document or verify payments made by employees.

The bottom line is that plan sponsors who choose to provide matching contributions for participants who make student loan payments will need to work with their recordkeepers to figure out what options are available and how best to account for these contributions.

Conclusion

As we approach the numerous effective dates in SECURE 2.0, more wrinkles will undoubtably emerge. Many of these issues will require guidance from the IRS and significant time to be sorted out (remember the 10-year rule on inherited IRAs?). Knowing where these possible issues stand will be key to the financial planning process and the administration of retirement plans. So while I would encourage you to monitor any updates on SECURE 2.0 closely in the months ahead, my hope is that this article will help you start the conversation with clients about how the legislation may impact their retirement plans.

IMPORTANT INFORMATION

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.