Plan Document Amendments
As part of the Consolidated Appropriations Act of 2023, SECURE Act 2.0 was signed into law on December 29, 2022, and is one of the most comprehensive pieces of retirement plan legislation ever enacted. As your qualified retirement plan’s Third Party Administrator, we are responsible for assessing the bill’s provisions, implementing mandatory features, and making recommendations on optional features that best support the interests of our clients and their plans.
The following is an overview of those provisions and their bearing on the plans administered by Ingham Retirement Group.
Long Time Part Time Workers
Effective 2024 (with 2025 Modification)
Employers must allow part-time employees with at least 3 years of service, who complete at least 500 hours of service in each consecutive year to be eligible for the plan’s 401(k) provision. The employer is not required to provide matching and/or nonelective contributions to these employees. Years worked prior to 2021 are excluded.
Additionally, SECURE 2.0 Act modifies this provision effective 2025 for long time part time workers with 2 years of service, who complete at least 500 hours of service in each consecutive year to become eligible for the 401(k) plan.
Catch-Up Contributions – Roth Catch-Up
Effective 2026 (Postponed from 2024)
Any owner or employee with gross wages/earned income in excess of $145,000 (indexed) in the prior year must designate any age-50 catch-up salary deferral contributions as Roth rather than pre-tax.
Optional Provisions: Ingham Elects to Default
Hardship Self Verification
Effective Q4, 2023
Your employees will be responsible for self-certifying the existence of a hardship and the amount to withdraw. Each employee will not need to provide supporting documents to the employer or Third Party Administrator (TPA). The participant will need to retain the documents in their personal financial files to provide to IRS if audited. The Employer, Plan Sponsor, and TPA will not be responsible for collecting the supporting documents.
Terminal Illness Distribution (Exempt from Penalty Tax)
A distribution resulting in separation of service in connection with a terminal illness is exempt from the 10% IRS penalty tax for early distributions. Terminal illness means you have been certified by a physician as having an illness that can reasonably be expected to result in death in 84 months or less.
Small Deferral Incentives
Employers may choose to provide small incentives during 401k enrollment meetings to entice new hires to join the 401k plan. Employers may offer de minimis financial incentives like gift cards in small amounts.
No Top Heavy for Otherwise Excludable Employees
Employers with employees under age 21 or with less than one year of service may perform the top-heavy test separately on the non-excludable and excludable employees and thus will likely avoid providing a 3% top-heavy employer contribution to those employees with less than one year of service.
This removes the financial incentive to exclude employees for a one-year waiting period from the 401(k) plan and should increase retirement plan coverage to more workers.
Raising Cash-out Limit to $7,000
Terminated employees with a balance under $7,000 will be forced out of the plan. A notice will be sent to each with options to distribute, or else their balance will be distributed automatically to an IRA Force Rollover account.
Domestic Abuse Withdrawals
Employees requesting a withdrawal and certifying the need due to domestic abuse will be approved for processing from the employee’s hardship available sources. The withdrawal amount is limited to the lesser of $10,000 or 50% of the participant’s account. A distribution made under this provision is not subject to a 10% tax on early distributions. Additionally, a participant has the opportunity to repay the withdrawn money to the plan over 3 years.
Catch-Up Contributions – Larger Catch-Ups
The catch-up salary deferral contribution limit will be increased to $10,000 for any participant who was age 60, 61, 62, or 63 for the entire year (i.e., someone who started the year age 59 or finished the year age 64 would not be eligible for the higher catch-up limit for that year).
Long-term Care Insurance Distributions
Starting in Q4 (2025), retirement plan participants may withdraw up to $2,500 each year to cover the costs of long-term care insurance without triggering the 10% early withdrawal penalty.
Optional Provisions: Ingham Elects Not to Default & the Employer Must Elect to Add
Roth Treatment of Employer Contributions
Technically effective starting in 2023, employers may allow employees to have employer contributions designated as Roth. For practical purposes, however, this provision will be difficult for employers and service providers to implement, so further guidance is expected.
- Payroll provider must add new payroll deduction type;
- Plan document must be amended to allow Roth contributions;
- Employer must track each employees’ election choosing to receive the employer provided match or profit-sharing contribution as Roth.
- Employer must coordinate with payroll company to assure contribution taxed in current taxable year.
Employer Match on Student Loan Payments
Employers will be able to match their employees’ “qualified student loan payments” instead of only matching their salary deferral contributions to the retirement plan.
“Sidecar” Emergency Savings Accounts
Employers may choose to automatically enroll non-highly compensated employees (NHCEs) in emergency savings accounts at a contribution rate of up to 3% of gross wages (but capped at $2,500). Contributions to the accounts are made on a Roth basis and may be matched by the employer. Up to four distributions can be taken by an employee from their “sidecar” account per year, and distributions are subject to neither processing fees nor income taxation.
Emergency Savings Withdrawals
One distribution up to $1,000/ year may be available for emergency purposes. Employees may self-certify that they meet the requirements of an “emergency”. An “emergency” is defined as an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses.
Starting in Q1 (2027), Employees contributing to a 401k may be eligible for an IRS tax credit of 50% of their contribution, dependent on their income. The calculation for the credit has been simplified and applies to low and middle-income individuals.
Timing of the Amendment to Include SECURE Act 2.0 Changes
Plans must comply operationally per effective dates mandated by the Act even though formal plan amendments will occur later.
Plan amendments to include provisions under SECURE Act 2.0 must be adopted by the last day of the plan year that begins in 2025 (i.e., 12/31/2025 for calendar year plans, or the first year-end date after 12/31/2025 for non-calendar year plans). The deadline to adopt amendments to include provisions under SECURE Act 1.0 and the CARES Act has been extended to the same 2025 deadline as for SECURE Act 2.0 amendments. In the meantime, plans must be operated in good faith to comply with the provisions of the new laws.
Terminating plans must amend their Plan to include the provisions before these dates. The required language will be provided by the document team.