SECURE Act 2.0, which was signed into law on December 29, 2022, introduced many changes in the rules for qualified retirement plans and IRAs. Most of the changes are optional for employers. If your small business has a 401(k), now’s the time to learn what you could do for your plan in 2024. Here are some of the changes to consider (there are others not discussed here):
Starter 401(k)s.
Employers with no retirement plan can offer a starter 401(k) plan requiring that all employees be automatically enrolled in the plan at a default deferral rate of 3 to 15% of compensation. The limit on annual deferrals is the same as the IRA contribution limit (the limit for 2024 is not yet known), with an additional catch-up contribution beginning at age 50. No employer contributions are required.
Replacing SIMPLE accounts with a safe harbor 401(k) plan.
An employer currently using a SIMPLE IRA may choose to replace it with a 401(k) plan that requires mandatory employer contributions (referred to as a safe harbor 401(k) because nondiscrimination testing is not required).
Emergency savings account linked to the 401(k).
Called a Pension-Linked Emergency Savings Account, or PLESA, this is a separate savings account tied to a 401(k) to which non-highly compensated employees can make after-tax contributions (a la Roth accounts). Employers can make matching contributions, but they don’t go into the PLESA; these contributions are in the regular 401(k) account. The maximum balance in the PLESA cannot exceed $2,500 (or a lesser amount set by the employer). Employees must be permitted to withdraw funds at least once a month with no fees on the first four withdrawals in the year. The money can be used for any purpose and the withdrawal is taxed like other Roth distributions.
Withdrawals for certain emergency expenses.
A 401(k) plan may permit withdrawals of $1,000 per year for an unforeseen or immediate financial need related to personal or family emergency expenses. The withdrawal is not subject to the 10% early distribution penalty and the amount withdrawn can be recontributed within 3 years.
Student loans treated as elective deferrals for purposes of matching contributions.
Employers may choose to make matching contributions for employees repaying their student loans. For purposes of the nondiscrimination test applicable to elective contributions, the plan is permitted to test separately the employees who receive matching contributions on student loan repayments.
Penalty-free distributions to domestic abuse victims.
The plan may allow those who are victims of physical, psychological, sexual, emotional, or economic abuse to take withdrawals up to the lesser of $10,000 or 50% of their account balance, with the option of recontributing the funds within 3 years. If the plan adopts this option, it can also allow for self-certification about the abuse.
Pooled employer plans.
If you are in a pooled employer plan (PEP)—a group 401(k)—you may designate a named beneficiary other than yourself (the employer) to collect contributions to the plan. This fiduciary must implement written contribution collection procedures. If you use an outside payroll company, check whether they are offering this option.
Mandatory distributions.
Through 2023, you are permitted to transfer account balances of former employers into IRAs if their balances are between $1,000 and $5,000. Starting in 2024, the limit increases from $5,000 to $7,000.
Conclusion
Deciding what to do or not do with respect to a 401(k) plan isn’t a DIY activity. Be sure to discuss your 401(k) plan with your CPA, benefits expert, or other professional to ensure you have explored all your options and have made the best decisions for your situation. If you don’t yet have a 401(k) plan, look closely at the starter 401(k) option.
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