Articles | August 7, 2023
Get ready for a deep dive on all things SECURE 2.0.
Our discussion focuses on the hottest topics surrounding this landmark retirement legislation — which contains roughly 90 separate provisions, each with its own effective date over the next three-plus years. Which provisions are mandatory and which are optional? Are you savvy about the details of the emergency savings program? How about the student loan repayment program? We’ve got answers to the most pressing questions on the minds of DC plan sponsors. Listen now.
Announcer: Governance, operations, investments, compliance. These are the four pillars of risk that define contribution plan sponsors need to stay up on every quarter. We're going to be giving you the scoop, the skinny, the lowdown on all the latest developments in the field; everything you need to know to stay current and informed. We're going to be talking regulatory issues, best practices, investment strategies, all of it about what it all means and more important, what it means to you. So put on your swimsuit. We're going to be doing some deep dives. Welcome to the Retirement Plans Insider from Segal.
Rick Reed: Hello everyone and welcome to episode two of the Retirement Plan Insider podcast. Today's topic is Secure 2.0. This long-awaited bill became law back in December of 2022 and introduced many new compliance challenges and considerations for plan sponsors. The culmination of this multi-year bipartisan effort contains roughly 90 separate provisions, each with its own effective date over the next three plus years. Some of the provisions are mandatory, while others are administrative and optional. I'm Rick Reed, vice president and defined contribution practice director at Segal.
Jarred Wilson: I'm Jarred Wilson, vice president and consulting actuary at Segal. And today we are joined by Julia Zuckerman, vice president in Segal's Retirement and Health Compliance Practice. Julia is going to discuss a few specific provisions under Secure 2.0 that relate to defined contribution plans. We'll focus on the various options available to plan sponsors and making changes to their retirement programs that can help participants juggle short and long-term financial needs.
Rick Reed: So let's dive further into Secure 2.0 and the hot topics that are important to this retirement legislation.
Julia Zuckerman: I think the takeaway is the evolution of the required beginning date under the statute where because of mortality increases, or I don't know how actuaries would say that because people are living longer. We want to give people more time to accrue benefits and before they need to start taking their distribution. So what Secure 1.0 now we're calling it or the original Secure Act was moved the required beginning date to age 72 from age 70 and a half and of course did not get rid of the still working, so-called still working rule where a plan can be designed to allow workers to put off taking their distributions until the calendar year after they terminate Secure 2.0. Also left still working provision intact, but changed the required beginning date, moving it even further back. So now for any individual who had not turned 72 by the end of the last calendar year 2022, their RBD is age 73 and then the required beginning date's going to increase to age 75 in 2033. So we have some time before we get there.
Julia Zuckerman: Something important for plans to keep in mind is that this is just the last date that a plan has to force participants to take distributions. A plan can have its own required beginning date anytime after normal retirement age. So that's something to consider from a plan design and drafting perspective, whether you want to use the latest beginning date, and plans certainly don't have to. So it's kind of confusing because it's called a required beginning date. You think, oh, this is the only time you can force people out. No, it's the statutory required beginning date. A plan can have its own date before that time.
Rick Reed: We're moving it from 70 and a half to 72 and then they came back, what, two years later and said, let's extend it even further. Do you think that was a correction? What changed that made them in your opinion, move it further out? I mean-
Julia Zuckerman: I think that was-
Rick Reed: ... did they miss the boat the first time around?
Julia Zuckerman: No, I think that that was always the plan. Secure 2.0 has been called Secure 2.0 since even before the ink dried, so to speak, on the original Secure Act. So I think that the idea was with people living longer and query whether that's still true in light of the mortality experience of the COVID Pandemic, but with the idea being that as people live longer, they should be able to keep their money in the plan for longer. Why certain provisions got into Secure that didn't get into... Sorry, didn't make it into secure the original Act and then made it into Secure 2.0 has to do with a lot of legislative maneuvering. But for the required beginning date, I do think that it was always in the plan to extend it and there were different permutations of how it would be extended gradually or just in one chunk or whatnot. But ultimately this is what made it across the finish line.
Rick Reed: The way I looked at Secure and Secure 2.0, their main purposes were like for... The original Secure Act, the main purpose seemed to be improving access to savings, getting people to save more and be more retirement ready. There was also the element of simplifying plan administration and then Secure 2.0 kind of went in, seemed to be focused on correcting some of those things, giving more guidance. I've had a lot of questions from clients about these simplification methods. I think the other two components that are most important are emergency savings and student debt. That's where all of my discussions have been with clients for the most part. So I don't really know what my question is there, but
Julia Zuckerman: Are there particular simplification points that your clients have been asking about?
Rick Reed: Like automatic enrollment failures. You know, you've missed people. That's been an area that some clients have said, how is that making my life better?
Julia Zuckerman: Well, I don't know if it's making every plan sponsor's life better to require open enrollment... Sorry, automatic enrollment for new newly created plans. Most, well, I don't know across our book business or generally, and Rick you may know this, most plans I look at have automatic enrollment just because why would you not? It's a really good way to encourage people to save without even thinking about it. But for some plans that don't or some plan sponsors that don't and creating a new plan, this might be a new and not desirable feature for whatever reason that they now have to have administrative capability for. Again, the plans that I look at already have this feature so I don't see it as such a big change.
Rick Reed: I mean, agree, a lot of our plans, a lot of the larger plans do have it. We are getting questions about it. For example, it's kind of by industry retail clients typically don't have it, but they're very interested in what it would take to implement it, but they want to do it so it's not administratively difficult.
Julia Zuckerman: Right.
Jarred Wilson: Yeah, I would say I guess I have seen more plans, not more plans, but just a decent number of plans that still don't have auto enrollment. And I mean typically I think the reason is driven around cost. It's a great way to get people to start saving without even thinking about it. But considering if your plan design does have a match, sometimes that could be a very expensive amendment for the plan sponsor to make if they're not yet ready to do.
Rick Reed: I'm dealing with that exactly with a retail Fortune 500 client, they have very high turnover and they want automatic enrollment, but they want to keep their safe harbor plan. They don't want their cost to triple or something of that nature. So it's just a balancing act and it can be difficult for some.
Jarred Wilson: Kind of switching topics a little bit. There's a lot about Roth and Secure 2.0 that I know people have already had questions on Roth contributions and catch-up contributions and in some situations those two topics combined. So what do you think are the biggest items to come out of Secure 2.0 with regard to Roth contributions? I mean a big one for example is that catch-up contributions for certain people must now be designated as Roth contributions, which on its own may sound simple enough, but there's a lot of potential issues that could arise for plan sponsors there.
Yeah, that's correct. And I think the issues would seem to be administrative in nature, like how are catch-up contributions identified? Is there certain coding that will need to be created to identify them and characterize them as Roth? There are plans that don't have any Roth treatment of contributions at the moment, and so they would have to add that for purposes of catch-up contributions. So this is kind of one of the nitty-gritty parts of the Secure 2.0 implications where plan sponsors need to go through their documents and see what needs to change, both in terms of an amendment as well as the administrative aspect for the catch-up contribution treatment as Roth.
Jarred Wilson: And the participants that are subject to this new rule are participants that earn over $145,000 in a year.
Julia Zuckerman: Yes, I should have mentioned that. The exception for the catch-up contributions needing to be characterized as Roth is for people who earn $145,000 or less and that number is indexed annually.
Jarred Wilson: Right. And actually this new rule doesn't start until 2024, so by that time the earning threshold will be different, and will have increased a little bit from the 145.
Julia Zuckerman: I should also mention on Roth that as a design option, Secure 2.0, now lets defined contribution plans give participants the option of receiving their match on a Roth basis and that availability is immediate. That provision went into effect on the day that Secure 2.0 was enacted December 29th, 2022. So that's an option that might be attractive to some plans depending on their workforce demographics, I guess.
Jarred Wilson: So would you say broadly a lot of these rules are just the continued encouragement of Roth as an approach to making contributions towards your retirement and encouraging more people, or at least giving more people the ability to choose to put money away on a Roth basis versus a more traditional pre-tax basis?
Julia Zuckerman: Yeah, I think more broadly there are required aspects of Secure 2.0. I don't mean to suggest that there aren't, but largely of the 90 something provisions that Secure 2.0 contains most are voluntary design features, design and administration features with the overarching goal of nudging participants toward greater retirement savings and giving them greater flexibility within which to do so. I think that the Roth provisions kind of fall along those lines where if you think that that treating match contributions in your account on a Roth basis will be advantageous to you and your employer cares enough to amend the plan to allow for it, then great. That could be a vehicle for increased savings and that's every provision looked at on its own, like okay, well how much is that going to make a difference? It depends on a person's tax bracket at the time they retire, but there are a lot of different variables there. But taken together with all of these other both required and permissible provisions is intended to increase retirement savings overall.
Jarred Wilson: So regarding catch-up contributions in addition to this Roth feature that's now going to be a part of those contributions for certain individuals. There's the catch-up limit itself, which there's an interesting provision that increased this limit for participants nearing retirement age to give them even more ability to put away additional funds towards their retirement than they otherwise would be able to. And this limit increase applies to participants age 60 through 63. And from what we can tell, that's not a glitch, that was not an error. That that's truly the intention that for participants age 64 and older, their limit kind of goes back down to the regular limit for other folks ages 50 through 59. Is that correct, and do we know the reasoning or the logic behind that provision?
Julia Zuckerman: Yeah, that is correct. And it's a little weird, not necessarily intuitive to explain, you can make higher elections and then once you turn 64, just kidding, no more increased catch-up contributions. I don't know the legislative history specifically behind that provision. I've got to think that there are data out there identifying that age bracket as a particularly hot time to make catch-up contributions just given people's retirement patterns and like there may be an arbitra... Well, there's always an arbitrary nature to age cutoffs, but that is in fact how the increased catch-up contributions work. So it goes back to the regular catch-up contribution level when a participant turns 64.
Rick Reed: Two things that I'm most interested in talking about are the things again that my clients are asking about, and those are around the establishment of emergency savings and the student loan repayment programs. So I guess, Julia, let's talk about emergency savings. Can you talk a little bit about what this provision is and if it's mandatory or et cetera?
Julia Zuckerman: Yeah, so there are a couple of provisions that relate to emergency savings, and this comes from the idea that things come up in people's lives, economically difficult times and that people may be reluctant to contribute to retirement accounts if they are concerned about day-to-day cash flow liquidity for some emergency situation that might come up. So what Secure 2.0 does is create two different approaches or two different plan design options for employers to help employees access small amounts of their funds in case of financial emergencies. One of the options is being called a sidecar because it's an option for employers to offer their non-highly compensated employees, an emergency savings account that's actually linked to their retirement account whereby employers could, and this is not required, it's permissive, opt employees into these emergency savings sidecars at up to 3% of their salary with the portion of the account that is comprised of employee contributions being capped at 2,500 or a lower amount if an employer wants to make it at a lower dollar value.
Julia Zuckerman: And then these contributions are treated as elective Roth contributions for purposes of the match, if the plan has a match feature and that way there's like a built in part of the retirement savings plan that is allocated toward emergency savings. It's not a tremendous amount. We're talking about $2,500 max, but that's one vehicle. And then the other option is more straightforward. It's really just a distribution that employers can allow their participants to take without paying the early distribution penalty.
Julia Zuckerman: And this is for small amounts up to $2000 a plan sponsor could allow participants to take out of their DC plan once every three years, and then the participant has the option of repaying that amount within three years and there is a prohibition on participants taking out another 1000 unless the earlier 1000 they've taken out has been repaid or the three years have passed. So kind of a check on people using their retirement accounts as a debit card type of situation. But both these options are effective for distributions that are made after the end of this year, 2023. So these are design features that may be attractive for some employers to consider, especially if they're seeing low uptake of their defined contribution plan and they think that one of the reasons for that is people's concern about needing cash for emergency on hand.
Rick Reed: Why would a plan sponsor want to take advantage of it, things of that nature. I don't know if that's really for you to answer or what do you think?
Julia Zuckerman: Yeah, I think it's hard to... It's very individual decision for plan sponsors given their population and dynamics. Whenever we talk about taking money out of a retirement account, that's, what's the word you guys use? Leakage, right?
Rick Reed: Right.
Julia Zuckerman: That's not good. It's not good to be tapping your retirement funds for some sort of emergency health issue that you run into and it would be better to live in a society where people didn't have to make those kinds of choices. But there's also a reality and the potential for increasing savings if people have this type of flexibility and they know that they're not stuck or stuck paying a penalty if they do need to take out their funds.
Jarred Wilson: Yeah, I know, because even plans where there's no loan option can be viewed by participants as, I guess scary to say that they know once every dollar they put in, that's it, they can't touch it for maybe another 30 years. So yeah, I agree. I think this feature could encourage more people to participate in plans knowing that if something extreme comes up, if an emergency comes up, they can now tap into these savings.
Julia Zuckerman: A lot of plan sponsors I've talked to about the emergency savings are like, no way. I don't want to encourage people to take their money out of the plan, and I don't think that that's going to make people contribute more. I don't know whether that's a widespread thought and time will tell how much uptake there will be of these types of provisions. And don't forget that there are also regular hardship distributions that existed before these emergency savings accounts. A plan doesn't have to, but it can allow participants to receive hardship distributions. Those are more specific for specific reasons, although self-certification is now allowed, so it's not as hard, no pun intended, to get a hardship distribution out of your plan as it used to be. But still there are kind of specified hardship reasons, whereas for emergency savings we don't have regs. But the thinking is not that it would have to fit into a certain emergency category to qualify.
Jarred Wilson: That was one of my questions, actually more for you Rick, is that have you seen that historically where plans have experienced some negative feedback from participants who feel they are in an emergency, a hardship situation and would need to withdraw funds, but they don't qualify in the technical sense of actually being of able to take a hardship withdrawal?
Rick Reed: Oh, absolutely. And it happens quite a bit where participants want to be able to tap in and they can't, it sometimes will leave a bad taste in their mouth or a bad experience and might prevent them from continuing in the plan. So having the flexibility I think is important. But not everybody wants to tap into their money, but there's a number of people that just want to know that they can if they choose to.
Jarred Wilson: Right. Sometimes, yeah, that peace of mind is all you need, even if you really have a small percentage that would actually tap into it, knowing they can is important.
Rick Reed: If you go back to the really early times of the introduction of 401ks loans weren't popular, loans weren't really even part of the design. It was when people weren't able to get in that sponsors, started putting them more into the plan to say, you can get it if you want it. Let's talk a little bit about student loan repayments because the employers have been waiting for this for quite some time. Can you talk a little bit about this provision and where you see it going?
Julia Zuckerman: Yeah, so it'll be interesting to see how many employers take Secure 2.0 up on this. Like you said, there has been a lot of chatter over the years. The idea here is with student loan debt rising and at some point the suspension in student loan debt ending that individuals are unable to both make an elective deferral to their defined contribution plan and pay their student loan payment in any given time period. So in that way, they're missing out on any match that the plan might have because they're not making an elective deferral that the match would be based on. So the idea here is to allow plans to make that match based, not on an elective deferral, but rather on the individual student loan payment up to certain amounts. And that way at least the individual gets the benefit of the match, even though they're not making the elective deferral.
Julia Zuckerman: How the mechanics would work, I think is still very much being discussed by record keepers. The statute itself does not contain any sort of certification requirement, but most employers implementing this provision, I would think would want some checks on how that's going to work with verifying payment of student loans. But prior to Secure 2.0, this was really not a design option for most plans in particular safe harbor plans. And now it is. So we'll see. I think a lot of plans are kind of in the consideration phase right now to see if this is something that they really want to offer. I think it depends on demographics. If they're in a area where they have a lot of young professionals, so to speak, with a lot of student loan debt and low participation rates, this could be an interesting benefit and perhaps one that attracts and works toward retaining some of those younger or more junior folks.
Jarred Wilson: We want to thank Julia for spending time with us today to discuss some of the more relevant provisions of Secure 2.0. We truly appreciate Julia's insights and expertise, and we thank you all for listening to us on today's podcast and hopefully you were able to learn a thing or two about Secure 2.0.
Rick Reed: Of course, we've only just scratched the surface of the amount of information that's contained in Secure 2.0. But as we mentioned at the outset, there's a significant number of provisions in the Act that is going to keep plan sponsors, advisors, record keepers, and legal counsel busy over the next few years. Here at Segal, we'll continue to be your trusted resource for any and all questions related to ways to maximize retirement benefits for your workforce. Thanks for joining.
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