Changes to 401(k) Rules in 2024

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Dear Paco,


Legislation passed at the end of 2022, known as the Secure Act 2.0, has brought about significant changes to the rules governing 401(k) plans. These changes aim to enhance coverage and boost retirement savings. One particular change involves the introduction of an automatic enrollment feature.

Automatic Enrollment

Under the new legislation, any business that has been around for more than three years and has more than ten employees must include an automatic enrollment feature in their 401(k) plan if it was established after December 29, 2022.

Automatic enrollment means that employees will be enrolled in the plan at a specific contribution percentage, unless they actively choose to opt out. Studies have shown that plans with this feature tend to have higher participation rates.

Requirements for Automatic Enrollment

For plans subject to the automatic enrollment provision, certain requirements must be met by 2025. These include:

  1. Minimum Initial Rate: The plan must set a minimum initial contribution rate between 3% and 10%.
  2. Annual Increases: The contribution percentage must automatically increase on an annual basis.
  3. Default Investment: The funds from automatic enrollment must be invested in a default option that meets the criteria for a Qualified Default Investment Alternative.

Focus on Roth Accounts

While there are several other notable provisions in the Secure Act 2.0, I want to highlight two concerning Roth accounts.

These changes in the 401(k) landscape are aimed at improving retirement savings options for employees and expanding the accessibility of these plans.

Roth Accounts and New Mandates

A new mandate has been introduced in relation to Roth accounts, specifically targeting higher-income participants. Individuals who earn more than $145,000 at an employer, indexed for inflation, are now required to direct their catch-up contributions to a Roth account. This means that the $7,500 catch-up contribution for those over 50 years old will no longer be made on a pretax basis.

Implementation of these Roth-related provisions may be delayed due to the need for plan document modifications and the establishment of proper record-keeping and administrative functions. The Internal Revenue Service (IRS) has already postponed the mandatory implementation of the Roth catch-up provisions until 2026.

One aspect of the Roth catch-up requirement in SECURE 2.0 seems to indicate that if a plan does not include a Roth account to receive catch-up contributions from individuals earning $145,000 or more, no employees would be able to make catch-up contributions, regardless of their income level. Although the IRS guidance delaying the provision until 2026 does not explicitly address this issue, it suggests that catch-up contributions will continue to be allowed for employees with an income level below $145,000, regardless of whether the plan includes a Roth provision.

Apart from these changes to Roth provisions, there may be other adjustments to your plan. These changes could include higher limits for when a plan can force former employees with a small plan balance to take a distribution, more lenient terms for hardship distributions, and the inclusion of longtime part-time employees in your plan.

If you have any questions or inquiries for Dan, please send an email to him with “Q&A” in the subject line.

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