SECURE 2.0, Part 1: Tips for DC plans navigating contribution changes

When the SECURE 2.0 Act passed in late 2022, it introduced 92 provisions affecting retirement plans—and created a long to-do list for plan professionals. In this episode of Critical Point, Milliman employee benefits expert Nina Lantz talks with Brandy Cross, our director of defined contribution (DC) plan compliance, about how DC plans are coping.

Learn which provisions plan sponsors are addressing first, and why it’s OK to wait before making plan changes. Plus, don’t miss Nina’s companion episode on SECURE 2.0’s impact on defined benefit plans.

Transcript

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Nina Lantz: Hello and welcome to Critical Point, brought to you by Milliman. My name is Nina Lantz, Principal and Director of Milliman's Employee Benefits Research Group, and I'll be your host today. In this episode of Critical Point, we're going to talk about how SECURE 2.0 expanded contribution options for defined contribution (DC) plans, whether those changes are required or optional, and what the implementation challenges are.

Joining me today is Brandy Cross, Principal and Director of Milliman's DC Compliance Group. Hi Brandy.

Brandy Cross: Hi Nina. Thanks for having me today.

Nina Lantz: So SECURE 2.0 was passed last December as part of the Consolidated Appropriations Act of 2023, and the law contains over 90 retirement-related provisions. In a separate Critical Point we talk about the changes in SECURE 2.0 that impact actuarial calculations for single-employer defined benefit plans, but today Brandy and I are going to talk about the impact the new law has on defined contribution plans.

So, Brandy, you recently published an article covering some of the contribution provisions of the new law. Can you briefly just tell us about them?

Brandy Cross: Absolutely. So, the article that I wrote contains five main provisions that specifically affect how money is going to get into, as contributions, DC plans. So basically speaking, those are:

1. The ability for employees to treat employer contributions, either match or nonelective, as Roth contributions. That provision is effective right now and is a voluntary or optional provision plan sponsors can elect into their plans.
2. We also have the ability for an employer to match qualified student loan payments. That provision starts in 2024 and is another voluntary or optional provision.
3. There's a requirement for catch-up contributions for those making over $145,000 to be made as Roth contributions starting in 2024, an interesting provision we'll talk a little bit more about later. It is mandatory, assuming that plan allows for catch-up.
4. There's an increased catch-up limit for those between the ages of 60 and 63. That starts in 2025 and is an optional provision if, assuming again, the plan allows for catch-up contributions.
5. And finally, a requirement for new DC plans that are put into effect after the enactment of SECURE 2.0, or new participating employers that join an existing multiemployer plan after that date, where they need to include an automatic enrollment and escalation feature starting after 2025. So that is mandatory for those new plans after that effective date.

Which SECURE 2.0 provisions are DC plans addressing first?

Nina Lantz: As you've been telling clients about these changes, which ones have they been most interested in?

Brandy Cross: We're really hearing from our consultants and our clients that they're most interested in just two of these provisions right now: the Roth catch-up contributions for those making over $145,000, and the matching option for student loan payments.

The one that interests me most, being in the compliance side of the arena, is our mandatory Roth contribution catch-up treatment for those making over $145,000, and really it’s less of a plan design issue that we're seeing, as most of the plans that we administer already have Roth contributions in them, they already have catch-up provisions in them, so that's a nonissue. It's really just how are they going to function, and how are participants going to be included in these changes that will happen to their catch-up contributions that they're used to making. However, it should be noted that really we have a lot of plans still in our smaller markets that don't have Roth provisions in them, so they're going to have to make sure that they're including and adding Roth provisions into their plans in order for their highly paid participants to continue making those catch-up contributions they're used to.

I was talking with one of our relationship managers the other day, and she mentioned that she'd been doing some investigation into her larger defined contribution plans, and she identified that on average 60% of all of the participants that were currently making catch-up contributions are over that $145,000 compensation limit, so that's going to be a significant number of people that are impacted by this change.

Elective deferrals and catch-up contributions

Brandy Cross: The provision also changes, and is interesting, in our Taft-Hartley multiemployer market, where some of these plans have been adding 401(k) features, mostly due to kind of the cumulative nature of their compensation and how this will be communicated when they change employers in this type of a plan. Our senior consultants in that space are working closely with plan attorneys to develop strategies around how to implement this provision.

From my perspective on this one, this is one where we need significant guidance. I think a lot of people are thinking about this provision on how monies will get into the plan with a participant election on a payroll-type basis, but as we all know, kind of—or those of us in the industry know—that's not the only way that money becomes catch-up, that initial election. Really, in order for elective deferrals to become considered a catch-up contribution under the regulations, you actually have to hit a limit. So for most employees or most participants that'll be the 402(g) or max deferral limit, and we switch over and those contributions become catch-up.

But in several instances, monies that would be otherwise just regular employee deferrals end up being able to be reclassified as catch-up contributions when, for instance, plan-imposed limits are hit, other statutory limits such as annual additions or what we call the 415 limit, and then a lot of elective deferrals become catch-up because of average deferral percentage (ADP) testing or nondiscrimination testing failures. So some of the regulations some of us are looking for around those are specifically what happens when monies that were otherwise elective deferrals become catch-up, and how will that Roth treatment for those over $145,000 really be impacted? I think a lot of us are assuming that that will be sort of like an in-plan Roth conversion in the next year, but it remains to be seen.

Challenges surrounding SECURE 2.0’s student loan matching provision

Brandy Cross: The other topic I think that we're hearing a lot about from our plan sponsors as our consultants go out and talk to them about these different provisions, like I said, is that student loan matching provision. This is of particular interest for our plan sponsors that tend to hire those with advanced or higher education degrees, many of them in professional services firms or the healthcare service industry. For employers, they're seeing this as a way to attract and retain potential employees, making sure that their overall benefits package that they're giving is competitive in today's job market, and those industries in particular are seeing a lot of interest in that, especially our doctor groups that are hiring those where they're coming out of school with a lot of student loan debt. That's really a place that we're seeing them want to focus on this and really consider putting this in pretty early in the process.

We do make sure that they understand that the match would be exactly the same for someone that's eligible for regular matching contributions made to the plan, subject to the same vesting schedule. It really just is what the deferral is considered, not your employee deferrals, but that student loan payment.

We do see a lot of challenges around this one, though, specifically kind of related to the identification and certification of those payments. SECURE 2.0 does allow for the self-certification on an annual basis, so it may just be that some of the provisions we're looking at are—while your elective deferral match may go in on a payroll basis, these may need to be on an annual basis so we can investigate that self-certification option, or what plan sponsors will really be comfortable with in that space.

Nina Lantz: But as far as the self-certifications go, doesn't SECURE 2.0 allow plans to use self-certifications for hardship distributions? So would you want those with student loan payments to also self-certify?

Brandy Cross: Yeah, it definitely does. Like I mentioned, SECURE 2.0 does specifically allow for self-certification of that employee for these provisions and, as you mentioned, both the Setting Every Community Up for Retirement Enhancement Act (SECURE 1.0) and the Coronavirus Aid, Relief, and Economic Security Act (CARES), as well as SECURE 2.0 for the hardship distributions, definitely allow for self-certification. It feels a little different, when you're self-certifying, getting access to funds that were otherwise yours and taking money out of the plan. Whereas otherwise, on the flip side, for the student loan payments, the participant would be self-certifying their contributions or their loan payments in order to get a matching contribution into the plan. We're just seeing plan sponsors maybe be a little leery of that, depending on the exact process that can be implemented by either an administrator or maybe even an outside vendor that they can hire to help them with that process. So I think it's one of those ways where finding a process that's easy and efficient for both the participants and the plan sponsors that's reliable is going to be a key factor in that decision. So we're continuing to work through the nuances of what that would look like and maybe how that would be administered on our side.

Nina Lantz: So these new provisions in SECURE that add contributions to a plan, I mean it sounds like a great idea. It's adding toward people's retirement savings. From the employee's perspective, who's going to benefit the most from these changes?

Brandy Cross: Most of the provisions actually promote additional savings by participants, both higher and lower earners, and those earlier in their career, and those later in their career, so it really runs the gamut. We see that most of these contribution provisions benefit pretty much everybody. We'll see the younger participants being advantaged by the student loan payment match and the automatic enrollment features, while the older participants will benefit from increased catch-up limits.

Why it’s no small feat to implement SECURE 2.0’s changes

Nina Lantz: So adding Roth employer contributions and increasing the catch-up limits sounds simple. As you noted before, many plans already offer Roth and catch-up contributions now, so how hard is it really going to be for recordkeepers and administrators to implement these changes?

Brandy Cross: So, honestly, from the outside looking in, and clearly as far as Congress is concerned, these provisions all sounded pretty positive and pretty simple, but today's defined contribution plans really aren't simple at all. There are so many players and systems involved—plan sponsors, recordkeepers, payroll providers, communication teams, human resources (HR) departments, and participants—that need to be involved in this process. Implementation of these two specific ones are really going to be kind of challenging. Both the provisions you mentioned—they're really complex and are going to require both a lot of system changes and process changes as well as then the stuff that's being communicated, and that's all once we get the required guidance. Both of these have a lot of guidance that's required on them, specifically those employer Roth contributions.

I chuckled and laughed at the beginning, when we first started talking about this in January. I spoke at a conference, and they were talking about, “Will administrators be ready to handle some of these changes?” And my comment about this one was, “No.” It went into effect the day SECURE 2.0 was enacted, and no one still knows what to do about it. No one is ready for employer Roth contributions, yet it's very highly publicized, and we get calls about if people can change their elections all the time. So operationally speaking, this one, again, is pretty challenging. It's not something that can just be thrown in, and it involves so many different pieces. So on the face of it, there's a new participant election. So participants have to elect something that they've never elected before. How that's going to be made, when it's going to be made, how long it's going to be effective for—all those things are challenging for the participants and that piece of the puzzle. There are potential payroll changes. So again, depending on how contributions are made to the plan, payroll systems may need to be updated to account for this new election and the tax treatment of these Roth contributions. Our recordkeeping systems are all going to need to change because instead of just one match source and one profit-sharing source, or one other nonelective source, we now are doubling all of those. We have to keep track of basis in all of those and combine them for all the required items under the plan.

DC plan challenges regarding vesting and taxes after SECURE 2.0

Brandy Cross: And then we have the issue that's still outstanding on vesting. The provisions indicate that these dollars must be vested dollars but don't go on to say if those are vested sources or if they are vested participants and how they make those elections.

And then the participants being responsible for the taxes, that's something interesting that we have to work through too, because through payroll or through recordkeeping systems and trust systems, will it end up being a W-2 issue and a box one issue, which is probably unlikely, but if made on a per-payroll basis may be the way it goes, or is it more likely that it's going to be a 1099-R issue, which means, again, more provisions that we need to work through with our trust partners and recordkeeping systems to make sure that that's properly handled. We assume it's likely going to be sort of like an in-plan Roth conversion at each deposit, which will likely make it end up with a 1099-R type situation, but we really aren't sure, we need additional guidance.

But this is sort of one area, though, while we are looking into it and investigating it and figuring out how to implement it, we're not seeing a lot of plan sponsors, at least in our group and the plan sponsors that we work with, be really anxious to be first to the table on this one. A lot of them already have the in-plan Roth feature in their plans today, so they're kind of content to let their participants that want to take advantage of this treatment sort of use that vehicle in order to do it. A lot of participants, while it seems like a good idea, may not be able to handle those taxes that they'll be hit with potentially, or the increased withholding they might need to do in order to cover the taxation of those just to make them Roth in any given year.

And I think the biggest thing with the increased catch-up limits between the ages of 60 and 63 is, again, it's really those communications between all of those systems and all of those players involved. The issue will be that payroll systems and recordkeeping systems will have to monitor now different age limits or different catch-up limits for each one of those when a participant rolls through this additional catch-up limit period, because remember that they not only roll into it at age 60, they roll out of it after age 63. So how we're communicating that? Catch-up used to be pretty simple. We went from a do you or don't you want to make catch-up, kind of how much, and do you want to make it pretax or Roth if that's available? And it is now—with that other Roth catch-up provision—now, are you 50? Are you 60 to 63? How much do you make? What bucket do you want to put it in? What bucket do you have to put it in? And then communicating sort of as they go through that whole life cycle.

How retirement professionals are quickly adapting to SECURE 2.0

Nina Lantz: Wow. I see what you mean by needing more guidance on all of this stuff. What's been your approach so far, and what are you doing going forward?

Brandy Cross: Well, as you know, Nina, as soon as SECURE 2.0 passed, I think, and even probably before that, while we were just waiting for it to pass, we've kind of known about it for so long, we had several teams of people here at Milliman kind of at the ready, trying to figure out exactly what some of these provisions meant, digging into them, and then how they would affect our plan sponsors. From a DC perspective, we just immediately started gathering people from compliance and regulatory consulting, and our implementations and systems teams, to go through them, and we literally put all 92 provisions that you handed us as we went through it and said which ones of these are mandatory, which ones are voluntary, which ones include system changes potentially, which ones include communication changes or document changes. And we literally have a grid that we work through all of them on. We lined them up by effective date and then started going through them one by one with all of our consultants to say which ones most affect our plan sponsors.

So the next step after it passed and we kind of got that grid together was identifying ones where it's maybe, while there is additional guidance needed, we can take some stabs based on history in our work, and many decades of document work and administration of defined contribution plans, to kind of see what we can figure out as far as best practices. We're sort of moving forward in good faith as plan sponsors want to enact some of these. In other instances where some of these provisions are just brand-new, we're really trying to help plan sponsors just say, you may not want to be the first ones out of the gate on this. We really do need to wait for that guidance, and then we continue to wait, monitor things, talk to others in the industry, just have conversations around all of these to figure out how we best move forward.

I mean, as you know, Nina, we're still waiting on provisions from SECURE 1.0 and guidance on some of those, and now we're waiting for new guidance on things that sort of overlap and have been updated. So, again, I think Milliman's real focus is just constant monitoring and working towards solutions and making sure that our consulting practice and our administration practice and our recordkeeping practices are sort of all working together to benefit everybody involved.

A key piece of SECURE 2.0: Communicating with plan participants

Nina Lantz: So speaking of communications, it feels like not only do the service providers have to communicate with each other, but a lot has to be communicated to participants. So what should plan sponsors be thinking about regarding the communications and letting people know what is or is not in their plans?

Brandy Cross: Yeah, I think that's key because I think there's two different sides to the communication coin. So first we want to make sure that plan sponsors understand how to communicate with employees that are maybe approaching them with these topics that they're hearing about in the news or maybe hearing about from their personal financial advisors, and they're coming in and wanting to make these elections. I think first of all it's that figuring out and telling employees and making sure that they're confident that you as the plan sponsor are working through all the optional and mandatory provisions, getting them lined up, and that you'll be ready, and that you're really making those decisions on which ones to implement based on what's in the best interests of your particular employees and your overall comprehensive benefit structure. So that's the first communication, is telling participants, just like we tell plan sponsors, that it's OK to wait, we don't have all the answers yet.

But then I also think it's important that as we sort of look ahead, that all of those communications that we send out to participants and work with sponsors on, on an annual basis, enrollment kits and notice packages—those multiple-page notice packages that will have to go out—all the communications that you give in benefits, all of those are really going to have to be relooked at as these different provisions come into effect, and it'll be a multiyear process because not everything rolls out at the same time. The plan sponsors will not all put into effect these provisions right away. You may decide that it's best for you to hold off on the student loan payment.

So because remember, I think it is important to remember, that those effective dates are just the earliest date you could put it in for those optional provisions. You don't have to put it in on January 1st, 2024. You can wait and see what happens and kind of feel around and figure out if that really would work for you, and maybe put it in in 2025.

Final thoughts on SECURE 2.0 and defined contribution retirement plans

Nina Lantz: Well, it sounds like there's going to be a lot of work to do in the coming months and when guidance comes out, whenever that happens. Thank you so much for taking us through this, Brandy. Is there anything else you want listeners to know about SECURE 2.0's impact on DC plans?

Brandy Cross: I think as a parting thought, if I had one, is that it's OK to breathe and to make fully informed decisions about the provisions. As with anything new, if it's not implemented correctly and really in a way that works for the plan sponsor, a well-intentioned provision will turn into a headache and a large correction later on.

Nina Lantz: Thanks again, Brandy. For more information about what we talked about today, please read Brandy's article, “The SECURE 2.0 Act of 2022: Qualified plan contribution updates and options,” on Milliman.com, and listen to our related podcast episode about the impact SECURE 2.0 will have on single-employer defined benefit plans.

You've been listening to Critical Point presented by Milliman. If you enjoyed this episode, please rate us five stars on Apple podcasts, or share this episode with your friends and colleagues. We'll see you next time.