Critical Point Episode 38: Surprises and obstacles SECURE 2.0 could present for plan sponsors and HR professionals

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Jason Brantley: Hello and welcome to Critical Point, brought to you by Milliman. I'm Jason Brantley and I'll be your host today. In this episode of Critical Point, we're going to be talking about surprises waiting for you in SECURE 2.0. Specifically, we'll be talking about some of the details below the headlines and the obstacles they could present for plan sponsors and HR professionals. There are ways in which the new regulation could derail or reduce participant contributions and we'll get into what to watch out for in more detail.

Joining me for this podcast are Charlie Clark, director of Milliman's Employee Benefits Research Group, and Karina Guerrero, Milliman's director of HR Rewards, Ops, and Systems. Charlie recently authored a series of articles outlining the implications of SECURE 2.0 while Karina will provide a frontline HR perspective. Let's go and get into it. Let me start with this question for both of you. What are the top three impacts of SECURE 2.0 from a policy perspective and also from an HR perspective?

Charles Clark: Hi, Jason. Thanks for asking us to speak with you today. So on a policy perspective, there's a lot of possible changes to savings plans that could impact plan sponsors and participants once SECURE 2.0 makes its way through the Congressional meat grinder, actually through the Senate right now, hopefully as easily as it did through the House. They did release in the last couple of days some proposed legislation called the “Rise and Shine Act” and it's going to be voted on by the entire Senate.

We also know that the Senate Finance Committee has released their own version, which passed unanimously, and they too have sent it to the Senate for consideration. What will then happen is SECURE 2.0 and the two Senate proposals will be consolidated and it will be voted on. But the current forecast for a vote on the Consolidated Pension Bill won't be for several months. We have to plan around the campaign season, for the midterm elections, so the last six weeks of 2022 is when we will know what we possibly will have as new law. And in that spirit, as you mentioned, we've identified and written about three particularly complex issues that we've labeled as plan sponsors, and I'm going to let Karina list them out so we can just get our audience up to speed.

Karina Guerrero: Yeah, so the three topics that SECURE 2.0 will impact HR and plan sponsor organizations are really the escalating RMD ages, the tracking of the long-term and part-time employee hours as well as the Roth-only catchup contributions issues. So these are things that from an HR perspective you almost have to sit back and watch and see if they pass and be prepared to roll with the punches.

Jason Brantley: OK. Now let's dig into some of the details. How will SECURE 2.0 change catchup contributions? Charlie, do you want to give us some insight on that one?

Charles Clark: Yeah, Jason, by the way, before we start getting into some of these details, one of the things that we point out in the article, as you mentioned, is that some of the options in whatever the pension bill becomes are mandatory; some of them are going to be optional. So we're going to talk about the Roth catchup contributions and some of it is optional, some of it is mandatory, and there's kind of a soft spot in the middle, too. But what would actually happen is that if you have a plan that permits catchup contributions, you have to be in a cohort that's at least age 50 and allow them to make contributions that are outside the regular contributions. And what'll happen starting in 2024, all these contributions necessarily will become after-tax Roth contributions. And in order to do that there's another specific item. If your plan participants who are doing this are near retirement age, they actually get a bonus. They actually can go up to $10,000 per year. Now the other thing that can happen here is that the employer can optionally say, "I'm going to make matching contributions as Roth contributions also." If a plan sponsor chooses to put in this optional provision into their plan, then they actually have to make it Roth only. So in order to continue this for some of their employees that actually prefer to do this, it's mandatorily going to be after-tax Roth only. And if they don't want to do it in the plan, they actually have to cut out all of the catchup contributions. So that's something that I see could be really problematic for employers, but, yet to come. We'll see what happens.

Jason Brantley: All those things seem really, really heavy. Karina, can you just break it down for us? What does that mean for participants and what will it mean to plan sponsors as well?

Karina Guerrero: That's a great question. For plan sponsors, I think these changes will require updates of processes between the payroll templates, the systems and administrators that the HR professionals are using for their 401(k) platforms. I think it's going to take real coordination between the record keepers and the HR systems as they'll need to thoroughly test how they make these changes. So if an employer decides to move forward with allowing Roth contributions for these catchups, it's making the changes and making sure that the system is actually catching it. So with any change, it's that testing, so it's additional work that most employers probably weren't thinking they were going to have to do.

For participants, I think plan sponsors are going to really need to ensure that communications are up to date and that employees are well educated on the changes ahead and what this means for them. I think HR should be prepared to really start hearing feedback from employees as if they decide to take this option and allow the Roth catchup. Some employees may feel that they're losing the tax advantage and they might start hearing some negative feedback or pushback. So I think employers need to be aware of what option they choose as it's, as Charlie mentioned, it's an all or nothing. There's not the option for some employees to pick Roth and some to just choose the pretax. So that's a big impact for HR organizations.

Charles Clark: And before we leave this topic, I should mention that apparently there's been some concern about the Roth-only contribution. What I have heard recently is that perhaps they will maintain the tax-deferred or pretax nature of catchups for those who make less than $400,000. Now the definition of compensation and what constitutes $400,000 depends on what the plan sponsor has as the definition of their plan. But apparently, it actually has gone up through the staffers on the Hill that perhaps an all or none just isn't going to cut it.

Karina Guerrero: Yes. I think that regardless of where the change ends up, the one thing that employers need to keep in mind is communication, communication, communication. Plan sponsors should not adjust the need to communicate and educate on the Roth and the impacts of this change if they do decide to go that path.

Jason Brantley: OK. What about required minimum distributions (RMDs)? Didn't SECURE just change them to 72? I'm still communicating 72 as a change to most people out there and now they're changing again?

Charles Clark: Well, you're right. They did just change and it wasn't too long ago. What the new proposal would do in SECURE 2.0 is change it to 73. Oh, and then change it to 74. Oh, and then, and then finally, change it to 75 by the year 2033. So if you had fun changing your systems from 70-1/2 to 72, you're going to get to do it three more times in the next 10 years.

Jason Brantley: Karina, let me ask you: Is this good for participants? Bad for participants? And same question, what about plan sponsors? What's the impact to them of this change?

Karina Guerrero: For plan sponsors I think the change is actually going to be easy. We've already had to make some changes in the last few years so I think they have already adapted to that change and will be prepared to pivot. So the biggest focus is communication and the changes to those who are going to be impacted, communicating and auditing that the changes that were actually made were captured correctly by the system. So it goes back to communication is going to be key, really. I think plan sponsors will be fine, but employer HR organizations are going to have to just monitor and make sure that those changes were made well. And I think employees will actually appreciate the change increasing especially as the market is changing.

Jason Brantley: OK, we’ve covered two of the SECURE 2.0 hot topics, let’s look at the third one—tracking long-term, part-time employee eligibility. What is the requirement?

Charles Clark: Thanks for asking that, Jason. Well, what happens is that the employer must count the number of hours worked for a specific cohort of their employees, who work at least 500 hours a year, but less than the typical 1,000 hours a year that would automatically qualify them for participation in the savings plan, and naturally they’d be recording this in their HR data system. Now what the SECURE Act did was change that starting in 2021, the employer had to track those particular types of non-full-time employees, for 2021, 2022, and 2023. And then, beginning in 2024, if they’re still in that non-full-time cohort, these employees are able to—and the employer has to offer them—the ability to contribute to the savings plan. The proposal in SECURE 2.0 accelerates these number of years from three to two, meaning that, starting in 2023, this group of employees would have the ability to contribute to the defined contribution plan.

Jason Brantley: Karina, what are the implications of this change from an HR perspective?

Karina Guerrero: Oh, this is a headache for sure for HR professionals out there managing plans. I think the biggest challenge with this is it could potentially drive more employers to offer part-time eligibility and part-time entrance into the plan, just from an administrative ease. The nightmare is really how are HR professionals tracking these hours? Most systems aren't tracking hours year over year and so it becomes this spreadsheet managed on somebody's desktop to be able to track those hours year over year, which in reality, that's just a challenge because it's leaving a lot of room for administrative errors.

Jason Brantley: Yeah.

Karina Guerrero: So it'll be an auditing challenge.

Jason Brantley: I know you're not looking forward to that one. Let me ask this one. If SECURE 2.0 becomes law, what are the next steps for plan sponsors? This timing seems really aggressive.

Charles Clark: Oh, it absolutely is very aggressive, and the reason, Jason, is because, when they wrote the bill, they expected that they would actually be able to have it become law and be effective in 2023. Well, that's just not going to happen. But what we know is that for plan sponsors and boards and HR executives like Karina, that the plan document has to get amended, it has to get accepted by the administrative committee. Which, by the way, as a fiduciary to the plan, there are disclosure rules that change under the Employee Retirement Income Security Act (ERISA), the part of federal regulation that has to do with disclosure, not necessarily the financing, and make sure that the plan participants see the information that they're supposed to see. Finally, changes to the recordkeeping platforms, the administration systems. Karina I believe accurately said that this is going to be an administrative nightmare. And I will tell you, in my long career I have never worked on administration systems, but I can imagine that they're not a cakewalk.

Jason Brantley: Well, when I read the article, this was all quite a surprise to me. Charlie, should we expect any other surprises?

Charles Clark: I'm kind of parsing through what the Senate Committee on Health, Education, Labor, and Pensions (HELP) has put out. I don't see anything really exciting in there for savings plans yet. I don't know what the Senate Finance is going to say. But one of the things that could turn up is Senator Murray is the Chair of the HELP Committee and one of the things that we've been looking out for is, perhaps, there could be a spousal approval of every distribution from a qualified savings plan, so that the current law under defined benefit plans, which is another type of retirement plan, the legal spouse, the legal beneficiary has to sign off on a distribution from the particular trust. What Senator Murray is an advocate of is having every distribution from a savings plan have the same technical need. And the other thing that we see that could be a disadvantage is that it slams into state laws as opposed to just the tax laws that are on the federal basis.

Jason Brantley: Wow. Thank you, Charlie. And thank you, Karina, also for joining us. To learn more about SECURE 2.0, visit Milliman.com. You've been listening to Critical Point presented by Milliman. If you enjoyed this episode, rate us five stars on Apple Podcasts and Spotify. Or share this episode with your colleagues. We'll see you next time.