Employers Cautious on 401(k) Law Optional Provisions in New Year

Many of the major provisions Congress enacted late last year in sweeping workplace retirement access legislation will take effect in 2024, but plan sponsors are still wary of the mostly optional coverage enhancements.

Employers don’t want to test the waters by adopting plan amendments that would allow them to treat worker student loan repayments as 401(k) contributions or establish in-plan emergency savings accounts, according to benefits advisers and attorneys.

Yet, the new year will trigger a number of new retirement plan participant and beneficiary entitlements that plan sponsors and fiduciary committees will have to manage. Tax-free emergency expense withdrawals and 403(b) plan hardship cash-outs take effect after Dec. 31, 2023. Plans themselves will be granted the authority to automatically rollover more unattended assets.

The slow rollout of SECURE 2.0 Act (Pub. L. No. 117-328) provisions and consternation over voluntary plan improvements reveals the long road policy makers face as they attempt to plug a growing US retirement savings gap. The difference between how much mid-career workers are saving now and the amount they’ll need for a comfortable retirement threatens to undermine future state and federal social safety net programs.

It’s a problem only compounded for workers who already face a wage-gap and who lack equitable access to other employer-sponsored benefits.

“The provisions regarding student loans and part-time workers will disproportionately benefit women and diverse populations,” said Melissa Elbert, a wealth solutions partner at Aon Plc.

SECURE 2.0 will eventually require new 401(k) and 403(b) plans to automatically enroll workers and escalate their contributions. Under the first SECURE Act of 2019 (Pub. L. No. 116-94) employers will be required to permit part-time workers with several years of service to participate in plans beginning next year, and eligibility requirements will broaden in 2025.

The IRS issued the employer community long-awaited guidance (88 Fed. Reg. 82796) on Nov. 27 regarding long-time, part-time worker classifications. Comments on the proposed rule will close in late January. Another SECURE 2.0 Act provision that was supposed to take effect in 2024 requiring catch-up 401(k) contributions to be made in post-tax accounts was delayed by regulators trying to sift through the laws onslaught of agency directives.

‘Wait and See’

Starting next year, employer plan sponsors can adopt new plan features that would allow them to treat workers’ monthly student loan debt repayments as retirement savings contributions when calculating matching benefits.

There are still lots of outstanding questions employers are grappling with about their fiduciary duty to determine whether loan repayments have actually been made and how loan-based matches would stack up against other workers’ account balances when conducting retirement plan non-discrimination testing.

In-plan emergency savings accounts and withdrawals related to domestic abuse claims also are add-ons employers can choose to begin adopting, but plan sponsor clients don’t seem interested in making it easier for participants to take money out of their accounts well ahead of retirement age, said David Joffe, a partner at Bradley Arant Boult Cummings LLP in Nashville.

Domestic abuse withdrawals, like emergency deductions, allow workers to remove up to 50% of their retirement savings—capped at $10,000—within 12 months of a self-certified incident.

“I haven’t seen a great interest among employers to authorize these additional types of distributions,” he said. “In a sense, most employers think there already are ways to get money out. A loan is perceived as better. You’re not losing out on your retirement savings, because you’re repaying it yourself.”

As for employers’ mandatory distributions—which allow sponsors to automatically roll funds out of an inactive account— SECURE 2.0 increases the permissible amount from $5,000 to $7,000. The processes to allow that kind of movement of money are already in place, meaning, for employers who don’t want to take on more new plan features in 2024, the additional workload may be minimal.

But automatic enrollment is coming, which will require plans to completely revamp their systems to default savers into investments and track their money even when workers aren’t paying attention.

It’s still “wait and see,” when it comes to regulatory burdens said Richard Clarke, chief insurance officer at Colonial Surety Co., but insurers like him are jockeying for position once additional SECURE 2.0 responsibilities become reality.

“There are going to be new liability issues for employers that plaintiff attorneys are going to want to exploit,” Clarke said. “Whether that comes in 2024, 2025, or even later, smaller employers in particular are going to need liability insurance to protect themselves.”