SECURE 2.0 Webinar Series: The Law Passed. Now What?

Updated with correction

With the passage of the SECURE 2.0 Act of 2022, new optional financial wellness benefits like student loan matching and emergency savings accounts give plan sponsors an opportunity to differentiate themselves from other employers, according to a panel of experts.

Employers will likely feel pressured to adopt these financial wellness features as they see competitors begin to roll them out, according to Andrew Braid, a partner in the Dechert LLP law firm.

“We don’t have a lot of guidance around the implementation of these provisions yet, but as people lose their hesitation in adopting them and see other employers roll them out, there’s going to be a little bit of a competitive race here,” Braid told attendees of a PLANSPONSOR webinar on Wednesday. (A recording of the entire webinar is available at the link.)

Braid said the student loan debt benefits are a big selling point for plan sponsors.

“If you can offer [student loan repayment] to … younger employees coming out of college with debt, [and with employers] trying to attract and retain talent, I think we’re going to see employers really pressuring their plan administrators and recordkeepers for answers and solutions on how they can implement these provisions,” Braid said.

Under SECURE 2.0, employers that offer 401(k) plans, 403(b) plans, SIMPLE IRA plans and governmental 457(b) plans can provide a matching contribution based on a participant’s “qualified student loan repayments.” This option will be available starting in 2024.

Employers also will be able to rely on employees’ self-certification for matching and therefore will not have to go through the administrative burden of verifying those payments on a payment-by-payment basis.

Bradford Campbell, a partner in Faegre Drinker, said SECURE 2.0 is unique in that, unlike most laws that typically provide a “laundry list of new mandates,” SECURE 2.0 has offered optional provisions.

“It really is quite a sweeping bill, and a lot of it is about choice, which is not what we normally think of in tax law,” said Campbell.

Jennifer Doss, the defined contribution practice leader at CAPTRUST, said there is a lot of interest among clients about the new financial wellness benefits under SECURE 2.0.

While there is currently limited guidance for how recordkeepers should implement these provisions, Doss explained that the new legislation contains two main provisions related to emergency savings, both of which are optional for plan sponsors starting in 2024.

A plan sponsor can create a “sidecar” account that is linked to a participant’s retirement plan. Contributions to this account are capped at $2,500 or a lower amount determined by the sponsor, and it must be a Roth account, because contributions will be taxed before they are deposited.

The new law also allows for an emergency withdrawal option under which participants can take out up to $1,000 per year for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” This withdrawal must be repaid within three years.

Again, a sponsor can rely on the participant’s self-certification that they are using the money for an emergency.

“Early indications [show] that the emergency distribution option might be the more popular one, ultimately,” Doss said. “It’s easier to communicate, easier to implement [and] it doesn’t necessarily encourage taking very frequent distributions from your 401(k) plan, which is something we have been telling participants for decades not to do.”

Plan sponsors have the choice of offering both the sidecar and emergency withdrawal, neither or just one of them, which gives plan sponsors a lot of flexibility, according to Doss.

When plan sponsors decide whether to offer the student loan benefit, Doss said the decision may come down to the industry they are in. For instance, she said professional service industries tend to have more participants with student loan debt, and those employers will likely want to offer this benefit to better compete with other companies.

Abbott Laboratories, a medical device company based in Chicago, sought and received a private letter ruling from the IRS in 2018 to offer its own. Since then, Doss said many plan sponsors have asked how they can implement a similar program, and the good news is that under SECURE 2.0, it is allowable for all plans.

Doss recommended that plan sponsors who are interested in these provisions should start conversations about them with their recordkeepers. She said individual recordkeepers may prioritize or implement the new provisions differently.

Braid added that in the same way he expects to see employers differentiating themselves based upon their plan features, there might also be an arms race among recordkeepers to provide the most “employer-friendly” procedures and administrative processes.

The next webinar in PLANSPONSOR’s SECURE 2.0 series, focusing on financial wellness benefits, will take place on March 15. A panel of industry experts will discuss SECURE 2.0 provisions related to employee financial wellness, ways plan sponsors can implement new benefits (and how advisers can help them) and how to determine the best benefits for a plan sponsor’s unique employee group.