Delay on Catch-Up Provision Allows Employers to Explore Optional SECURE 2.0 Features

Now that plan sponsors have until 2026 to implement the mandatory Roth catch-up contribution provisions of the SECURE 2.0 Act of 2022, the additional time may allow plan sponsors to consider some of the optional provisions in the legislation, according to David Stinnett, principal of strategic retirement consulting at Vanguard. 

The delay from the Internal Revenue Service came as a relief to many plan sponsors, as the legislation originally required them to implement the provision by 2024. Stinnett says plan sponsors should now be thinking about how to best use this extra time.  

“That time for most, whether they’re employers, payroll providers [or] 401(k) recordkeepers, is going to be used to ensure a smooth rollout, rather than just putting [the Roth requirement] completely aside and getting to it later,” Stinnett says. 

He adds that the extra time allows plan sponsors to take a “data-driven approach” to assessing whether optional provisions, such as emergency savings and the 401(k) student loan repayment matching program, make sense for their organizations. 

“When you look at the student loan optional provision, engage your recordkeeper now that you have the time [and] look at the participation rates and savings rates of workers in their 20s and 30s,” Stinnett says. “If you see that the participation rates and the savings rates for your employees in their 20s and 30s is better than you thought, or is not a problem, you still might want to add this provision, but the sense of urgency might not be as great as you thought it was.” 

Plan sponsors may also consider evaluating the savings rates of their Generation X workers, as many in this cohort are faced with paying off their children’s college loans.  

Emergency Savings Options 

Stinnett also points out that many plans have only recently added new financial wellness capabilities on their websites, and he suggests that data from wellness providers, such as how much participants are engaging with those tools, can help determine whether one of the two emergency savings provisions would be worth implementing.  

The first emergency savings provision in SECURE 2.0 allows the creation of a “sidecar” account tied to a participant’s retirement account. This account would be capped at $2,5000 or a smaller amount set by the plan sponsor. Employers can also auto-enroll participants for salary deferral into such an account at a rate of up to 3% and must allow withdrawals at least once per month.  

However, employers cannot contribute directly into the sidecar account, and if an employer offers a match, that match must go into the participant’s retirement account, while the employee contribution would go into the sidecar account.  

Stinnett says this provision is much more administratively complicated than the other emergency savings option, which permits participants to withdraw up to $1,000 per year from their retirement account to pay for an emergency. They must repay the $1,000 within three years in order to withdraw this amount again, and they can repay the account through ordinary deferrals. A sponsor may also rely on a participant’s self-certification that they are using the money for an emergency.  

“We’ve certainly seen more interest from plan sponsors in the $1,000 emergency savings withdrawal provision versus their interest in the other program,” Stinnett says. “It’s basically because the administrative complexity of it to set it up and all the communication involved in it is a little daunting when they’re also worried about the mandatory Roth provision.” 

He adds that sponsors are also waiting for additional explanatory regulations from the Department of Labor on how to administer these provisions correctly.  

Take Advantage of Open Enrollment 

Open enrollment for health insurance is coming up for many employers, as it is typically held in October and November, and Stinnett says sponsors could solicit their employees and ask how they feel about the suite of benefits currently offered and invite suggestions for other benefits they wish were available.  

“While the data does not tell a consistent picture that student-loan debt burden is preventing younger workers from participating in their [retirement] plan, I think it is probably very clear that having employee benefits around student loans is a very attractive thing from a recruiting and retention perspective,” Stinnett says.  

But Stinnett says it is important to stay clear of offering too many benefits, so as not to overwhelm participants with options.  

“Before you seek to add new services layered on your existing plan, you first want to make sure you have the foundational best practices adopted: automatic enrollment, automatic increase of savings rates, defaulting into a target-date fund and, increasingly, making sure that you have low-cost digital advice so that participants can personalize and get financial coaching,” Stinnett says. “If you have those things already, then you can seek to do some of these interesting new additive options, but really make sure that you have those things down.”