SECURE 2.0 Brings Opportunities—and Some Challenges
By Jonathan Yahn, JD, CPC
The ink was barely dry on the President’s signature when the calls started coming in about the SECURE 2.0 Act. And as you might expect, the questions weren’t all about what new provisions this legislation contained. Lots of the questions shared a common theme, such as “When can we start using these new rules?” Although this seems like a simple question, the answer can get complicated:
“According to the SECURE 2.0 text, this provision is effective for plan years starting after December 31, 2022.”
“Great! So that means we can start following this rule now, right?”
“Well. . . maybe. . . you see . . .”
“Is there an issue?”
“Not an ‘issue,’ exactly. More like a challenge.”
A classic SECURE 2.0 challenge. Consider two similar SECURE 2.0 provisions that are effective now. First, participants in 401(k) and other plans can now elect to receive employer contributions (such as profit sharing and matching contributions) as Roth contributions. Second, SEP and SIMPLE plan participants can designate both elective deferrals and employer contributions as Roth contributions. Many plan participants welcome these new provisions. The long-term benefits of Roth contributions—with their tax-free earnings potential—may propel employees to sign up for such contributions as soon as their employers make them available.
So what’s the problem? While SECURE 2.0 contains numerous provisions that will enhance retirement savings and benefit both employees and employers, a few hurdles have surfaced.
We need detailed guidance on most of the SECURE 2.0 provisions.
Employers may elect not to adopt optional provisions.
Plan administrators and financial organizations need time to program their systems to accommodate the new rules.
Plan documents—including IRA opening documents—must be updated to allow for many of the new options.
Some practical considerations. As with the new Roth contribution rules, there are many beneficial changes in the SECURE 2.0 Act. But aside from the implementation concerns, there are other challenges with SECURE 2.0. It contains some drafting errors, which will have to be addressed by Congress or the IRS. There are also many technical questions that have arisen, which will not be discussed here. But even some of the most straightforward provisions cannot be added to plans without additional guidance and effort.
First, let’s briefly look at the election to treat employer contributions as Roth contributions. To offer this option, it appears that an employer will either need to 1) currently offer a Roth contribution source in the plan, or 2) amend the plan to offer one before adding the new Roth employer contribution provision. Further, because Roth contributions are after-tax, Roth employer contributions will be included in a participant’s income for the year. So SECURE 2.0 correctly requires that these contributions be immediately 100 percent vested. That rule alone will require important systems programming changes—changes that may take time to complete.
Next, let’s consider the new rule that allows SEP and SIMPLE plan contributions to be made as Roth contributions. Although there may also be payroll-processing concerns that could arise from making employer contributions as Roth contributions, let’s focus just on the new Roth deferral option for SIMPLE plans. Current SIMPLE IRA documents don’t contemplate Roth deferrals. So it seems that the IRS will have to either create a model document that allows Roth deferrals or provide guidance on permitting financial organizations to take such contributions without having to wait for an IRS-approved SIMPLE/Roth document.
But even if we get the SIMPLE IRA document issues resolved, we still have the practical concern about how financial organizations will account for the new Roth contributions on their systems. Will they establish Roth “subaccounts” within a SIMPLE IRA “wrapper”? Or will they somehow designate certain contributions as SIMPLE contributions within a Roth IRA? (Remember that SIMPLE IRAs have restrictions on moving assets in or out within the first two years after the first contribution is received.)
What’s the important takeaway? We’ve taken only a quick glimpse at some of the impediments to applying some of the SECURE 2.0 provisions. But let’s not forget that SECURE 2.0 contains many beneficial changes for our clients—changes that employees and employers alike may want to take advantage of. Some employers may choose not to implement certain provisions. But many will. And they will ask you when this can happen. So how do you respond?
More than ever, perhaps, it’s important for you and your clients to be patient. We need clear guidance from the IRS on many of the SECURE 2.0 provisions. So while you may want to expedite processing certain types of transactions that are—and will be—allowed, you may also want to exercise some caution.
SECURE 2.0 is complex. And it may take some time for federal agencies to tell us how these laws must be carried out. Ascensus will continue to follow new guidance as it comes out. Visit ascensus.com for the latest information on SECURE 2.0.
