SECURE 2.0 Guidance Addresses Designated Roth Contributions

This is the second of two blogs on IRS Notice 2024-2. (Check out the first blog here!)This notice provided welcome guidance on a select number of provisions affecting 401(k) plans under the SECURE 2.0 Act (SECURE 2.0).

Designated Roth Contributions

Under SECURE 2.0, 401(k) plans may choose to permit participants to elect to receive employer matching and/or discretionary (non-elective) contributions in the form of Roth (i.e., after-tax) contributions, effective for plan years beginning after December 29, 2022.

The Notice makes the following clarifications:

• Designated Roth matching and discretionary contributions are subject to the same in-service withdrawal restrictions and timing rules as those that apply to designated Roth elective contributions;
• An employee must be fully 100% vested in the employer contribution (either matching or discretionary) at the time it is allocated;
• Elections must be made by no later than the date that the contribution is allocated to the participant’s account, must be irrevocable, and may be made at least annually; and
• There are special rules regarding taxation, withholding, reporting, and related concerns.

Safe Harbor Automatic Enrollment Corrections

SECURE 2.0 establishes a “safe harbor” method of correcting certain errors related to automatic contribution arrangements – particularly failures to implement the arrangement with respect to eligible employees, or improper exclusions of such employees from the plan itself — effective for errors occurring after December 31, 2023. (More information about plan corrections is available on the Dashboard.)

The Notice clarifies that:

• Corrected elective deferrals must be made by the earlier of:
  • the date of the first wage payment occurring on or after the last day of the 9½-month period following the end of the plan year during which the error occurred; or
  • if an employee notifies the plan sponsor of the error, the date of the wage payment occurring on or after the last day of the month following the month in which they notified the plan;
• The safe harbor my be used to correct errors involving terminated employees;
• Corrective matching contributions (adjusted for earnings), if applicable, must be made within a reasonable period (as defined in the Notice); and
• Written notice of the error must be given to employees affected by the error within 45 days after the date correction begins.

Small Employer Tax Credit for New Plan Contributions

SECURE 2.0 added a new tax credit for certain small employers (generally, those having no more than 100 employees) equal to 100% of contributions made to 401(k) plans in the year in which the plan is established, effective for tax years beginning after December 31, 2022.

Notice 2024-2 makes the following clarifications:

• The new credit is treated as a separate credit, i.e., in addition to the existing tax credit for qualified startup costs associated with establishing and administering an eligible employer plan;
• A plan is treated as being “established” on its effective date;
• There are special rules regarding employer eligibility and self-employment income for purposes of the generally applicable $100,000 compensation limit.

Small Employer Tax Credit for Enhanced Eligibility for Military Spouses

SECURE 2.0 also created a new tax credit for certain small employers (here again — generally, those having no more than 100 employees) that provide for participation for military spouses within two months after such spouses’ dates of hire, effective for tax years beginning after December 29, 2022.

Under the Notice:

• Employers may only claim the new credit in a year during a three-year period in which they are eligible to take the credit; and
• An employer is first eligible to take the credit for the taxable year that includes the later of:
  • the date on which the plan or amendment implementing the change becomes effective; and
  • the date on which the military spouse begins participation in the plan.
    • Credit can be claimed, however, for time that a military spouse participated in the plan before the plan provided for such participation.

NOTE: This article is intended as a general overview of certain select provisions of Notice 2024-2 as it affects most 401(k) plans and is not meant to offer a comprehensive analysis of the provisions mentioned, or to address other provisions contained in the Notice, including provisions applicable to other types of retirement plans (such as defined benefit plans, governmental plans or 403(b) plans). As always, be sure to consult with your own ERISA attorney or other professional advisor for individualized advice with respect to your plan’s unique situation.