By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
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The past few years have seen a shifting landscape in the retirement plan marketplace due to significant regulatory changes. This has been particularly true with the retirement plan market for nonprofit and tax-exempt organizations. The enactment of SECURE Act 2.0, following up on its predecessor SECURE Act, has created some powerful changes impacting the retirement plan design options for nonprofit and tax-exempt entities. As many nonprofit groups continue to traverse these new regulatory changes and determine how to best utilize them, there are several key provisions that are generating discussion and excitement with this client segment.
1.) The Pension-Linked Emergency Savings Account (PLESA) provision provides employers with the ability to give plan participants access to a portion of their contributions to 403(b), 457(b) or 401(k) plans for emergency needs. Contributions to these accounts are made as Roth contributions (i.e., on an after-tax basis), are only available for employee salary deferral contributions, and the account balance attributable to these contributions cannot exceed $2,500 for 2024 (indexed for inflation). This provision can help eliminate one of the primary barriers for employee participation in a retirement plan, which is the concern that the participant can’t easily access funds in the retirement plan if needed.
2.) The Student Loan Matching provision permits employers to make matching contributions on behalf of plan participants to 403(b), 457(b) and 401(k) plans based on their student loan payments. This innovative new provision is designed to bolster retirement savings by alleviating another key barrier for participation in retirement plans for employees saddled with high student loan payments.
3.) The Automatic Enrollment provision requires any newly created 403(b) or 401(k) plan to include automatic enrollment and escalation features beginning in 2025. Although previous regulation encouraged the use of automatic enrollment by offering tax incentives to for-profit businesses, this most recent legislation has made automatic enrollment and escalation features mandatory for 403(b) and 401(k) plans. The provision requires an initial deferral level of 3%, with escalation of 1% per year until the deferral level reaches at least 10% (not more than 15%). This feature is anticipated to greatly enhance retirement participation and readiness among nonprofit employees.
4.) The Enhanced Roth Contribution provision permits employers to offer some flexibility to their employees regarding plan contributions. Roth elective deferral contributions to 403(b) and 401(k) plans have been available to plan participants for some time. Now, plan sponsors will also be able to permit plan participants to designate employer matching and non-elective contributions as a Roth contribution. Although this feature will be optional for employers to offer in their retirement plans, it could create a terrific benefit to provide greater tax planning benefits and alternatives to plan participants.
Despite these new and imaginative regulatory changes in the retirement planning landscape, the core objectives for nonprofit and tax-exempt entities remain unchanged: to attract and retain employees while also providing a vehicle for employee retirement savings. Navigating this evolving retirement marketplace will require some adaptability, requiring nonprofits to stay informed of regulatory changes to ensure compliance and optimization of new features and benefits for their employees.
Additionally, although many of the new provisions created in SECURE 2.0 are not yet available for use, retirement plan recordkeepers and administrators are working diligently to seamlessly incorporate the new features to their platforms. As always, nonprofit groups should consult with a tax or legal advisor and their financial advisor before establishing a new plan or implementing changes to an existing plan.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.