SECURE 2.0: Optional changes for 401(k) plans

Summary of optional provisions 

Explanation of optional provisions 

1. Provisions effective immediately

Roth designation of employer contributions

Prior to SECURE 2.0, employer matching or non-elective contributions to a 401(k) plan were required to be made on a pretax basis. However, SECURE 2.0 provides plan participants with the ability to elect to receive matching contributions and non-elective contributions on an after-tax Roth basis. Roth employer contributions are taxable to the employee when made. In addition, participants must be 100% vested at the time the contribution is made. If non-Roth employer contributions vest over a period of time, it could result in an employer maintaining multiple vesting schedules. The plan’s record keeper and payroll provider should be consulted to ensure the employer contributions are recorded correctly. Since SECURE 2.0 does not address how a Roth-designate employer contribution should be reported for tax purposes, e.g., Form W-2 or Form 1099-R, guidance from the IRS is anticipated. If an employer chooses to add this provision to its plan, a plan amendment is required.

Small financial incentives

Another optional provision in SECURE 2.0 permits an employer to offer de minimis financial incentives to encourage employees to make salary deferral contributions to a 401(k) plan. Previously, financial incentives that could be provided by an employer were limited to matching contributions. Although SECURE 2.0 specifies that an employer may not use plan assets to provide financial incentives, it does not define what constitutes a de minimis financial incentive. It is anticipated that the IRS will provide guidance. This provision does not require a plan amendment.

Hardship distributions

Pursuant to SECURE 2.0, an employer with a 401(k) plan that permits distributions on account of hardship can rely on the employee’s certification that the employee had an event that meets the deemed hardship criteria. Previously, the employer’s reliance on the employee’s self-certification was limited to the amount needed to satisfy the hardship. Self-certification applies to plan years beginning after Dec. 29, 2022.