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Actionable federal tax insights for employee benefits in 2024

Tax Strategy Playbook

Baker Tilly’s inaugural Tax Strategy Playbook discusses the outlook for the new year’s tax policy landscape, outlines how current tax policy impacts your business and discusses opportunities for tax planning and mitigating inherent risks. We delve into various areas within federal, global and state and local tax.

Our Tax Strategy Playbook addresses federal tax updates related to employee benefits, including planning for automatic enrollment, Roth designation of employer contributions and student loan matching contributions under SECURE 2.0.

Automatic enrollment in 401(k) plans was first introduced in 1998 with the goal of increasing participation in 401(k) plans among younger, lower-paid employees, providing them with the opportunity to save for retirement. Over the years, the increase in retirement savings as a result of this program has been significant. Looking to build on this momentum, the SECURE 2.0 Act of 2022 (SECURE 2.0) requires new 401(k) plans adopted on or after Dec. 29, 2022, to automatically enroll participants in the plan with plan years beginning in 2025.

Although automatic enrollment isn’t mandatory until the 2025 plan year, employers who adopt a new 401(k) or 403(b) plans after the effective date should prepare for implementation.

Highlights of the new automatic enrollment system include:

  • Automatic enrollment mandates the employee deferral rates and auto-escalation rates
  • Default rate: During the first year of an employee’s participation, the automatic employee deferral rate cannot be less than 3% and not more than 10%
  • Rate increases: The default rate must increase by 1% each year until it reaches at least 10% or may go as high as 15%
  • Effective date: The annual increase must be effective on the first day of each plan year

As with most rules, there are exceptions. Automatic enrollment does not apply to 401(k) or 403(b) plans adopted before the effective date, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) 401(k) plans, small businesses with 10 or fewer employees, new businesses in existence for less than three years, and church plans or governmental plans.

Although there is still time to design a plan, employers with affected plans should be proactively considering a myriad of factors such as the default rate, rate increases, eligibility, documentation requirements and payroll implications. Employers should confirm with their plan recordkeepers, payroll providers and administrators that they all will be ready to comply with automatic enrollment requirements.

Beginning in 2023, the SECURE 2.0 Act of 2022 (SECURE 2.0) provides that plan participants in 401(k) or 403(b) retirement plans could be given the choice to receive employer contributions as after-tax Roth contributions. This is an optional provision, the implementation of which is at the sole discretion of employers.

Prior to SECURE 2.0, employer contributions, including matching contributions, were required to be made on a pre-tax basis. Under the new law, if an employer chooses to participate in making Roth employer contributions, the amounts are taxable to the employee recipient at the time the contribution is allocated to the employee’s account. However, the amount is not subject to Federal tax withholding or FICA taxes.

Unlike traditional non-Roth employer contributions, which may vest over a period of time, SECURE 2.0 also requires that Roth employer contributions fully vest immediately. As a result, an employer who chooses to amend its plan to add this provision could have multiple vesting schedules to monitor. Recent guidance from IRS clarifies that only employees who are currently fully vested in employer matching or nonelective contributions may elect to designate employer contributions as Roth. For example, if a plan has a three-year cliff vesting schedule for employer contributions, the employee could not elect Roth treatment until the third year when fully vested.

Employers who wish to take advantage of this opportunity should consult with their plan recordkeepers to ensure systems are set up appropriately and payroll providers to discuss employee tax reporting obligations.

Over recent years, employers have sought more creative ways to attract and retain talent. With student loan debt reaching all-time highs and becoming increasingly burdensome for borrowers, student loan payment assistance has become an increasingly attractive prospect. Beginning in 2024, employers with 401(k), 403(b) and governmental 457(b) plans, and Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plans may provide matching contributions to an employee’s retirement account when an employee makes qualified student loan payments. The match may be made as a Roth contribution if the plan allows.

Loans eligible to be considered qualified student loan payments (QSLPs) are those taken out for higher education expenses of the employee, their spouse or dependent. The employee must directly make the repayment for it to qualify for the match; payments on behalf of employees or reimbursement arrangements by the employer will not qualify. In addition, the employee must certify on an annual basis to the employer that the QSLPs were made. QSTPs made by an employee may be treated as an elective deferral of salary and will qualify for employer matching contributions up to the annual maximum deferral, which is $23,000 in 2024.

As this program is part of a recent legislative package, no formal guidance has been issued and employers are facing many unknowns. Below are just a few of the items we’re hoping to get answers to:

  • Is there a corresponding increase in the cap on QSLPs for catch-up contributions for employees aged 50 or older?
  • Will reasonable procedures established by the Department of the Treasury (Treasury) for employees to claim the QSLP match permit an employer to require substantiation with the certification that is submitted?
  • Can employees who terminate their employment claim the match?

Ultimately, this program may prove to be a strong incentive to attract and retain younger talent and provide attractive retirement savings opportunities while reducing the debt burden employees are carrying from post-secondary education. A knowledgeable advisor can provide guidance, especially considering the current unknowns, for employers considering providing matching student loan payments.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. Baker Tilly US, LLP does not practice law, nor does it give legal advice, and makes no representations regarding questions of legal interpretation.

Christine Faris
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