IRS Limits Retirement Plan Enrollment Incentives to $250
Author: Rena Pirsos, XpertHR Legal Editor
January 4, 2024
A new notice from the IRS tries to answer employers' questions about retirement benefits under the SECURE 2.0 Act.
Enacted in 2022, the SECURE 2.0 Act builds on Congress's previous efforts to ramp up participation in 401(k) and 403(b) plans.
Incentives to Participate
SECURE 2.0 allows employers to provide de minimis incentives to employees who enroll in a 401(k) or 403(b) plan, provided the incentives are not paid for with plan assets. This provision became effective for plan years beginning in 2023.
While SECURE 2.0 did not place any monetary value on de minimis incentives, the IRS has. According to the notice, de minimis incentives may not exceed $250 and may only be paid to employees who are not enrolled in a plan. De minimis incentives may be paid in a lump sum or parceled out to employees who continue to have contributions withheld from their pay.
De minimis incentives do not include employer matching contributions and they are subject to federal payroll taxes, federal unemployment taxes and state income taxes under Internal Revenue Code (IRC) conformity statutes.
Roth Matching Contributions
Secure 2.0 changed the rules related to employer nonelective and matching contributions by allowing employers to make the contributions on a Roth, after tax basis. The notice clarifies that employees, not employers, make the choice to designate some or all of their employer matching and nonelective contributions as Roth contributions.
The notice clarifies that, for contributions made after December 29, 2022, only employees who are fully vested to receive employer contributions may designate those contributions as Roth matching contributions and Roth nonelective contributions. Further, the notice says that plans offering designated nonelective or matching contributions will not fail discrimination testing.
The notice confirms some long-standing rules regarding Roth contributions. First, an employer's Roth contributions must be made no later than the time contributions are allocated to an employee's account and must be irrevocable. Second, as with an employee's designated Roth contributions, a separate accounting is required. Finally, these contributions are taxable to employees but not subject to payroll taxes.
Auto-Enrollment Plans
Auto-enrollment plans force employees into the plan by requiring them to opt out to receive their full pay. Plans established after December 29, 2022, must be auto-enrollment plans, beginning with the 2025 plan year. Plans established before December 29, 2022, are called pre-enactment plans.
Not every plan established after December 29, 2022, however, is an auto-enrollment plan. Plans are established on the date plan terms are initially adopted, even if the effective date of the plan is after the adoption date. Under this rule, if plan terms are initially adopted before December 29, 2022, but not effective until sometime in 2023, the plan is considered a pre-enactment plan and auto-enrollment does not apply.
SECURE 2.0 also provides a safe harbor to employers that make reasonable administrative errors related to implementing an auto-enrollment or auto-escalation feature or by improperly excluding employees from the plan.
The notice provides that, in general, under this safe harbor, employers have until the date of the first payment of wages made to the employee by the last day of the nine and one half-month period after the end of the plan year to begin corrected elective deferrals for the excluded employee.
Plan Amendments
In general, the deadline to amend a qualified plan that is not a governmental plan or a collectively bargained plan is December 31, 2026. Amendments may apply retroactively to the effective date of a particular SECURE 2.0 Act provision, provided the plan is operated as if the amendment were in effect beginning on the effective date of that provision.