Dear Dan,
A co-worker was telling me that starting this year, we must contribute a minimum percentage to our 401(k) through some kind of auto enrollment. Another co-worker says that’s just for new people. Who’s right? What’s changed with 401(k)s in 2024?
—Paco in Frisco
Dear Paco,
Legislation passed at the end of 2022, commonly referred to as the Secure Act 2.0, made many changes to 401(k) rules designed to expand coverage and increase retirement savings. One of those changes requires plans established after Dec. 29, 2022 by businesses more than three years old and with more than 10 employees to include an automatic enrollment feature.
An automatic enrollment feature automatically enrolls employees in the plan at a specific contribution percentage. Employees are not forced to participate. They may opt out but doing so requires action on their part. Studies show that plans with automatic enrollment features typically have higher participation rates than other plans.
If applicable, by 2025 your plan’s automatic enrollment feature must meet several requirements including a minimum initial rate between 3% and 10%, automatic increases to the percentage annually, and the funds must go into a default investment that meets the requirements for a Qualified Default Investment Alternative.
There are several other provisions of the Secure Act 2.0 that will garner media attention. I’ll touch on two that revolve around Roth accounts.
Roth employer contributions are now permitted. To date, employer contributions like company matching funds were made on a pretax basis and were taxable when distributed. Going forward plans may offer an election to have employer contributions put in a Roth account. Roth contributions would be considered taxable income, but distributions would be tax-free if certain conditions are met. This provision is one that plans may elect but is not mandatory.
Also related to Roth accounts is a new mandate that higher-income participants (those earning more than $145,000 at an employer, indexed for inflation) must direct their catch-up contributions to a Roth account. This means the $7,500 catch-up contribution for those over 50 would no longer be made on a pretax basis.
Due to the need to modify plan documents and set up proper record-keeping and administrative functions, it is unlikely either of these new Roth-related provisions will be available any time soon. In fact, the Internal Revenue Service has already delayed mandatory implementation of the Roth catch up provisions until 2026.
Further, the Roth catch up requirement in SECURE 2.0 seemed to mandate that if a plan did not include a Roth account to receive catch up contributions by those earning $145,000 or more, no employees would be able to make catch-up contributions regardless of their income level. The IRS guidance delaying the provision until 2026 does not explicitly address this issue but seems to indicate that catch-up contributions will continue to be allowed for employees under the $145,000 income level regardless of whether the plan includes a Roth provision.
In addition to these Roth provisions, you may see other changes to your plan including higher limits for when a plan can force former employees with a small plan balance to a distribution, more liberal terms for hardship distributions, and the inclusion of longtime part-time employees in your plan.
If you have a question for Dan, please email him with “MarketWatch Q&A” on the subject line.
Dan Moisand is a financial planner at Moisand Fitzgerald Tamayo serving clients nationwide from offices in Orlando, Melbourne, and Tampa Florida. His comments are for informational purposes only and are not a substitute for personalized advice. Consult your adviser about what is best for you. Some reader questions are edited to aid the presentation of the subject matter.
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