Beginning January 1, 2024, 401(k) and 403(b) retirement savings plans must meet a series of new requirements under the SECURE Act of 2019 and SECURE Act 2.0 of 2022 that essentially simplify plan rules for employers, expand coverage to more employees and help plan participants save more for their future. As a reminder, some of the laws’ provisions that went into effect in 2023 included raising the required minimum distribution (RMDs) age, reducing penalties for failing to take RMDs and expanding tax credits for small employers with 50 or fewer employees.
Following are some of the most critical changes employers must adopt in 2024 to keep their qualified plans compliant with the law. It is important to note that the IRS has already delayed certain provisions of the act that were set to take effect this year, including a requirement that high earners’ catch-up contributions to qualified retirement plans be made on a Roth basis. This rule is now set to take effect in tax year 2025.
Introduction of Starter 401(k) Plans
Employers that do not currently sponsor employee retirement savings plans may initiate a starter 401(k) or 403(b) that automatically enrolls all employees into the plan with an initial elective salary deferral of 3 to 15 percent of compensation. The annual contribution limit is the same as the annual IRA contribution threshold, which is $7,000 in 2024, plus a $1,000 catch-up contribution for plan participants age 50 and older.
Introduction of Tax-Free Emergency Savings Accounts for Certain Employees
Employers may offer non-highly compensated employees a short-term emergency savings account (ESA) funded with salary-deferred Roth 401(k) contributions capped at $2,500 per year. Contributions above this annual cap must be allocated to the employees’ Roth 401(k)s. While plan participants may take up to one withdrawal a month, only the first four withdrawals each year are free of fees and penalties. An employee who separates from the employer may choose to cash out their balance penalty-free, move it to their Roth 401(k) or roll it over to or into a separate Roth IRA.
Introduction of Penalty-Free Withdrawals for Family Emergencies, Victims of Domestic Abuse
Plan participants facing a personal or family emergency with an immediate and unforeseeable financial need may withdraw from their plans up to $1,000 each year without incurring a 10 percent early withdrawal penalty. The withdrawal must be repaid within three years or risk exposure to the 10 percent penalty.
In addition, beginning in 2024, victims of domestic abuse may make a penalty-free withdrawal of $10,000 or 50 percent of their vested 401(k) account balance (whichever is less) within one year of an abuse incident. Victims have three years to repay those distributions to their plans.
Increased Contributions Limits for SIMPLE Plans
The annual limits for salary deferrals and catch-up contributions to SIMPLE IRAs and SIMPLE 401(k) plans increase 10 percent. Employers with 26 to 100 employees may offer higher deferral limits when they provide a 3 percent employer contribution or a match of 4 percent of compensation.
Higher Dollar Limit for Involuntary Cash-Out of Separated Participants’ Accounts
Employers may transfer a former employee’s 401(k) account to an IRA when the 401(k) vested balance at the time of employee separation (after Dec. 31, 2023) is $7,000 or less, up from $5,000. The employer is not required to obtain the former employee’s consent to make this transfer.
Elimination of RMDs from Employers’ Roth 401(k)s
Participants in a workplace Roth 401(k) are no longer required to begin taking required minimum distributions (RMDs) from those plans during their lifetimes. This follows the same rules for taxpayers with Roth IRAs, whose contributions of after-tax dollars can be withdrawn tax-free after age 59½.
Surviving Spouse Election to be Treated as Employee
An employee’s surviving spouse may elect to be treated as the employee for purposes of taking required minimum distributions, allowing them to take RMDs based on the age of their deceased spouse.
Later Date for Amending Benefit Plans
Employers must amend their retirement saving plans by their company’s tax return filing due date, including extensions, or Sept. 15 for S corporations and pass-through entities and Oct. 15 for C corporations. Previously, amendments had to be signed by the end of the plan year they went into effect.
About the Author: Olga Ismail is the head of Retirement Plan Consulting and a financial advisor with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. She can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or firstname.lastname@example.org.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
401(k) plans are long-term retirement savings vehicles. Withdrawals of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59½, may be subject to a 10 percent federal tax penalty. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance cannot be guaranteed. Matching contributions from an employer may be subject to a vesting schedule. Please review your retirement plan documents or consult with a financial professional for more information.
Posted on January 30, 2024