What You Must Know
- The laws created an choice to permit staff to deal with employer-matching contributions to 401(okay)s as Roth contributions.
- The act additionally created a compulsory auto-enrollment rule for retirement plans with a money or deferred association.
- The steerage addresses some provisions which are already in place and others that may grow to be efficient.
Simply earlier than the Christmas vacation, the Inside Income Service issued long-awaited steerage on varied provisions below the Setting Each Neighborhood Up for Retirement Enhancement (Safe) 2.0 Act. The steerage, which is available in a question-and-answer format, addresses some provisions which are already efficient and others that may grow to be efficient within the coming yr or shortly thereafter.
A lot of the steerage is relevant to any sponsor of a retirement plan and addresses points akin to employer Roth contribution necessities, obligatory auto-enrollment guidelines, the de minimis monetary incentive provision and the brand new terminally sick exception to the ten% penalty for early distributions.
Each employers and staff ought to pay shut consideration to the steerage to totally perceive their rights and duties.
Employer Roth Contributions
The Safe Act created an choice to permit staff to elect to deal with employer-matching contributions to 401(okay)s as Roth contributions, that are made on an after-tax foundation and are tax-free when withdrawn.
Beneath the brand new steerage, the IRS has clarified that members have to be allowed to make a Roth election at the least as soon as per yr. Presumably, that election might cowl all employer-matching contributions made all year long. The participant have to be totally vested in an effort to make the Roth election, and the plan remains to be entitled to have a vesting schedule.
Contributions are topic to earnings tax within the yr of contribution however are usually not topic to employment taxes. Contributions are reported as in-plan rollovers in Kind 1099-R.
A plan may be permitted to permit solely employer Roth contributions with out additionally permitting worker Roth deferrals.
Grandfathering Guidelines for Necessary Auto-Enrollment
Safe 2.0 created a compulsory auto-enrollment rule for retirement plans with a money or deferred association. Nevertheless, preparations that had been established earlier than Dec. 29, 2022, are grandfathered and thus exempt from the brand new rule.
The IRS clarified that when two plans which are grandfathered merge, grandfathered standing won’t be misplaced. Additional, a plan won’t lose grandfathered standing by merging with one other plan maintained by multiple employer if that plan features a grandfathered money or deferred association.