The SECURE 2.0 Act, signed into law on December 29, 2022, has introduced a transformative feature—small, immediate financial incentives for contributing to retirement plans. As we mark the first anniversary of this groundbreaking change, it's imperative to unravel the intricacies of this innovative provision and understand its impact on both employers and employees.
Traditionally, retirement plans primarily relied on long-term incentives like matching contributions to encourage employee participation. SECURE 2.0 Act, however, ushered in a new era by permitting plan sponsors to offer small financial incentives, such as gift cards in modest amounts, for enrolling and participating in 401(k) and 403(b) plans.
This shift is a welcomed change, acknowledging that individuals may be especially motivated by immediate financial incentives to join their employer's retirement plans. However, a crucial point to highlight is that these small incentives must not be funded from plan assets. Instead, employers must find alternative funding sources for these incentives.
While this marks a positive evolution in benefits law, there are uncertainties that need clarification, potentially causing plan sponsors to approach these incentives with caution. One such ambiguity is the absence of a clear definition for what qualifies as a de minimis dollar figure for these incentives. Without a defined cap, plan sponsors may hesitate due to concerns about potential excesses that could lead to prohibited transactions.
Furthermore, the new rule leaves questions unanswered regarding whether plan sponsors can set conditions on the incentives, such as deferring a specific percentage of pay into the participant account. The issue of excluding certain classes of employees, such as highly compensated ones, remains unclear.
Though the provision is aimed at plan sponsors, service providers have raised queries about providing incentives in addition to or in place of the plan sponsor. This lingering question awaits government clarification before organizations can confidently offer such incentives.
In conclusion, introducing small immediate financial incentives under SECURE 2.0 Act marks a progressive step in enhancing retirement plan participation. While challenges and uncertainties persist, the potential benefits for both employers and employees make this provision a significant development in the landscape of retirement planning.
Stay tuned for more insights as we navigate the evolving landscape of retirement planning and delve into the nuances of legislative changes.
Contact your Marsh McLennan Agency retirement plan advisor to learn about SECURE 2.0 Act and how it affects your organization.
