ERIC Highlights Key Areas of Confusion on SECURE 2.0

The ERISA Industry Committee sent an open letter to the Department of the Treasury and Internal Revenue Service on Thursday asking for clarification on various provisions in the SECURE 2.0 Act of 2022, including the student loan match, Roth catch-up contributions and Roth matching contributions.

The letter asked the federal agencies to prioritize these regulatory and guidance projects as part of their priority guidance plan for 2023 through 2024. ERIC’s requests mostly focused on issues raised by the SECURE 2.0 Act, but also addressed a few other topics.

SECURE 2.0 permits plans to offer matching contributions for student loan repayments starting in 2024 as an optional feature. The statute allows participants to self-certify their payments and does not lay out procedures that sponsors may use to verify that participants are, in fact, paying down their debt. The ERIC letter asks for clarification on this point, as well as how the match can be structured in terms of match frequency: paycheck by paycheck, quarterly, annually, etc.

The letter also encourages the IRS to explore if student loan payments made by a participant can be matched by employer contributions to 529 plans or health savings accounts. Andy Banducci, the senior vice president for retirement and compensation policy at ERIC, acknowledges that the statute does not explicitly permit this. But Banducci recalls that the student loan match concept started with an IRS private letter ruling and suggests the IRS could explore if it has the authority to expand the concept to include employer matching contributions to 529s and HSAs, not just retirement accounts.

SECURE 2.0 also permits sponsors to allow employer matches to be made on a Roth basis, meaning participants could elect to pay income tax on their match in order to receive it into a Roth source. Sponsors want clarification on this provision, especially as it relates to vesting schedules, Banducci says. If an employer has two-year cliff vesting, but an employee has been electing a Roth match and therefore has been paying taxes on unvested matching contributions, then leaves after one year, what happens? Do they get the money anyway? Are they owed a tax refund? An important question, and one for the IRS to answer, since the statute does not. Further, can the student loan match be made to a Roth source?

ERIC’s letter also seeks guidance on how to implement the provision that requires Roth treatment for catch-up contributions by highly compensated employees.

Banducci says this provision creates issues for employees with variable income and for mid-year hires with respect to determining their status. The letter asks for clarity and asks if retirement plans could simply mandate Roth status for all catch-up contributions, regardless of employee status, if only for simplicity’s sake. Banducci says this is not spelled out in the statute, but if it is permitted by the IRS, it could save a lot of recordkeeping stress.

Lastly, the letter asks for guidance on health coverage items unrelated to SECURE 2.0. Specifically, the letter asks for the flexible spending account glitch to be fixed. Melissa Bartlett, the senior vice president for health policy at ERIC, explains that the FSA glitch occurs because the IRS does not permit one spouse to have a flexible FSA while the other has an ordinary HSA. Technically, the partner with the HSA is not eligible for it, since the spouse’s FSA could also be spent on them. Bartlett says the IRS does this to prevent “double-dipping.” The letter does not outline how precisely to fix the situation, only that it should be addressed.