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IRS Notice 2024-02 Delivers Start of SECURE Act 2.0 Guidance

On December 20, 2023, IRS released Notice 2024-021 containing a slew of guidance on 12 provisions of SECURE Act 2.0, including:

  1. Expanding automatic enrollment in retirement plans
  2. Modifications to plan start-up credits for small employer plans
  3. Military spouse retirement plan eligibility credit for small employers
  4. Small immediate financial incentives for contributing to a plan
  5. Contribution limits for SIMPLE plans
  6. Exception to the early distribution penalty tax for terminal illness withdrawals
  7. Replacing SIMPLE retirement accounts with safe harbor 401(k) plans during a year
  8. Market rate cash balance plans
  9. A safe harbor for correction of employee elective deferral failures
  10. Provisions relating to plan amendments
  11. SIMPLE and SEP Roth IRAs
  12. Optional treatment of employer matching or nonelective contributions as Roth contributions

A summary of selected segments of Notice 2024-02 follows.

Optional treatment of employer matching or nonelective contributions as Roth contributions

SECURE 2.0 allows 401(k), 403(b), and governmental 457(b) plan sponsors to provide participants the option to receive matching or nonelective employer contributions as designated Roth contributions, effective as of December 29, 2022. The following guidance applies to this new provision:

  • Plan sponsors can decide whether or not to allow any kind of Roth contributions within their plans, whether it’s employee elective, employer matching, or employer nonelective.
  • If offered, and elected, employees must designate employer contributions as a Roth contribution no later than when they are added to their account. This designation is final, but the participant must be able to make or change the designation going forward at least once a year.
  • Roth employer contributions are subject to taxation and separate accounting rules. They include the participant's income in the year they are added to the account, even if the contribution is “deemed to have been made” for the previous year.
  • Only employer contributions that are fully vested may be designated as Roth.
  • Roth employer contributions are not subject to federal income tax withholding and are not wages for purposes of FICA or FUTA withholding.
  • Roth employer contributions must be reported using Form 1099-R for the year in which they are credited to the employee’s account. The total amount of designated Roth matching and Roth nonelective contributions that are allocated in that year are reported in boxes 1 and 2a of Form 1099-R, with code ‘G’ in box 7.
  • Roth employer contributions are not included in the IRC Sec. 415 safe harbor definition of compensation.

Market Rate Cash Balance Plans

To put it simply, Notice 2024-02 allows cash balance plans that previously avoided using market rate interest credits (e.g., returns on an S&P 500 Index fund) for funding because of IRS anti-backloading rules, to convert to a market rate prospectively without special grandfather rules.

SECURE Act 2.0 stated that cash balance plans using a variable interest crediting rate could use a reasonable assumption as to the rate of return (e.g., on a designated S&P 500 Index fund or the yield on designated fixed income securities) not to exceed 6%.

A key question that came up when implementing this provision was whether a plan that hadn’t been using a market rate could, under the new SECURE Act 2.0 rules, switch to a market rate for future benefits, or whether it would be required, under anti-cutback rules, to preserve the old fixed (or variable + a minimum) rate for prior accruals.

According to Notice 2024-02, plans that either

  1. Currently provide increasing pay credits
  2. Are being changed to provide for increasing pay credits may do so prospectively

As long as they don’t reduce a participant’s “accumulated benefit” (the balance in the participant's cash balance account).

These regulations are quite complex, and this is only a summary. They offer plan sponsors considerable flexibility in switching to market-based interest credits for plans with increasing pay credits. If you’re interested in implementing this change, then sponsors should consult with their legal and actuarial advisors as to how best to go about doing so.

Expanding automatic enrollment in retirement plans

SECURE Act 2.0 provides that, effective for plan years beginning after 2024, 401(k) and 403(b) plans established after the law’s enactment date of December 29, 2022, must default participants into the plan at a contribution rate of at least 3% of pay, escalating each year by 1% up to at least 10%. The new rule does not apply to plans adopted before the date of enactment, for the first 3 years of a new employer’s existence, or to employers with 10 or fewer employees.

Notice 2024-02 provides that:

  • When it comes to the exemption for plans established before the date of enactment, a plan is considered established on the day when the terms allowing salary deferral elections are first adopted. Regardless of whether the plan terms are effective after the adoption date.
  • If two plans, both of which qualify for the pre-enactment exception, merge into one, the merged plan also qualifies for the exception. Similarly, if a plan is split from a pre-enactment plan, the exception would still apply. However, if a pre-enactment plan merges with a plan that doesn't qualify for the exception, the exemption is typically lost. It may be possible, however, concerning certain mergers, under certain circumstances, to preserve the exception where the merged plan with the exception is designated as the ongoing plan.
  • The rules for automatic enrollment would apply to starter 401(k) plans.

Tax credit for small plan coverage of military spouses

SECURE Act 2.0 introduces a new tax credit for small employers (i.e., < 100 employees) for DC plans providing that military spouses are, within two months of hire, immediately eligible for and fully vested in employer nonelective and matching contributions. The tax credit is the sum of $200 per military spouse, plus up to $300 based on employer contributions, per year for three years.

  • The requirement of having less than 100 employees must be met for each year that the tax credit is claimed.
  • If an employer provides benefits that don’t qualify for the military spouse credit but later amends or adopts a plan that does qualify, the three-year credit period begins when a military spouse begins participation in that plan (or in the case of an amendment when the amendment takes effect).
  • While the credit is only effective for taxable years of the employer beginning after December 29, 2022, where the three-year credit period begins before 2023 (e.g., qualifying benefits are provided beginning with the 2022 year), the credit may be claimed for the portion of the three years that remains after 2022.

Small immediate financial incentives for contributing to a 401(k) or 403(b) plan

SECURE 2.0 allows employers to offer small or de minimis financial incentives, such as inexpensive gift cards, to encourage employee participation within workplace retirement plans. These incentives, however, must not be paid from the retirement plan’s funds.

Notice 2024-02 provides:

  • A financial incentive is considered de minimis “only if it does not exceed $250 in value.”
  • This special treatment is only available for employees who have no 401(k) or 403(b) salary deferral election in effect.
  • The incentive may be given in installments.
  • Matching contributions do not qualify as de minimis incentives.
  • De minimis incentives are not subject to plan contribution rules. Thus, plan qualification and deductibility timing rules do not apply to them.
  • De minimis incentives are remuneration, includible in gross income and wages and subject to employment tax withholding and reporting.


This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

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