How to Prepare for Section 603 of SECURE Act 2.0
Have you been paying close attention to the SECURE Act 2.0? If so, you know that Congress has written new laws to expand retirement plan coverage for millions of Americans. While certain sections of SECURE Act 2.0 are already in effect, Section 603—along with many others—will take effect on January 1, 2024.
This means that 401(k) and 403(b) plan providers and product leaders have a tight turnaround to stay compliant. It’s a race against time, but with proper planning, you can beat the clock. In this post, we break down Section 603 of SECURE Act 2.0 and the steps 401(k) and 403(b) plan providers should take to ensure compliance by the fast-approaching deadline.
Breaking down Section 603
The United States is facing a retirement crisis. Across all age groups, the average American has only $89,300 set aside for retirement. When you consider that the benchmark set by popular savings strategies like the 4% rule is $1.5 million, there’s due cause for concern.
To curb this trend and help more people prepare for retirement, Congress is updating the catch-up contribution rules in Section 603 of SECURE Act 2.0.
Under current law, retirement plan participants age 50 and older can make catch-up contributions to their 401(k), 403(b), or IRAs—but under Section 603, that’s about to change. According to Section 603, if a retirement plan participant wants to make a catch-up contribution—and they earn more than $145,000 per year—they will be required to make the contribution on a Roth tax basis. In other words, catch-up contributions for these individuals will no longer be eligible for pre-tax treatment in 2024.
The purpose of the provision is to create more opportunities for Americans to accelerate their savings in the years leading up to retirement. By imposing a Roth-based rule, Congress ensures that plan participants will be able to withdraw tax-free dollars when they retire, thereby strengthening their financial security.
While a glitch in Section 603 could inadvertently eliminate the ability for anyone to make catch-up contributions in 2024, Congress has told the U.S. Treasury that corrections are coming, so retirement plan providers should prepare to stay compliant with Section 603 as Congress intended.
Section 603: Questions to ask yourself right now
Section 603 is effective beginning January 1, 2024, which means that 401(k) and 403(b) providers must be prepared to update policies for every single retirement plan participant age 50 or older who is making catch-up contributions and earns over $145,000. To ensure you are ready for the new requirements, here are some questions you should be asking yourself right now:
- How do I identify which of my plan participants are currently subject to Section 603 regulations, and how many of these plan participants am I responsible for? Hundreds? Thousands? More?
- How do I identify when participants become newly eligible (i.e., when they reach their 50th birthday and/or if they begin earning more than $145,000)?
- Do I have the technology in place to automate all of these contributions updates and manage them on an ongoing basis?
- Is my team capable of updating every single retirement plan in just six months?
If you can’t keep up with Section 603, you risk noncompliance, which could result in harsh penalties, steep fines, or legal fees associated with disputing any penalties in court.
How to prepare for Section 603 of SECURE 2.0
If you determine that you are among the plan providers affected by Section 603, here’s what you can do to stay prepared:
- Study up on Section 603 and learn as much as you can about the legislation. To help yourself, your team, and your customers understand what’s happening, remember the provision’s key points in simple terms:
- If a plan participant 50 or older makes more than $145,000 per year and wishes to make a catch-up contribution, they must do so on a Roth basis.
- If other eligible employees wish to make catch-up contributions on either a pre-tax or Roth basis, they are permitted to do so.
- All retirement plans must be modified to reflect these updates by January 1, 2024.
- Get ready to transfer data. To prepare for Section 603, you’ll need to pull in data from payroll systems to:
- Determine which participants are 50 or older and earned over $145,000 in the 2023 tax year
- Identify whether they are making catch-up contributions
- Verify those contributions are made on a Roth basis.
- Monitor the situation. It’s unlikely, but Congress could delay the provision or the IRS could extend compliance due dates to January 1, 2026. Nevertheless, preparing for Section 603 should be mission critical at your organization, so you don’t fall behind.
Updating the data
Naturally, updating contributions means you’ll have to exchange large volumes of data between you and plan providers. Since you need to look at every plan participant who is 50 or older and earns more than $145,000 per year, you’ll need to pull in data from HRIS and payroll systems, such as:
- Participant Information: Each participant's full name, Social Security number, and contact information is necessary to identify and locate the individual's retirement plan account.
- Income Verification: Documentation or records are needed to confirm that the participant's gross income exceeds the threshold of $145,000 per year.
- Account Balance: Checking the current balance of the participant's retirement account(s) helps determine the available funds for transferring catch-up contributions to a Roth basis.
- Catch-Up Contribution Eligibility: Each participants’ date of birth is needed to confirm whether they are age 50 or older. This is crucial since catch-up contributions are only available to participants who have reached the age threshold.
- Job Change and Contribution Allocation: If a participant changes jobs mid-year, they may have contributed to retirement plans at both employers. Since each employer's retirement plan would have its own account for the participant, you need to consider the contributions made at each employer and ensure that the catch-up contributions are correctly allocated and characterized as Roth contributions.
- Allocation Details: Information about the participant's investment allocation within the retirement account, including the percentages or amounts invested in different asset classes or specific funds, helps ensure that the updated contributions align with the participant's desired investment strategy.
While this data can vary based on your current retirement plan, platform, or procedures in place, it should give you an idea of how complex the compliance process can be. Now that you know the different types of data, how will you transfer all of it?
Transferring the data
When you’re updating retirement plans to stay compliant with Section 603 of SECURE Act 2.0, there are four ways to transfer data:
- Entering data manually
Manual data entry is the least expensive option in terms of upfront costs, but it puts undue burden on sponsor administrators and is prone to errors. Improperly tracking data could result in a failure to update retirement plans and expose you to Section 603 compliance regulations. Manual data entry is simply unreliable, time-consuming, and expensive.
- Transferring data via SFTP files or flat files
Transferring SFTP and flat files could be easier than asking in-house developers to build custom, direct integrations—but transferring all of that sensitive retirement plan data has several drawbacks:
- Sponsor admins are forced to compose custom reports and upload them correctly.
- Manual data entry raises risks and requires validation to avoid errors.
- This method does not allow for real-time data access.
- Excessive data syncs slow down the compliance process for retirement plan providers and plan sponsors.
- Building your own custom integrations
Custom integrations with HRIS and payroll systems offer the advantages of automatic, real-time data syncs, as well as read and write capabilities. However, they are also complex and expensive to build and maintain. Challenges of building custom integrations include:
- Number of systems: Did you know that there are more than 5,700 HRIS and payroll systems in the U.S. market? To serve every customer, your team would need to build custom integrations for hundreds of different systems, which could take months and cost hundreds of thousands of dollars.
- Technical complexity: Building custom integrations is technical, complex, and difficult to achieve. Only experienced engineers with a strong understanding of both HRIS and payroll systems are capable of building the most effective custom integrations.
- Cost: Custom integrations are not a cost-effective option for retirement plan providers. The soft costs of building a single integration can be as high as $200,000, and the hard costs, such as API fees, can add up quickly. Ultimately, custom integrations are a time-consuming and expensive undertaking.
- Leveraging the power of unified employment APIs
Unified employment APIs combine the advantages of custom integrations with the simplicity and cost-effectiveness of off-the-shelf software. How do they work? A unified employment API aggregates connectivity to hundreds of HRIS and payroll systems—automatically, instantly, and with a single integration. This means that you can get all of the benefits of custom integrations without having to build and maintain them yourself.
Specific to Section 603, unified employment APIs can help you:
- Pinpoint which participants are 50 or older and make more than $145,000 per year
- Limit these participants to Roth catch-up contributions in 2024
- Automate their catch-up contributions per pay run
- Automate recordkeeping to stay compliant
- Monitor participant ages and income to repeat the process in real time
- Identify when a participant switches jobs in the middle of the year
- Confirm a participant’s $145,000 salary from multiple payroll providers
What are the detailed pros and cons of buying a unified employment API versus building integrations in-house? Find out here.
A Section 603 implementation plan for 401(k) and 403(b) providers
Remember, time is a crucial factor. To ensure you have a solution in place to comply with Section 603 by the deadline of January 1, 2024, we recommend:
- Evaluating your data transfer options and making a decision as soon as possible
- Implementing a solution no later than August 31, 2023
- Validating and testing your solution in September
- Rolling out your solution to all users in October
- Monitoring performance for complete and compliant functionality through the end of the year
With this implementation plan in place, you’ll be able to make the necessary adjustments before January 1, 2024.
Here's how Finch can help
Finch is a unified employment API that integrates with 200+ HRIS and payroll systems, allowing retirement plan providers to transfer critical data quickly and responsibly. With real-time access to employment data, retirement plan providers can automate contribution management and push changes directly to payroll.
The benefits of using Finch include:
- Speed to market: Finch is a pre-built solution that's ready to use. There's no need to build and maintain custom integrations, so you can launch integrations fast.
- Automated enrollment and contribution management: Finch provides real-time read-and-write access to HRIS and payroll systems, so you can automate contribution management with ease. This reduces the risk of errors and saves sponsor admins time in the process.
- Stronger security: Finch is a pass-through system, which means that it does not store any sensitive data. This reduces the risk of data breaches and compliance violations.
- Confident compliance: Finch lets you set predefined rules and algorithms for retirement plan data—such as age and income—so you can check for compliance with contribution limits and eligibility criteria. You can also flag any non-compliant data for further review and action.
- Strong security: Finch uses industry-standard security measures to protect data privacy and security.
As you keep close tabs on Section 603, understand that time is short and compliance is critical. With a unified employment API like Finch, you can automate all the necessary updates and stay compliant.
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