Employee benefits and retirement plan solutions Trends and Insights SECURE 2.0 Act: IRS offers updated guidance to new retirement rules

SECURE 2.0 Act: IRS offers updated guidance to new retirement rules

The latest IRS guidance on the SECURE 2.0 Act of 2022. Get clarity on 401(k) auto enrollment and escalation, using financial incentives, and treating certain funds as Roth contributions.

Three women looking at a laptop reviewing the SECURE 2.0 updated rules for 401(k) plans.

Some welcome regulatory clarity was delivered in December just as the calendar marked the first anniversary of the SECURE 2.0 Act of 2022 (SECURE 2.0). The IRS released Notice 2024-2, which contains miscellaneous changes and much-needed guidance to many provisions within this groundbreaking retirement legislation.

The new guidance covers both required and optional provisions effective now and, in the future, but here’s a highlight of the more impactful direction for those effective now.

Is your retirement plan required to have automatic enrollment and automatic escalation? (Section 101)

To get more employees to participate and save enough in their employer’s retirement plan, SECURE 2.0 requires that new 401(k) and 403(b) plans utilize a minimum threshold of auto-enrollment and auto- escalation. This change should help drive significant benefits for retirement savers covered by newly established plans. Both proprietary data and survey results show that most employees would stay in the plan if automatically enrolled. Thus, creating a scenario meant to help individuals be better prepared for retirement.


Of participants would continue contributing to the retirement plan if automatically enrolled.

Principal® Retirement Security Survey – Eligible but not participating, December 2023.


Of participants opt out automatic enrollment, no matter the default deferral rate.

Principal® proprietary data as of Oct. 31, 2023.

Plans that were newly established on or after Dec. 29, 2022, require automatic enrollment and automatic escalation to be implemented beginning Jan. 1, 2025, with some exclusions.

IRS Notice 2024-2 helps clarify that the provision doesn’t apply to plans established before Dec. 29, 2022. These are considered pre-enactment plans. However, the term “established” is determined differently for 401(k) and 403(b) plans:

401(k) Plan terms were adopted before Dec. 29, 2022, even though the plan's effective date may be after Dec. 29, 2022.
403(b) The plan's effective date was before Dec. 29, 2022, without regard to the date of adoption of plan terms.

For plan mergers, the requirement doesn’t apply when two pre-enactment, single-employer plans are merged. After the merger, the merged plan retains the pre-enactment status. For spin-offs, if the original plan was a pre-enactment plan, then the spun-off plan also maintains that status.

What are the SECURE 2.0 rules for financial incentives to promote retirement plan participation? (Section 113)

Though we believe incorporating automatic enrollment and automatic escalation are the primary plan design features to increase participation, incentives can be an additional option.

SECURE 2.0 allows plan sponsors to offer small financial incentives to employees to help boost plan participation.

IRS Notice 2024-2 clarifies that the incentive:

  • Can only be made to employees without an election to defer on file.
  • Cannot exceed $250 in value.
  • Cannot be made as a matching contribution nor be paid from plan assets.
  • May be offered as a lump sum or as a series of installments, even over multiple plan years. For example, a plan sponsor may offer a $150 cash card for employees who enroll within the next 30 days and an additional $100 if the employee is still enrolled one year later. Incentive amounts are includable in an employee’s gross income and wages and are subject to withholding and reporting requirements unless another exception applies.

The ability to use incentives may encourage those who are less likely to contribute to the retirement plan. Our data shows that age and income influence one’s decision to participate. Gen Z and those making less than $50,000 annually are most likely not to participate in the employer-sponsored retirement plan.

Can employer matching or nonelective contributions be treated as Roth contributions? (Section 604)

Today, most plan sponsors (76%) offer employees the option to designate their deferral as Roth contributions. Of the employees choosing to do so—Gen Z has the highest percentage (52%) of designating their entire deferral amount as Roth contributions. This seems to correlate with personal finance recommendations that younger workers lean towards an all-in mindset when it comes to Roth.

SECURE 2.0 provides 401(k), 403(b), and governmental 457(b) plan sponsors the option of permitting employees who are fully vested in their employer contributions to designate employer and nonelective contributions as Roth contributions.

The new guidance clarifies that Roth employer and nonelective contributions are not subject to withholding (employees choosing this option may want to increase their withholding as a result) and are not treated as wages for purposes of FICA tax and FUTA tax, with one exception:

Roth nonelective contributions to a governmental 457(b) plan may be subject to FICA, but only if FICA taxes would otherwise apply to the employees.

Roth employer and nonelective options are includable as gross income for the taxable year in which the contribution is allocated to the account and must be reported on Form 1099-R.

Though this optional provision was available as of 2023, retirement plan service providers were waiting for clarification about the taxes. They can now determine the type of build-out capabilities needed to support their systems.

What’s next for Secure 2.0?

We expect the IRS to issue additional guidance throughout the year on provisions in which there are still outstanding questions. In the meantime, find answers to trending questions about the SECURE 2.0 Act and what it means for employers.