Saving enough money for retirement is always a challenge.
But for anyone who doesn’t have emergency savings, or who has student loans to pay or who is a long-term part-time worker, that challenge is especially hard.
Starting next year, however, the two most recent retirement laws – Secure Act and the Secure Act 2.0 – contain four provisions that may make it easier for some to bolster their retirement savings while also meeting more immediate financial obligations.
A lot will be up to your employer, however, for two reasons. First, of the four provisions they are only required to implement one of them. The others are optional, said Brian Graff, CEO of the American Retirement Association.
And second, even employers who choose to implement one or more of the provisions may not do so until later in the year as they are still awaiting IRS guidance on outstanding questions and figuring out the administrative complexities of implementation, Graff noted.
Paying off student loans can put a crimp in how much someone can save for retirement. Recent college graduates on staff may be most likely to have student loan debt, but their older colleagues do, too.
The National Institute on Retirement Security found that the 13% of employed Gen Xers – those next in line to retire after the Baby Boomers – still have student loan debt, with a median of $25,000 and an average of $40,000.
And, NIRS noted, “The average amount of retirement savings is consistently lower for Gen X households with student loan debt than those without.”
Starting next year, Secure 2.0 will let employers offer matching contributions to employees who are making student loan payments and put that match into the employee’s 401(k) account. That way, the employee can accrue retirement savings even if they aren’t able to make significant contributions themselves.
A survey by ARA found that a third of employers said they were seriously considering offering a match and Graff thinks more may get on board by 2025. “A lot of employers think it’s a good benefit to attract and retain younger workers,” he said.
Apart from Secure 2.0 provisions, Congress passed a separate law that lets employers give workers up to $5,250 tax free to offset the payment of principal and interest on their workers’ federal and private student loans. That provision is only in effect, however, until December 31, 2025.
Such a benefit, if an employer offers it, might free up an employee to put more into their 401(k).
Boosting emergency savings and access to funds
Secure 2.0 includes two provisions that pertain to emergency savings. Both are optional for employers to implement.
The one companies are most likely to adopt, at least initially, is essentially an additional form of a hardship withdrawal from your 401(k), Graff said.
When the ARA surveyed plan sponsors, 10% said they will add it and another 44% said they are taking a hard look at it.
This provision lets you take out up to $1,000 a year, penalty free, from your 401(k) for any type of emergency, no explanation required. The withdrawal will still be subject to income tax.
Employees may choose to pay the money back within three years through regular paycheck contributions, and they would get a tax deduction for those contributions just as they do for regular 401(k) contributions. But in order to take a second withdrawal of $1,000 in another year, the first amount withdrawn must have been paid back in full.
The second emergency saving provision is often referred to as the “side car.” It involves an employer creating an emergency fund for an employee within their 401(k) plan, and letting an employee make direct contributions to that fund. The employer would cap how much may go into the fund, but under the law it can’t exceed $2,500.
Your employer would match your contributions to the emergency fund but that match would go into the retirement portion of your 401(k).
Your contributions to the emergency fund would be subject to income tax, so you would be funding it with after-tax money. The employer match, however, would still be treated as tax deferred to you – meaning the amount won’t show up as taxable income to you in the year it is made. And it will be allowed to grow untaxed until you withdraw it in retirement.
Once you have hit the cap in the emergency fund, you may either stop making contributions or redirect further contributions to your 401(k) retirement savings account, Graff said.
The provision that employers must implement as a result of both Secure Act and Secure 2.0 pertains to long-term part-time workers and their eligibility to participate in a company’s 401(k) plan.
It used to be a part-time worker had to work at least 1,000 hours over a consecutive 12-month period to be eligible. But thanks to the Secure Act passed in 2019, a part-time worker who has worked at least 500 hours over a 12-month period for three consecutive years (e.g., from January 1, 2021 until December 31, 2023) will be eligible to participate in their employer’s 401(k) plan in 2024.
And Secure 2.0, which was passed at the end of the last year, made the eligibility criteria even easier, requiring that part-time workers who log at least 500 hours a year only need to do so for two consecutive years to be eligible. But that provision won’t take effect until after December 31, 2024. That means in 2025, any part-timer who has logged 500 years annually in 2023 and 2024 would be eligible to start saving in their employer’s 401(k) and would be eligible for the employer match.
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