Common Cash Concerns: What Signs Can Be Found in the Guidance for Secure 2.0 Act Sections 304 and 348?

Cash balance plans are subject to a backloading test, to ensure they do not disproportionately favor older employees. The IRS’s new guidance allows more flexibility in the interest rates cash balance plans may use.

The fact that the Secure 2.0 Act is still gathering attention is not news. But recent guidance from the IRS to clarify how the implementation of the new laws might be. Two smaller sections of the Secure 2.0 Act that may be worthy of additional investigation by plan sponsors and their compliance teams. Both sections involve cash: section 304 concerning increasing the small account cash out limit and section 348 which addressed defined benefits with cash balances. Recently, the IRS issued guidance on the first, not the second, but each issue has unique concerns and is worth reviewing. This guidance may hint at potential regulatory flexibility towards plan sponsors.

While the Secure 2.0 Act ushered in a host of updates to retirement plan law, not every provision was crystal clear. In late February 2024, in an effort to clarify concerns regarding tax treatment of plans and distributions, the IRS issued new guidance.[1] Cash balance plans were included in the grocery list of sections this new guidance covered. “Section 348 …  provided that cash balance plans that use pay credits and variable interest credits can assume a crediting rate is reasonable provided they do not exceed 6%.”[2]

This area can pose potential confusion for plan sponsors of this type of benefit plan for a host of reasons. Included among those reasons may be the interest rate that is sometimes tied to the increase in those cash benefit deposits by the employer. In addition, these kinds of plans also must meet a balancing test similar in some ways to the anti-discrimination test to which other plans are subject. Cash balance plans are subject to a backloading test, to ensure they do not disproportionately favor older employees. The IRS’s new guidance allows more flexibility in the interest rates cash balance plans may use. In its recent guidance, the IRS provided that a plan sponsor should use a reasonable projection of the variable interest crediting rate, not to exceed 6%, in these plans. This, in turn, may create more flexibility for plan sponsors of those plans to create pay incentives for senior employees.

An additional aspect of the Secure 2.0 Act that is gaining attention involves section 348. That section increased the automatic cash out for small balances in plans and went into effect in 2024, slightly later than some other provisions. Under previous law, the automatic cash out for former employees was capped at $5,000. Now, that limit is $7,000. Since many employers began to offer multiple plans in recent years – adding IRAs to their line up of retirement benefit options – some employers may have struggled with how to apply this automatic cash out to former employees with balances in multiple accounts. It may be important to note that the small balance cash out is per plan. That means, for example, a former employee who enrolled in a newly offered IRA and but ceased contributing to it due to inflation or other budgetary constraints leaving an account balance below $7,000 yet has a balance in their 401(k) account of more than $7,000 would be cashed out of the IRA not the 401(k) account. This higher cash out limit may help reduce the administrative burden on plan sponsors.

Cash outs may also reduce administrative burden by alleviating the need for a plan audit in some circumstances. Market fluctuations and changes in interest rates had large impact on some companies’ workforces. Many increased to meet the needs of new demand, others reduced workforces to address reduced funding. These fluctuations may have changed the total number of plan participants so that some plan sponsors may no longer have to audit their plans. line. Experts have noted that the increased amount for automatic cash outs may help plans fall into the small plan category. “If your plan filed as a “small plan” last year and the number of plan participants is fewer than 121 at the beginning of this plan year, you may continue to file your Form 5500 using Schedule I as a “small plan” under the “80-120 Participant Rule.” This rule allows plans with between 80 and 120 participants at the beginning of the plan year to file the Form 5500 in the same category (“large plan” or “small plan”) as the prior year filing.”[3]

Some experts note that this provision has elements plan sponsors may want to keep an eye on. Firstly, while the force out provision may be automatic in its operation, plan sponsors must take action to include force out provisions in their plan. Other key aspects to consider include that there is no mechanism of adjustment to the $7,000 cap.[4]





These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.

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