7 Questions Advisers Can Ask Plan Sponsors in Q4

September 8, the day PLANADVISER interviewed Vestwell Director of Plan Design and Consulting Kevin Gaston, was also what is known as 401(k) Day, the Friday after Labor Day.

But when speaking with Gaston, about retirement coverage broadly and the minutiae of 401(k) policy changes, one gets the sense that every day is 401(k) Day for him.

Between the SECURE 2.0 Act of 2022 and state mandates, Gaston is not alone, at least among policymakers, when it comes to focusing on defined contribution retirement plans. That’s partly why he sees this as a fruitful moment for plan advisers.

“The best thing about the SECURE credits and 2.0 rule changes are that, if you’re in the industry and you’ve been looking for a shot in the arm, this is a new fresh set of things to talk about,” he says. “That moment where you get to walk into a business owner’s office and set up a plan, you have a trusted new client, and you are their trusted adviser.”

Here are seven question Gaston recommends plan advisers ask clients as they near the final quarter of the year.

Question 1: Are you ready to move from a Savings Incentive Match Plan for Employees IRA into 401(k) plan?

Starting in 2024, plan sponsors can convert a SIMPLE IRA—a government workplace retirement plan designed for small businesses—into a safe harbor defined contribution plan during the plan year without any tax hit.

“A SIMPLE IRA is a great product. There’s nothing wrong with it. It actually fills a need very easily,” Gaston says. “But here’s where advisers would want to look at it. … SIMPLEs have some very basic limits to what they can do and a lot of the complex plan design that a business owner might want to think about.”

Those caps include only being available to companies with fewer than 100 employees and employee salary deferrals being capped at $15,500 if less than 50 years old, at $19,000 if older. Under SECURE 2.0, the switch can also be made to a safe harbor 401(k) or 403(b) plan in the current plan year, as opposed to waiting for the year to change over.

“This gives advisers another option to say ‘Hey, this is the year you’re doing well, and if you want to do more, let’s talk right now. Let’s get this going,’” Gaston says.

Kevin Gaston

Question 2: Are you looking for a way to build up Roth savings?

Employer matches and catch-ups may not be deposited into a Roth account, which the plan sponsor may also be able to take as a business deduction.

Gaston notes that—positively, in his view—the mandatory Roth catch-up contribution for higher-income earners was delayed two years by the IRS. That said, employers can still choose to offer their match or catch-up offering as a Roth offering with taxes paid up front.

Overall, however, recordkeepers, payroll providers and plan sponsors themselves are either not ready for that switch or likely have questions about how to handle it, Gaston says. For instance, an employer contribution would have to be fully vested to be taxed when going into the savings.

“If you’re thinking about employer contributions going to your match, or nonelective as a Roth basis, have that conversation about the complexity that is involved and is that right for your business?” he says, noting that smaller businesses may be more apt to take it on than those with 500 or more employees.

Question 3: Have you taken advantage of employer contribution credits?

Even if a plan sponsor did not make an employer contribution to the plan in 2023, it can make one after the plan year and still deduct it from 2023 taxes.

“If you are a 20-person business and you’re just getting started, you may not have an adviser,” Gaston says. “The biggest thing for advisers is to be able to explain the rules [around employer credits for starting plans] and … [then] partner up twith bookkeepers and CPAs who not only can help you find businesses that don’t have plans that didn’t know any of this, but can get you in the door with a voice of reason and authority.”

Question 4: Are you familiar with the attribution rule changes?

SECURE 2.0 changed some business ownership attribution rules. Business owners may be able to treat plans with common ownership as spin-off plans.

Before SECURE 2.0, in some states, if spouses had separate businesses, each spouse would be considered to own the other spouse’s business, making any changes or spin-offs complicated when it came to retirement plan benefits. Starting in 2024, state community property laws can be disregarded, and spouses can claim rights to their own businesses separate of their partner.

“It was a little unfair that you could have two different 401(k)s for a husband and wife and then move to a different state and need to combine them,” Gaston says. “It was a pain point that isn’t there anymore that advisers can discuss.”

Question 5: Did you have a great year as a company and want to increase company contributions?

Clients can make contributions to the plan up until the date in 2024 they file their 2023 tax returns.

Under prior rules, plan sponsors could only increase company contributions up until the end of the current year. Now sponsors have until the following tax season to make an additional contribution. That will help, Gaston says, an adviser’s “year in review” meetings, because clients are no longer “handcuffed” by not being able to take action if, by January or February, they determine they had a good full 2023 and want to add contributions.

“It’s a small rule, but it makes a big difference for the right person,” he says.

Question 6: Are you a sole proprietor looking to set up a plan for last year?

If so, for the first year only, clients can start a 2023 plan in 2024 and defer salary, even after the year has ended.

This rule takes some of the friction out of a single business owner setting up a retirement plan benefit if they have had a “breakout” year and are ready to start a 401(k) plan, Gaston says.

“It just gives more ability to get that first year up and running,” he says.

Question 7: Do you have highly compensated employees making catch-up contributions or did your plan fail ADP testing that triggers you to make catch-up contributions?

 After the IRS decision to delay the mandatory catch-up contribution for high-income earnings, this catch-up does not need to be treated as a Roth until 2026. But even with the longer timeline, advisers should be aware of the possible tax consequences of having employees pay taxes up front before contributing.

Gaston says this rule, while delayed, will still create fruitful conversations for plan advisers with their clients.

“To me, a lot of these rules are decreasing the friction point of starting a plan,” he says. “Let’s make small businesses and participants have the 401(k) be as useful as possible.”