Topic: LEGAL & LEGISLATIVE

These two legislative victories in Kansas and Ohio were top priorities in the NAPEO 2024 State Government Affairs State Action Plan.    

The recent election should have little to no impact on the PEO industry priorities before Congress. We have adopted legislative and regulatory priorities that can obtain bipartisan support.

Pay transparency is one of the hottest trends impacting the workforce today. It affects all aspects of workplace relationships – including hiring, recruitment, and retention efforts; supervision and leadership; and compensation and benefits.

Loper Bright’s impact is already being felt. Agencies are backing away from some controversial rules and both new and pending challenges to agency positions have been bolstered as courts begin to apply the new framework.

There are three actions PEOs and their customers can take to save up to 85% in California litigation costs thanks to a recent legislative compromise. Anyone doing business in California is no doubt familiar with the Private Attorneys’ General Act – or PAGA, the scariest four-letter word in the state for employers.

The Pregnant Workers Fairness Act (the “PWFA”) requires covered employers to make reasonable accommodations to qualified employees or applicants known limitations related to, affected by, or arising out of pregnancy, childbirth, or related medical conditions unless doing so would cause undue hardship on business operations.

The Supreme Court’s recent landmark ruling that gives employers a powerful tool to fight back against regulatory overreach will have a broad impact on just about every area of workplace law – and every industry.

We entered 2024 knowing that the odds of any legislation, let alone major bills, were quite low. Furthermore, Congress and the White House are up for partisan grabs in this upcoming election. Knowing this, we are using this year to build relationships with members of Congress.

Focus on pay transparency is showing no signs of slowing down. The pay transparency movement, which started with a couple of states, continues to steadily spread across the country and is now a focus at the federal level. PEOs and their clients must remain vigilant of current and proposed laws and developing trends.

The California Supreme Court’s recent decision in Raines v. U.S. Healthworks Medical Group could create additional exposure for PEOs under California’s employment discrimination laws.

The SECURE 2.0 Act was passed as part of the larger Consolidated Appropriations Act of 2023. The SECURE Act itself was over 350 pages containing a myriad of retirement-focused provisions. The 2.0 Act impacts all of the most commonly used retirement vehicles (think 401K, 403b, 457 and IRAs) and does so with provisions correcting the previously passed SECURE Act, some taking effect immediately in 2023, others in 2024 and 2025 and still others as late as 2033.  Not every provision will apply toward PEOs or even your clients, but many of them can have far-reaching changes that will require PEOs and the plan sponsors to be informed. 

2023 PROVISIONS 

The most publicized change for 2023 was to the required beginning date for required minimum distributions (RMDs) from qualified retirement plans and IRAs. Prior to the passage of both SECURE Acts, the date had been April 1st of the year after someone attained the age of 70½. This half-year “rule” caused much confusion and headaches for individuals and plan administrators. The first SECURE Act changed this to age 72 and now the SECURE 2.0 Act has moved it further to age 73. This will go even further in 2033, to age 75. 

The SECURE 2.0 Act has come to be known as the “Rothification” Act. Many retirement funding options have now been opened to being done on a post-tax basis (similar to Roth IRA contributions).  Beginning in 2023, Roth contributions can now be made to SEP and SIMPLE IRA accounts as well as being available for employers to make Roth matching contributions for 401(k), 403(b) and 457(b) plans. The overall goal was to provide a short-term influx of tax dollars to the government due to post-tax treatment and to provide tax-free growth and distributions in the future for individuals. While a welcome change to many, the IRS will need to issue further guidance so employers, employees and individuals will know how to report these contributions.   

Tax credits available to small employers to cover start-up expenses for a new plan were enhanced under the SECURE 2.0 Act. The credit percentage increases to 100% for employers with less than 50 employees for the first three years of a new plan. SECURE 2.0 also implemented a new credit available for employer contributions to a new small employer pension (SEP) plan. The credit is the employer contribution amount, up to $1,000 per employee, for a five-year period. The full credit applies to employers with 50 or fewer employees and prorated up to 100 employees.  The credit also reduces each year going from 100% in the first two years to 75% in year three, 50% in year four and finally 25% in  year five. This small employer pension credit was also made applicable to an employer joining a multiemployer plan (MEP).  SECURE 2.0 corrects wording from the first SECURE Act allowing an employer to retroactively apply this credit back to 2020 (an amended tax filing will be required). 

2024 PROVISIONS  

Beginning in 2024, catch-up contributions made to eligible employees who had compensation exceeding $145,000 in the prior year will need to be made on a Roth (post-tax) basis. The IRS pumped the brakes on this provision on August 25, 2023, to provide a two-year transition period for employers to make this switch. The IRS also clarified that high-paid self-employed persons (i.e., partners in a partnership) won’t be required to make catch-up contributions on a Roth basis even if they exceed the income threshold. The IRS also indicated that further guidance will be forthcoming once public comment has been received and reviewed. 

Employers will have the option to adopt a plan provision to allow for employer matching contributions to be made for employees who are making student loan payments. The employer effectively treats those payments as the employee’s “deferral” and makes corresponding match contributions. Similar to some of the other provisions, further guidance will be needed from the IRS to determine what levels are to be used and how the amounts are referenced/supported. 

Starter 401(k) plans can be offered by employers who wish to provide the ability for employees to defer a part of their wages without having all the added administrative testing requirements applicable to traditional 401(k) plans.  These plans would only allow for employee deferrals at a level between 3-15% of compensation. 

Roth 401(k) accounts will no longer be subject to RMD rules. Prior to SECURE 2.0 Act, Roth 401(k) balances were included in RMD computations for those employees who were taking or were required to take RMDs from their qualified retirement plans. Whereas Roth IRA accounts were not subject to RMD rules, their 401(k) brethren are now treated the same way. 

FUTURE PROVISIONS TO KEEP ON YOUR RADAR 

In 2025, all 401(k) and 403(b) plans will be required to adopt automatic enrollment features that start initial deferral elections at 3% for employees becoming eligible to participate in the plan. The employee can elect out and/or request a refund of any deferrals within 90 days of eligibility. Exclusions will be allowed for employers with 10 or fewer employees. 

Catch-up contributions will increase to $10,000 (or 50% more than the level computed for 2024) for employees who are at least 60 years old. They will also be indexed for inflation going forward (for those age 50 or older as well). 

Part-time workers (those with at least 500 hours per year) will be allowed to participate in a 401(k) plan one year earlier than what was passed under the original SECURE Act. If an employee meets the 500-hour rule for two consecutive years, they can be eligible to participate in the plan (assuming they meet the other eligibility rules – age). Any employer contributions made can be placed on a vesting schedule. 

There are numerous other provisions of the SECURE 2.0 Act that may impact PEOs and their clients. This article outlines several of the likely provisions that will impact most PEO plans. But as with most bills passed by Congress, there are still many rules that will require further guidance from the IRS and substantial updates to be made by plan administrators. Additionally, new language will need to be worked on to allow employers to adopt the necessary plan amendments imposed by the SECURE 2.0 Act. 

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs. 

There’s an energy around the PEO industry this year that’s palpable. Nowhere is that more true than in Washington DC, where we are starting to make our mark as a strong contributor to the vitality and success of the backbone of the economy: small and mid-size businesses. We’ve got a great story to tell. Help us tell it.

There’s an energy around the PEO industry this year that’s palpable. Nowhere is that more true than in Washington DC, where we are starting to make our mark as a strong contributor to the vitality and success of the backbone of the economy: small and mid-size businesses. We’ve got a great story to tell. Help us tell it.