How PTO Conversion Plans can help with Secure 2.0

The retirement savings gap has become a significant problem for American workers. The financial hardships of the pandemic, coupled with rising inflation, have put people behind on their contributions, resulting in putting off retirement—nearly one-quarter of workers say they plan on retiring later than expected. Additionally, over half of Americans have taken early withdrawals from their 401(k) accounts to help make ends meet.

The government realizes this is a problem for millions of Americans, so it has stepped in to help with the SECURE 2.0 Act. Here's what it means for you and your financial wellness benefits.

What is the Secure 2.0 Act?

The Secure 2.0 Act addresses additional issues related to retirement savings that were not part of the original SECURE Act. The act aims to provide more flexibility and accessibility to help individuals plan for a more secure future. The act was signed into law in late 2022. It featured several new provisions related to retirement, such as higher catch-up contributions, qualified charitable distributions (QCDs), reduced withdrawal penalties for failing to take a required minimum contribution (RMD), and more.

However, for folks who are still several years off from retirement, the act offers several other provisions that benefit their financial wellness.

How will Secure 2.0 impact my financial wellness benefits?

Automatic enrollment in your employer's 401(k) plan

One of the main benefits of the SECURE 2.0 act is automatic enrollment in your employer's 401(k) or 403 (b) plan at 3 percent. Additionally, this provision permits retirement plan service providers to offer plan sponsors automatic portability services, transferring an employee's low-balance retirement accounts to a new plan when they change jobs. These actions eliminate the hurdles employees face when opening a retirement account or moving their balance, making it much easier to start saving for retirement.

Emergency saving account options

Another provision of this act is adding an emergency savings account for defined contribution retirement plans. This Roth account is eligible to accept employee contributions starting in 2024. Employees would be limited to a contribution amount of $2,500 annually (or lower, as set by the employer), and the first four withdrawals in a year would be tax- and penalty-free. In addition, depending on plan rules, contributions may be eligible for an employer match. With this benefit, employees can be more inclined to build their emergency savings to use in the event of an unexpected or short-term expense.

Employer-matched contributions to pay down student debt

A unique feature of this act is the ability for employers to "match" employee student loan payments with matching payments to a retirement account. Though this won't go into effect until 2024, it provides an excellent incentive for employees to save for retirement while simultaneously paying down their loans.

Rollover 529 plans to a Roth IRA

After 15 years, 529 plan holders can roll their assets over to a Roth IRA. Once rolled over, beneficiaries are still subject to annual Roth contribution limits and an aggregate lifetime limit of $35,000. That said, rollovers cannot exceed the aggregate before the five years ending on the distribution date. The rollover itself is also treated as a contribution towards the annual Roth IRA contribution limit.

How does a paid time off conversion plan work under Secure 2.0?

A paid time off (PTO) conversion plan can be an effective strategy to enhance the benefits provided under the SECURE Act 2.0.

The SECURE Act 2.0 introduced several retirement plan enhancements, such as increased contribution limits and improved retirement savings options, and a PTO conversion plan can align well with these changes by allowing employees to convert unused PTO into retirement contributions.

Here’s how you can leverage this combination to maximize benefits for employees:

PTO conversion to retirement contributions

Unused PTO for retirement savings: Allow employees to convert their unused PTO into contributions to their retirement accounts, such as 401(k) or Roth 401(k) plans. Under SECURE Act 2.0, employees now have more flexible contribution limits and options, making this a powerful tool to boost retirement savings without impacting their current income.

Tax-advantaged contributions: Contributions from converted PTO can go into tax-advantaged accounts, allowing employees to save more pre-tax dollars or contribute to post-tax retirement savings (Roth 401(k)).

Increased catch-up contributions: For employees nearing retirement, SECURE Act 2.0 increases catch-up contribution limits. PTO conversion can be a practical way for older employees to contribute more and take advantage of the higher limit without additional strain on their paychecks.

Expanded Roth Contributions

Roth option for PTO conversion: SECURE Act 2.0 increases the availability of Roth accounts within employer-sponsored plans. Allowing employees to convert PTO into Roth contributions can give them the flexibility to build after-tax retirement savings, potentially leading to tax-free income in retirement.

Diversification of retirement income: Employees can choose whether to allocate their PTO conversion to traditional pre-tax 401(k) contributions or Roth accounts, allowing them to diversify their retirement income streams and better manage future tax liabilities.

Support for Long-Term Part-Time Workers

Boost contributions for part-time workers: The SECURE Act 2.0 expands eligibility for part-time workers to participate in retirement plans. Offering PTO conversion to part-time employees can provide them with an additional way to contribute toward their retirement, even if they have fewer hours or lower wages, encouraging long-term savings.

Retirement Plan Awareness and Engagement

Educate employees on SECURE Act 2.0 and PTO conversion: Use the introduction of a PTO conversion plan as an opportunity to raise awareness about SECURE Act 2.0 enhancements. Inform employees about how converting unused PTO can help them meet new contribution limits, diversify their savings with Roth accounts, and make the most of catch-up contributions.

Address Student Loan Debt Repayments

Support for loan repayments and retirement contributions: The SECURE Act 2.0 provides provisions for matching contributions tied to student loan repayments. A PTO conversion plan can complement this by allowing employees to divert their unused PTO to student loan repayments while ensuring that employer matches are directed into retirement savings.

How PTO conversion benefits employers and employees under Secure 2.0

Offering a PTO conversion plan shows a commitment to employee financial wellness, which can improve retention, engagement, and job satisfaction. Additionally, it provides a tax-efficient way to offer enhanced benefits.

From an employee perspective, it allows employees to better manage their PTO, reduce taxable income, and increase retirement contributions—while also benefiting from the SECURE Act 2.0’s expanded provisions.

How To Use a PTO Conversion Plan Under Secure 2.0