On December 20, 2023, IRS released Notice 2024-02, “Grab Bag” guidance on certain provisions of SECURE 2.0. Outlined below is a series on Grab Bag guidance of particular interest to sponsors of tax-qualified retirement plans, including SECURE 2.0 provisions with respect to:

  • Optional treatment of employer matching or nonelective contributions as Roth contributions
  • For cash balance plans using a variable interest crediting rate, allowing use of a reasonable projection of that variable interest crediting rate, not to exceed 6%
  • Plan startup/contribution incentives
  • Other Grab Bag guidance

Roth Employer Contributions

SECURE 2.0 allows DC plan sponsors to provide participants the option to take matching or nonelective employer contributions on a Roth basis, effective as of December 29, 2022. With respect to this new provision, the Grab Bag notice provides the following guidance:

  • Sponsors may but are not required to include in their plan any type of Roth contribution: employee elective, employer matching or employer nonelective.
  • The rules currently (pre-SECURE 2.0) applicable to employee elective Roth contributions also generally apply to the new Roth employer contributions. Thus, designation of an employer contribution as a Roth contribution “must be made by the employee no later than the time that the contribution is allocated to the employee’s account and must be irrevocable.” Roth employer contributions “are subject to inclusion treatment and separate accounting rules,” and the employee must be able to make or change the designation at least once a year.
  • The employer Roth contribution is included in income in the year it is allocated to the participant’s account (even, e.g., where the contribution is “deemed to have been made” for the prior year).
  • Only fully vested employer contributions may be designated Roth contributions.
  • Employer Roth contributions are not subject to federal income tax withholding under IRC section 3402. and are not wages under IRC section 3121(a), for purposes of FICA, or IRC section 3306(b), for purposes of FUTA.
  • Employer Roth contributions “must be reported using Form 1099-R for the year in which the contributions are allocated to the individual’s account. The total amount of designated Roth matching contributions and designated Roth nonelective contributions that are allocated in that year are reported in boxes 1 and 2a of Form 1099-R, and code ‘G’ is used in box 7.”
  • Employer Roth contributions are not included in the IRC section 415 safe harbor definition of compensation.

Cash Balance Plans

To start with the bottom line at the top: the Grab Bag guidance will generally allow plans that have not provided market rate interest credits (e.g., returns on an S&P 500 Index fund) because of IRS anti-backloading rules to convert to a market rate prospectively without special grandfather rules.


Prior to the change made by SECURE 2.0, IRS took the position that cash balance plans that provided for a variable interest crediting rate (e.g., a rate based on returns on an S&P 500 Index fund) had to assume that all future interest credits were zero for any year in which the variable rate was negative.

This position created a problem for plans that provided for increasing pay credits, e.g., a formula that provided a pay credit of 3% for the first five years of service, 4% for years six to15, and 5% for year 16 and up. Those plans generally depend on the value of future interest credits to avoid violating ERISA/IRC anti-backloading rules, and because of IRS’s “future interest credits = 0” rule generally did not adopt a market interest crediting rate. Instead they adopted a fixed interest crediting rate (e.g., 4%) or one of the “fixed income index + minimum” rates permitted under applicable regulations (e.g., a 1-year Treasury Rate with a 3% cumulative minimum).

SECURE 2.0 reversed IRS’s somewhat counterintuitive position, providing that plans using a variable interest crediting rate could use a reasonable assumption as to the rate of return on, e.g., a designated S&P 500 Index fund or the yield on designated fixed income securities, not to exceed 6%.

In implementing this provision, a critical question has been, if a plan that did not use a market rate (because of IRS’s regulatory position) could it, under the new SECURE 2.0 rule, simply switch (prospectively) to a market rate or would it be required, under IRC anti-cutback rules, to preserve the old fixed (or variable + a minimum) rate for prior accruals.

Clarity about what the SECURE 2.0 change does

Notice 2024-02 begins by making explicit what the SECURE 2.0 fix does. It is worth quoting IRS at length here:

For a cash balance plan that provides for pay credits to participants that increase with a participant’s age or service and provides for a variable interest crediting rate, the effect of the enactment of [the cash balance provisions] of the SECURE 2.0 Act is that the plan no longer risks violating [IRC anti-backloading rules] if that interest crediting rate falls below a certain point. To prevent such a violation prior to the enactment of [SECURE 2.0], a plan of this type had to provide for a fixed annual minimum interest crediting rate as part of its interest crediting rate. With the enactment of [SECURE 2.0], the fixed annual minimum interest crediting rate is no longer needed.

Generally, no anti-cutback problem for plans switching to a market rate/variable rate

Under Notice 2024-02, plans that either (1) are currently providing increasing pay credits or (2) are being changed to provide for increasing pay credits may do so prospectively, so long as they do not reduce a participant’s “accumulated benefit” (that is, the balance in the participants cash balance account) “determined as of the end of the interest crediting period that includes the applicable amendment date.”

IRS further clarifies SECURE 2.0 anti-cutback relief for cash balance plan amendments as follows:

  • The relief “applies with respect to an amendment that affects interest credits for interest crediting periods beginning after the later of the effective date of the amendment or the date the amendment is adopted, but not interest credits for interest crediting periods beginning before the later of the effective date of the amendment or the date the amendment is adopted.”
  • The relief applies “only if: (1) the plan’s interest crediting rate prior to the amendment is the greater of a fixed annual minimum rate or [a fixed income index + minimum permitted under regulations], and the amendment either (a) reduces or eliminates the fixed minimum interest crediting rate while retaining the underlying interest rate … or (b) changes the interest crediting rate to an investment-based rate [i.e., a market rate interest crediting rate]; or (2) the plan’s interest crediting rate prior to the amendment is a permitted fixed rate …, and the amendment changes the interest crediting rate to any permitted variable rate ….”

We note that these rules are very technical and can only be summarized here. They do, however, allow sponsors of plans with increasing pay credits significant flexibility in converting to market-based interest credits. Those sponsors should consult with their legal and actuarial advisors as to how best to go about doing so.

Plan Startup/Contribution Incentives


SECURE 2.0 includes:

Increased startup costs credit: An increase in the three-year credit related to small employer startup costs for employers with no more than 50 employees from 50% to 100% of startup costs.

New contributions credit: A new five-year credit for matching and nonelective contributions (to qualified plans other than DB plans) for employers with no more than 100 employees. The credit is limited to $1,000 per year for any employee whose wages are $100,000 or less. The credit is a percentage of the contribution made with respect to the employee, equal to: 100% for the first taxable year in which the plan is established; 100% for the second taxable year; 75% for the third taxable year; 50% for the fourth taxable year; and 25% for the fifth taxable year. The credit is phased out for employers with more than 50, but no more than 100, employees.


The Grab Bag guidance:

  • Reaffirms that the five-year contributions credit is a separate credit, not subject to the limits on the startup costs credit.
  • Clarifies the timing requirements for eligibility for the startup costs credit:
    • The startup costs credit is available for the three-year period (the “startup costs credit period”) beginning with the taxable year the plan is established or, at the employer’s election, the year before that.
    • An employer is eligible for the startup costs credit only if (1) it had no more than 100 employees for the taxable year preceding the startup costs credit period, and (2) has no more than 100 employees for the taxable year for which the startup costs credit is claimed or is within the statutory two-year grace period. (Briefly, the statutory grace period provides that, except in the case of acquisitions, an employer that satisfies the “no more than 100 employees” rule in year one “will be treated as an eligible employer for the two years following the last year the employer was an eligible employer.”)
    • The increased startup credit is subject to similar rules, substituting 50 employees for 100 employees.
    • For purposes of these rules, a plan is treated as being established on the date it becomes effective for the employer.
  • The timing requirements for eligibility for the contributions credit work in a similar way:
    • The five-year contributions credit period begins with the first taxable year during which the eligible employer plan is established.
    • An employer is eligible for the startup costs credit only if (1) it had no more than 100 employees for the taxable year preceding the contributions credit period, and (2) has no more than 100 employees for the taxable year for which the contributions credit is claimed or is within the statutory two-year grace period.
    • The $100,000 limitation on employees taken into account for the contributions credit only applies to wages, not earned income. Thus, for example, the credit may be taken for a self-employed individual or a partner with significant “earned income” but no “W-2” wages.
    • The contributions credit is taken in the same taxable year that a deduction would be.

Other Issues

We will very briefly cover certain other guidance included in the “grab bag” relevant to qualified plan sponsors: SECURE 2.0’s new automatic enrollment requirement; the military spouse tax credit; and the new rule allowing “de minimis financial incentives” for 401(k) participation.

Expanding automatic enrollment in retirement plans

SECURE 2.0 provides that, effective for plan years beginning after 2024, 401(k) plans established on or after the date of enactment (December 29, 2022) must default participants into the plan at a contribution rate of at least 3% of pay, escalating each year by 1% up to at least 10%. The new rule does not apply to plans adopted before the date of enactment, for the first three years of a new employer’s existence, or to employers of 10 or fewer employees.

The “Grab Bag” Notice provides that:

  • For purposes of the exception for plans established before the date of enactment, a plan is considered established “on the date plan terms providing for the [salary deferral elections] are adopted initially. This is the case even if the plan terms … are effective after the adoption date.”
  • If two plans both of which qualify for the pre-enactment exception are merged, the merged plan also qualifies for the exception. If a plan is spun off from a pre-enactment plan, the exception would generally continue to apply. Generally, when a plan that does qualify for the exception is merged with one that does not, the exception is lost. It may be possible, however, with respect to certain mergers, under certain circumstances, to preserve the exception where the merged plan is designated as the ongoing plan.
  • Generally, the automatic enrollment rules would apply to starter 401(k) plans.

Military spouse retirement plan eligibility credit for small employers

SECURE 2.0 provides a new small employer (100 employees or fewer) tax credit for DC plans that provide that military spouses are, within two months of hire, immediately eligible for and fully vested in employer non-elective and matching contributions otherwise available to participants with two years of service. The tax credit is the sum of $200 per military spouse, plus up to $300 of employer contributions, per year for three years.

The “Grab Bag” Notice provides that:

  • The 100 employees or fewer requirement must be met for each year for which the credit is claimed.
  • Where an employer provides DC benefits that do not qualify for the military spouse credit and then either amends or adopts a plan that does qualify, the three-year credit period begins when a military spouse begins participation in that plan (or in the case of an amendment, when the amendment is effective).
  • While the credit is only effective for taxable years of the employer beginning after December 29, 2022, where the three-year credit period begins before 2023 (e.g., qualifying benefits are provided beginning with the 2022 year), the credit may be claimed for the portion of the three-year period that is after 2022; for example, where a plan gives (otherwise) qualifying benefits beginning in 2021, the three-year credit period for a spouse hired in 2022 would (generally) begin in 2022. No credit would be available for the 2022 year, but a credit would be available for the remaining two years of the three-year period (that is, years 2023 and 2024).

Small immediate financial incentives for contributing to a 401(k) plan

SECURE 2.0 allows employers to offer “de minimis financial incentives, not paid for with plan assets, such as low-dollar gift cards, to boost employee participation in workplace retirement plans.”

The “Grab Bag” Notice provides that:

  • A financial incentive is considered de minimis “only if it does not exceed $250 in value.”
  • This special treatment is only available for employees who have no 401(k) salary deferral election in effect. The incentive may, however, be given in instalments.
  • Matching contributions do not qualify as de minimis incentives.
  • De minimis incentives are not subject to plan contribution rules. Thus, IRC plan qualification and deductibility timing rules do not apply to them.
  • De minimis incentives are remuneration, includible in gross income and wages and subject to employment tax withholding and reporting.

We will continue to follow these issues.