Dubbed TPA, the Third-Party Administrator is an organization responsible for managing all aspects of your employees’ retirement plans. TPAs design retirement documents in addition to preparing both employee and employer statements.
Furthermore, TPAs ensure that the retirement plan complies with the Internal Revenue Service (IRS) non-discrimination retirements. This organization goes the extra mile to prepare annual reports and returns required by DOL, IRS, or other government agencies.
The TPA is undergoing a tremendous change as explained below.
Under recent legislation under the Setting Community Up for Retirement Enhancement (SECURE) Act 2.0, nearly every employer will be required to establish newly defined contribution plans. These plans will automatically help enroll newly hired workers. Plus, the plan will enhance a pretax contribution level of around 3% of your individual employees’ pay. This percentage is likely to increase annually up to around 10%.
However, this increase in contribution level will not go beyond 15% of your employees’ pay. In this regard, employees will affirmatively choose a different contribution plan to suit their needs. Should your employees fail to make an investment election, their contributions will be defaulted into what is legally referred to as a qualified default investment alternative or rather QDIA. Each of these provisions applies to both the new 401(k) and 403(b) contribution plans established following the legislation’s enactment date.
There is an exception to automatic enrollment/escalation. This particular exception encompasses small businesses with fewer (10 or less) employees, church plans, and governmental plans. Those who have been in business for not more than three years are also exempt from automatic enrollment.
Citing Jonathan Barber’s (head of compensation and employee benefits policy research at Ayco) statement, the SECURE Act 2.0 stipulates that employers who produce new retirement plans will have to mandatory auto-enroll their employees.
Bear in mind that automatic enrollment has never been made mandatory despite its steady growth as a contribution plan feature. So, this changing landscape of TPAs may help raise enrollment rates in the future.
‘Roth-ify’ Catch-Up Contributions
The current law allows employees aged 50 and above to make additional catch-up contributions. These employees are required to make contributions to the 401(k) or similar contribution plan. As it stands out, the maximum amount one can donate when it comes to catch-up contributions as of 2021 is around $6500. This amount is usually indexed yearly for inflation.
SECURE Act 2.0 takes the responsibility of keeping the catch-up contribution limits for employees aged 50. Also, this act will increase the yearly catch-up contribution to about $10,000 for those aged 62 all the way to 64 starting in 2023. Just like the $6500, the $10,000 would be indexed for inflation.
As stated in the current law, catch-up contributions (to qualified retirement plans) provided by employers should be made on a Roth or a pre-tax basis. As a matter of fact, the SECURE Act 2.0 makes it possible for all catch-up contributions subjected to employer-sponsored retirement plans to be part of the Roth tax treatment.
Currently, the catch-up contributions for individual retirement accounts (IRA) stand at $1000 for those aged 50. This amount is not indexed as such although it may be subject to SECURE Act 2.0 index for inflation as early as 2023.
Other changes expected with the Third-Party Administrators in the future include:
- Allowing Roth matching contributions
- Delaying mandatory distributions
- Expediting part-time employees’ participation
- Authorizing student-loan matching
Many changes are expected within the TPAs. Besides the changes highlighted above, TPAs under the SECURE Act 2.0 is expected to prepare a national database for lost retirement accounts, expand self-correction opportunities, increase public awareness of all the Retirement Savings Contributions Credit, extend to 403 (b), and eliminate the barriers that limit lifetime income annuities.