2023: The dawn of a new era in retirement planning for small businesses

Employers have weathered a seismic shift in their workers’ expectations over the past few years. Due in part to the pandemic, the shifting face of the workforce, and a growing focus on employee well-being, employers of all sizes have reexamined their benefit offerings from the ground up. Similarly, federal agencies and regulatory bodies have pursued initiatives to safeguard Americans’ retirement plans in the face of growing financial pressures and economic uncertainty, culminating with the passage of new retirement planning legislation, SECURE Act 2.0.

It’s in this context that many employers are considering how the Internal Revenue Service (IRS)’s recent release of the 2023 401(k) contribution guidelines and the new SECURE Act 2.0 may affect their retirement benefit offerings in 2023 and beyond. Now is the time for business owners to examine their policies and procedures to make sure their retirement plans are working for their employees. Still, many small business owners are only just beginning their journey by designing and offering robust retirement benefits.

The details of the new guidelines

The upcoming year will introduce a series of changes in the world of retirement benefit planning. Under the IRS’ recently announced new guidance, the 2023 limit on employee elective deferrals for traditional and safe harbor 401(k) plans will be $22,500, a $2,000 increase in the limit from last year’s maximum ($20,500).

The limit for SIMPLE 401(k) plans will also increase to $15,500 from $14,000. Similarly, the limits for catch-up contributions for workers over 50 years of age will increase to $7,500 for traditional and safe harbor plans and $3,500 for SIMPLE 401(k) plans. The increased contribution limits ($22,500 for traditional and $15,500 for SIMPLE plans) apply to the total of an employee’s elective deferrals (excluding catch-up contributions), employer matching contributions, employer non-elective contributions, and allocation of forfeitures.

While it’s not uncommon for the IRS to increase contribution limits for employer-sponsored plans, the agency’s decision to increase these limits by such large amounts is worth noting. Each of these increases represents significant boosts from previous years—with some tripling the increase offered between 2021 and 2022 and others being increased for the first time in over seven years.  The choice may reflect the impact inflation has had on the costs of living across the country, the uncertainty Americans feel as they plan for their financial futures, and the changing expectations of employment arrangements as post-pandemic trends progress.

A set of guidance that is expected to impact retirement plan design in the years to come is the passage of the Securing a Strong Retirement Act of 2022 (SSRA) by Congress and signed into law. Now passed in its final form, “SECURE 2.0”will:

• Raise the required minimum distribution (RMD) age to 75 to allow workers to keep saving for longer should they so choose.
• Expand the catch-up contribution limits for 401(k), 403(b), and SIMPLE plans.
• Allow employers to make matching contributions to a 401(k) plan based on an employee’s student loan payments.
• Offer part-time workers access to employer-sponsored retirement plans after meeting certain requirements.
• Enhance the “Savers Credit.”
• Encourage automatic enrollment into 401(k) plans so employees must opt out of saving rather than opting into it.
• Increase tax credits for start-ups.
• Simplify plan administration and compliance.

These considerable increases in contribution limits and the passage of SECURE 2.0 speak to the rising awareness of the importance of retirement planning among workers and regulators alike. Today’s workplaces are a melting pot of generations, with baby boomers, Gen Xers, millennials, and Gen Zers all working side-by-side, and SECURE 2.0 aims to ensure a financially stable retirement for all of them.

Building a better benefit plan

Despite the increases to contribution limits and the significant changes that SECURE 2.0 will bring, employers cannot rely on SECURE’s measures alone nor guidance from the IRS to set their employees up for long-term success. Whether a small business is embarking on this journey for the first time or looking to improve its approach to improve recruitment and retention, navigating the ever-changing waters of retirement planning means balancing employee needs, business imperatives, and compliance.

Related: 401(k)s are “substantial” retention tools for small & medium-sized employers

Although most people are familiar with 401(k) accounts, a large portion still has questions about how they work and what each plan type is for. This is especially true for those moving from the employee to employer side for the first time, as is the case for many small business owners. Picking the right type of plan is key, but it can be difficult to navigate. There are numerous types of 401(k) plans, each with its own benefits and requirements:

• Traditional 401(k): For employers of any size with flexibility in employer and employee contributions up to IRS limitations
• Roth 401(k): For employers of any size that want to combine traditional 401(k) and Roth contributions to allow employees to contribute both pre- and after-tax income
• Solo 401(k): For business owner-operators without any employees (other than a spouse)
• Safe Harbor 401(k): For employees with an ownership stake in a company on the condition that employer contributions are fully vested at the time of contribution
• Simple 401(k): For businesses that (1) have no other retirement options, (2) have fewer than 101 employees, and (3) adhere to strict contribution and vesting requirements
• Pooled Employer Plan (PEP): For businesses of any size that wish to pool assets with other employers into a plan administered by a specialized third party (Pooled Plan Provider; P3) to mitigate risk and simplify administration
• Profit-sharing 401(k): For employers that want to base their contributions on company profits
• 403(b): For non-profit organizations and certain government businesses in lieu of a 401(k)

Here are the steps small business owners can take to begin the process:

 Talk to employees. Determining which plan is “right” for a business means finding something that works for employees as well as it works for the company. Business owners—especially those with small workforces—have the ability to ask employees for input in this regard. That’s an opportunity they shouldn’t pass up.

Choose carefully. Picking the right plan can make all the difference for both employers and employees. Offering a robust retirement plan can be a valuable recruitment and retention tool and improve employee engagement and morale. It can also offer employers benefits like tax incentives and small business funding options from banks and other institutions.

Ask for help when needed. If the task of designing a plan that’s flexible enough to keep up with the ever-changing regulatory landscape, employers are not alone. Partnering with an experienced third-party administrator or consultant can help business owners understand how their choices will affect their business and their people and ensure that employees are taken care of now and into the future.

 Michael Majors is VP of Human Resource Services Sales at Paychex.