What SECURE 2.0 means for employees’ short-term expenses and long-term savings

In this labor market, employers are improving their benefit offerings to make themselves more attractive for recruits. With the recent enactment of the SECURE 2.0 Act of 2022, companies and plan sponsors gained several valuable new avenues to help employees achieve their financial goals. These important tools can help address the financial vortex too many of us face.

Every day financial issues are blocking most U.S. workers from saving enough for retirement.

Our financial coaches often hear employees say things like, “I can’t contribute to my 401(k) because I have big student loan payments.” More than half the U.S. population does not have enough in a savings account to cover a $1,000 emergency. For many of the employees we work with, these life challenges are taking priority over retirement savings.

Employers and plan sponsors want to do more to support employees through these storms. They are looking for ways to help employees devote savings to retirement while meeting day-to-day financial obligations. Over time, a little saving can go a long way – especially early in a career.

By maintaining an emergency fund, with three-to-six months of expenses, employees can protect their ability to meet short- and long-term goals.

Our challenge as financial planners is to help people feel confident and start to save even when they think they cannot, because of things like student loans, high rent payments, consumer debt, medical expenses, caring for children and parents, or other constraints on their present finances.

This was the thinking behind several of the provisions of SECURE 2.0.

Automatic enrollment

Effective for plan years beginning after December 31, 2024, employees will be automatically enrolled in a 401(k) or 403(b) plan at 3% at least of their salary, with an annual auto-esalation of 1% up to 10%. This change is intended to help  more people to save early on, showing them the benefits and giving them the confidence and incentives to prioritize saving for the future in a similar way they prioritize day-to-day financial obligations.

Related: SECURE 2.0 encourages employers to expand employee benefits (not just retirement plans)

While employees can opt out, the hope is most will not.

Also in 2024, companies will be allowed to make matching contributions under a 401(k), 403(b) or SIMPLE IRA for “qualified student loan payments” made by an employee to pay for qualified higher education expenses. This will allow employees to contribute to their current student loan obligations, while still taking advantage of employer-matches to boost retirement savings.

There is also a new “Saver’s Match“ designed to help boost retirement savings for those with lower incomes, effective in 2027. The maximum contribution eligible for a match is $2,000 per individual, resulting in a maximum government match of $1,000.

Emergency savings accounts

Employers will also gain the option to offer a pension-linked emergency savings account (ESA). Employers may automatically opt employees into these accounts(of which they can opt out)  at no more than 3% of their salary, and the portion of an account attributable to the employee’s contribution will be capped at $2,500 (or lower as set by the employer).

Once the cap is reached, additional contributions can be directed to an employee’s Roth contribution plan (if they have one) or stopped until the balance falls below the cap. The first four withdrawals in each plan year may not be subject to fees or charges solely for withdrawing.

Beyond the new $2,500 emergency savings provision, companies can help employees build emergency funds by matching after-tax 401(k) contributions that will be accessible through new in-service withdrawals.

The law provides an exception for distributions used for emergency expenses, which are unforeseeable or immediate financial needs for personal or family emergencies. Only one distribution is permissible per year, up to $1,000, with the option to repay it within three years. SECURE 2.0 clarifies that the interest rate must be reasonable and no higher than 6%.

No further emergency distributions are permissible until the fourth calendar year period following the year of distribution unless complete repayment occurs. This becomes effective in 2024.

Employees’ catch-up contributions to their 401(k), 403(b) and governmental 457(b) plans will now be made on a Roth basis if their FICA wages in the prior year from the employer sponsoring the plan exceed $145,000 (indexed to inflation).  Plans may permit participants to designate employer matching or non-elective contributions as Roth contributions. This change can help employees reduce their tax liability on their retirement savings.

Another way companies can help employees save is by giving them access to a dedicated saving account with payroll withdrawals. Banks and credit unions often offer convenient payroll deduction programs with favorable savings rates and lower fees.

Financial planning benefits and education can also be a huge boost, by helping younger generations understand the importance of saving early on in their careers. With short-term and long-term savings, as well as access to resources that help them optimize their benefits, employees can gain more control over their life goals.

Employers and plan sponsors can now do more to help, thanks to these new provisions of SECURE 2.0 – but it is just a start.

Plan sponsorscan take advantage of these new options to reward responsible saving and help their employees meet financial needs across the short, medium and long terms.

Nancy DeRusso is Head of Financial Wellness at Goldman Sachs Ayco Personal Financial Management.