6 SECURE 2.0 provisions that can empower small businesses & their employees
The American Retirement Association estimates that 19 million additional workers will gain access to a workplace retirement plan through SECURE 2.0’s Starter 401(k) provision alone.
In the post-pandemic era, it is more crucial than ever to maintain a strong, healthy workforce. Saving and planning for retirement is one of the most valued workplace benefits, according to the Society for Human Resource Management, which rates retirement benefits as the second highest benefit after health insurance. The quest to provide retirement plans, however, often becomes a daunting task for small businesses.
In 2022, Congress passed the SECURE 2.0 Act in an effort to improve small business’ access to retirement benefits. SECURE 2.0 includes things like the expansion of auto-enrollment plans, tax credits for small businesses, and enhanced saver’s credit for lower-income workers. The American Retirement Association estimates that 19 million additional workers will gain access to a workplace retirement plan through SECURE 2.0’s Starter 401(k) provision alone.
The Act contains more than 90 provisions that aim to make it easier for businesses to offer retirement plans and lessen the burden of managing them. Below are some of the key provisions employers should know about.
SECURE 2.0 provisions employers should know
1. Starter 401(k): The Starter 401(k) allows employers that have not sponsored certain types of retirement plans within the same year to set up a simplified 401(k). Under this new plan, employers are not permitted to contribute, and employees will be automatically enrolled at least 3% of pay. Contribution limits are much lower for employees than a traditional 401(k). Currently, in 2024, employees can contribute a maximum of $6,000, with a $1,000 catch-up for those 50 or over (and may be adjusted annually to account for IRS cost-of-living adjustments).
There has been work in Congress that may lead to an increase to $7,000 to align with the IRA limits. In exchange for lowering the deferral limit, employers do not have to worry about annual ADP, ACP, or top-heavy testing.
The Starter 401(k) can be a great option for a small business that cannot afford the administrative complexities and heavier price tag of a standard 401(k) but still wants to give workers an opportunity to save for retirement. In states that have an employer-sponsored retirement plan mandate, the Starter 401(k) could be a great alternative to State-Roth IRA options.
2. Auto-enrollment: The new rules will also now require many 401(k) and 403(b) plans established after December 28, 2022 to include automatic enrollment, along with auto-escalation, beginning January 1, 2025. The initial auto-enrollment default must be between 3% and 10%, and the rate must increase every year by 1%, until the participant hits at least a 10%, and no more than 15%, contribution.
While participants will still be able to opt-out or set their own contribution rate at any time, this feature tends to increase participation as those that fail to take action will automatically begin to save for retirement. There is an exception for small businesses with 10 or fewer employees, new businesses in existence less than three years, church plans, and governmental plans.
3. Tax credits: The original SECURE Act, passed in 2019, increased the Retirement Plans Startup Cost Tax Credit to the greater of $500 or the lesser of either $250 for each eligible non-highly compensated employee (NHCE) or $5,000. The credit applies for up to three years and is limited to 50% of eligible startup costs, which include ordinary and necessary costs to both set up and administer the plan, as well as educate employees about the plan. (Please consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.)
Employers qualify for this credit if they have 100 or fewer employees, have at least one plan participant who is an NHCE, and have not sponsored a plan in the last three years.
SECURE 2.0 removes the 50% cap for qualifying businesses with up to 50 employees so that 100% of startup costs could potentially be covered. The maximum credit is still $15,000 over three years.
SECURE 2.0 also provides an additional credit for employer contributions, up to $1,000 per employee. Employers with up to 50 employees are eligible for the full credit, which is phased out for employers with 51-100 employees.
The new tax credit provisions, effective as of January 1, 2023, could significantly increase the benefits of starting a 401(k) plan for the smallest businesses and also provide monetary incentive for small businesses to start a safe harbor plan, which could make plan administration less of a burden in the long run.
A qualified small business that adds an EACA (Eligible Automatic Contribution Arrangement) or a QACA (Qualified Automatic Contribution Arrangement) that meets the requirements to be an EACA can claim a tax credit of $500 per year for a 3-year taxable period, beginning with the first taxable year the employer includes the auto-enrollment feature. The automatic enrollment credit does not require the plan as a whole be new, just that the EACA feature be newly added. Additionally, there is no requirement that the plan cover at least one NHCE, unlike the start-up credit.
4. Student loan matching: In 2024, employers are now able to make a matching contribution to a retirement plan based on payments that employees make toward qualified student loans. The match must follow the same formula and vesting schedule as the plan currently has for their normal matching contribution, and the contribution will be deposited into the employee’s retirement account.
Qualified student loan payments can include payments made by an employee for student loans made on behalf of the employee, the employee’s spouse, or dependent.
Related: The powerful benefits of SECURE 2.0 for small businesses (that many are unaware of)
Employers will be able to rely on the employee’s certification that loan payments are being made. The student loan participants may also be tested separately from the rest of the plan for ADP purposes.
The new rules will allow employees with large student debt to still capitalize on any matching contributions offered by their company to help them keep on track for retirement.
5. Required minimum distributions: At a certain age, savers must start withdrawing a minimum amount of money from specific retirement accounts, including 401(k) and traditional IRAs. This is known as a required minimum distribution (RMD). A favorable provision for later-stage savers that already began on January 1, 2023 is the RMD age increasing to 73. The RMD age will also increase to age 75 in 2033. Additionally, starting in 2024 designated Roth contributions will no longer be included when calculating the RMD amount.
The late withdrawal penalty is also decreased to 25% (down from 50%), The penalty will be reduced to 10% for IRA owners if the account owner withdraws the RMD amount previously not taken and submits a corrected tax return depending on how soon the error is corrected. The provisions provide a logical adjustment to required distributions as life expectancy increases, allowing individuals more time to determine their best withdrawal strategy for tax purposes.
6. 529 college savings accounts: A 529 plan, often called a college savings account, is a tax-advantaged savings plan used to pay for education expenses. Typically, a parent owns the account and their child is the beneficiary. Beginning January 2024, 529 beneficiaries can roll up to $35,000 to a Roth IRA from a 529 college savings account as long as it has been open for over 15 years and the beneficiary (who also must be the owner) has earned income at least equal to the amount of the rollover. Additionally, contributions or earnings made within the past 5 years—before distributions start—are not eligible to be converted.
In the past, account holders faced taxes and penalties for non-qualified withdrawals. Under this provision, beneficiaries can still receive the tax benefits of 529 plans, even if they don’t use all the available funds on education, and can even get a head start on retirement.
Helping to pave the way to a secure tomorrow
There’s a lot of complexity when it comes to SECURE 2.0, but a lot of hope as well for a positive impact on American retirement readiness. According to Guideline research, more than half of people are not actively saving for retirement, and these new SECURE provisions have the potential to improve that number and help increase comfortability for both employers and employees.
Jeff Rosenberger, COO of Guideline, has 15+ years in financial services and tech.