SECURE 2.0: A golden opportunity for employers to offer better 401(k) benefits
With new provisions in SECURE 2.0 taking effect in 2024, employers have new options they can leverage to engage with employees who want more workplace benefits, such as student loan matching and emergency savings.
In a recent webinar, Betterment at Work, a financial wellness services company that works with small and mid-size businesses, outlined some of the provisions of SECURE 2.0 it finds most compelling. The company also offers guidance in its SECURE 2.0 Playbook.
Here are four SECURE 2.0 provisions employers are excited about:
No. 1: Tax credits
Both versions of the SECURE Act provide tax credits to incentivize employers to launch a 401(k) plan if they don’t already offer one. A start-up tax credit of up to $5,000 per year for the first three years of the plan is available to eligible employers that start up a plan with an original effective date after Dec. 29, 2022. The credits are tied to ordinary and necessary costs, including recordkeeping and advisory fees, to establish the plan and educate employees about it, said Rob Krupa, head of 401(k) compliance at Betterment.
Employers with less than 100 employees also are eligible for tax credits of up to $500 per year when they automatically enroll employees into their plan and include auto-escalation features. The goal is to increase participation in employer-sponsored retirement plans at a certain deferral rate, although employees are free to change their deferral or opt out if they choose.
“That’s a pretty easy win for most plan sponsors or prospective plan sponsors who are going to start up a new plan,” said Krupa, noting some employers will be eligible for a total of $16,500 in tax credits over the first 3 years of their plan.
No. 2: Participation incentives
Another SECURE 2.0 provision that has generated interest and even some trial programs is participation incentives. Plan sponsors historically have only been able to offer incentives in the form of an employer match. For those who are not financially able to provide a match, offering a small, non-matching incentive – essentially a small gift card – may be a great way to encourage employees to enter a plan and begin saving, said Krupa.
No. 3: Student loan payment contributions
In what Krupa described as perhaps the most exciting SECURE 2.0 provision, employers are now able to make 401(k) contributions to match qualified student loan payments made by their employees. “If an employee isn’t able to contribute to their retirement in the 401(k) plan, but they are making their student loan repayments, which is generally considered a good behavior, you are still able to reward them with the employer matching contribution,” said Krupa. 401(k) matching on student loan payments has received a lot of attention, especially as the COVID-19 payment pause ended in October 2023.
No. 4: Automatic enrollment
Beginning in 2025, the SECURE 2.0 Act makes Eligible Automatic Contribution Arrangement (EACA) the default for all 401(k)s created December 29, 2022 or later, with a few exceptions. That means for those plans, employees’ deferrals must be set between 3% and 10%, according to Betterment’s SECURE 2.0 Playbook. In addition, 401(k) plans are required to automatically escalate contributions at 1% per year to at least 10% but no more than 15%. Newly auto-enrolled participants must also have a 90-day window to request their funds back.
Other provisions
Other SECURE 2.0 provisions that employers should be aware of are self-certification of hardships for withdrawals, required minimum distribution changes, and the ability for employer contributions to go toward Roth accounts. Provisions that are emerging in 2024 include allowing employers to terminate a simple IRA and replace it with a safe harbor 401(k) plan anytime during the year with proper notice.
Another provision allows employers to build emergency savings plans within a 401(k). SECURE 2.0 also increased the account balance at which employers can force participants out of a plan when they leave the company.
In 2025, provisions that will become effective include increased catch-up limits for older participants and long-term/part-time employee service requirement reductions.
Why leverage SECURE 2.0/?
Leveraging SECURE 2.0 provisions can help employers attract and retain quality employees. Betterment’s 2023 Retirement Readiness Annual Report found that more than half of employees want their employers to engage with them more about different benefits they are offering, said Harlyn Croland, head of business operations and strategy at the firm.
Related: SECURE 2.0: New ways to boost 401(k)s and support employees’ unique needs
“A modern benefits offering takes into consideration some of these secondary financial benefits like student loan matching,” said Croland. “In spite of a broad stock market rebound, we found that employees’ financial wellness has continued to trend downward in 2023. And this is following a year marked by inflation, increased cost of living and emergency funds that have been significantly depleted, leaving individuals increasingly prone to tap into their retirement savings prematurely.”
This decrease in financial wellness was accompanied by an uptick in financial anxiety levels, which hit women and younger generations the hardest, noted Croland. “Our findings also highlight emerging workplace trends such as ‘quiet quitting’ and ‘rage applying’ as employees are facing disillusionment with their current work situations.”
However, there is room for companies to re-engage these employees, with 72% of workers reporting that having an employer offer better financial wellness benefits centered around a 401(k) plan would actually reduce the likelihood that they consider quiet quitting or rage applying again in the future, Croland said.