SECURE 2.0 Helps Small Employers Help Their Employees
Approximately 78% of people who work for companies with fewer than 10 employees and about 65% of those who work for companies with 10 to 24 employees do not have access to a retirement plan at work. That’s unfortunate because workers with a retirement plan are far more likely to save for retirement than those without a plan. In 2022, 62% of those without a retirement plan had accumulated less than $1,000 for retirement, compared with 71% of those with a plan who had saved at least $50,000. More than four in 10 workers with access to a work-based plan had amassed a quarter million dollars or more.
In December 2022, Congress aimed to address this issue (among others) by passing legislation that will help small employers more efficiently and cost-effectively offer retirement plans to their workforces, while providing incentives to help improve participation rates among lower-income workers. The SECURE 2.0 Act of 2022 — so named because it builds upon the original Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019 — is a sweeping set of provisions designed to improve the nation’s retirement-planning health. Here is a brief look at some of the tax perks, rule changes, and incentives included in the legislation.
Tax Perks for Employers in 2023
Perhaps most appealing to small business owners, the Act enhances the tax credits associated with adopting new retirement plans, beginning in 2023.
For employers with 50 employees or less, the pension plan start-up tax credit increases from 50% of qualified start-up costs to 100%. Employers with 51 to 100 employees will still be eligible for the 50% credit. In either case, the credit maximum is $5,000 per year (based on the number of employees) for the first three years the plan is in effect. In addition, the Act offers a tax credit for employer contributions to employee accounts for the first five tax years of the plan’s existence. The amount of the credit is a maximum of $1,000 for each participant earning not more than $100,000 (adjusted for inflation) in income. Each year, a specific percentage applies. In years one and two, employers receive 100% of the credit; in year three, 75%; in year four, 50%; and in year five, 25%. The amount of the credit is reduced for employers with 51 to 100 employees. No credit I allowed for employers with more than 100 workers.
Retirement Plan Rule Changes and Applicable Years
New Starter Plans (Effective 2024)
Beginning in 2024, employers may adopt a deferral-only starter 401(k) or a safe-harbor 403(b) plan. These plans are intended to be lower cost and easier to administer than traditional retirement plans.
Key features include:
- Automatic enrollment for eligible employees
- Employee contributions only (no employer contributions)
- Default contribution rate of at least 3%, increasing up to 15%, unless the employee opts out
- Annual contribution limits of $6,000 per participant, or $7,000 for participants age 50 and older
- Contribution limits are indexed for inflation
SIMPLE Plan Enhancements (Effective 2024)
SIMPLE retirement plans will benefit from two important contribution changes starting in 2024:
- Increased nonelective contributions
Employers may make nonelective contributions of up to 10% of compensation or $5,000, whichever is less. - Higher contribution limits for small employers
- Employers with 25 or fewer employees may increase both standard and catch-up contribution limits by 10%, instead of using the regular limit.
- Employers with 26 to 100 employees may also allow higher contributions if they:
- Match employee contributions on the first 4% of compensation, or
- Make a 3% nonelective contribution for all eligible employees, regardless of participation.
Mandatory Auto-Enrollment (Effective 2025)
Starting in 2025, most 401(k) and 403(b) plans will be required to:
- Automatically enroll eligible employees, unless they opt out
- Begin contributions at at least 3% of compensation
- Automatically increase contributions by 1% each year
- Continue increases until contributions reach at least 10%, but not more than 15%
Plans Exempt from This Requirement
The auto-enrollment mandate will not apply to:
SIMPLE 401(k) plans
Plans in existence before December 29, 2022
Employers in business for less than three years
Employers with 10 or fewer employees
Governmental and church plans
Incentives for Participation
SECURE 2.0 drafters were creative in finding ways to encourage workers, particularly those with lower incomes, to take advantage of their plans. For example, effective immediately, employers may choose to offer small-value financial incentives, such as gift cards, for joining a plan. Beginning in 2024, employers may provide a matching contribution on employee student loan payments, which should help encourage younger workers to plan for their future. Also in 2024, workers will be able to withdraw up to $1,000 a year to cover unforeseeable or immediate emergencies without having to pay a 10% early distribution penalty, which should help address the fear of locking up retirement-plan contributions for many years. Employees will have up to three years to repay the emergency distributions and will not be able to take a second emergency distribution during this three-year period unless the first has been reimbursed.
1) AARP, July 2022
2) Employee Benefit Research Institute, 2022
IMPORTANT DISCLOSURES
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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