The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act has been getting a lot of attention for its many provisions that make it easier for people to save for retirement. Among other things, the law increases catch-up contribution limits, postpones required minimum distributions, enhances matching contributions and expands hardship withdrawals.
SECURE 2.0 can also have an impact on employers. Not only does it expand tax incentives for employers that set up new retirement plans, but it also helps employers boost participation in their plans. Plus, it provides opportunities to adopt plan enhancements that can help attract and retain workers. Here are some highlights.
Expanded credits for small employer plan start-up costs
For purposes of the tax credit for small employers who establish new qualified plans, SECURE 2.0 amends the definition of “small employer” to include employers with up to 50 employees (down from 100). And it allows those employers to claim a credit equal to 100% of their qualified plan start-up costs (up from 50%), up to a $5,000 annual limit.
The law also creates an additional credit of up to $1,000 per employee for contributions to new qualified plans on behalf of employees earning $100,000 or less (adjusted for inflation after 2023). Employers with 50 or fewer employees are entitled to the full $1,000 credit. For larger employers, the credit is reduced by 2% for each employee in excess of 50 and eliminated for employers with more than 100 employees.
Eligible employers are entitled to 100% of the credit in the plan’s first two years. Then it’s reduced by 25% each year and phased out after year five.
Starter 401(k) plans
To encourage companies without a plan to adopt one, SECURE 2.0 offers the “starter 401(k) plan.” This streamlined option promises simpler, less costly administration than a traditional plan. Starting in 2024, these plans will allow employers to maintain 401(k) plans without the need to comply with costly nondiscrimination testing requirements.
Starter 401(k)s are “deferral-only arrangements” — that is, employer contributions are prohibited. Employees are automatically enrolled at a contribution rate of 3% to 15% of compensation (unless they opt out), with contribution limits comparable to those of IRAs.
Incentives for participation in qualified plans
Employers that increase participation in their qualified plans — particularly by non-highly compensated employees — enjoy many advantages. For example, higher participation generates additional tax benefits and cost savings, improves employee satisfaction, and makes it easier to satisfy nondiscrimination requirements. SECURE 2.0 helps boost participation in several ways, including by:
- Requiring most new 401(k) and 403(b) plans (those established after December 29, 2022) to automatically enroll participants, beginning in 2025. Unless a participant opts out, the initial contribution rate must be 3% to 10%, increasing 1% each year until it reaches 10% to 15%.
- Reducing the service requirement for eligible part-time employees from three years to two years of consecutive service if they’ve worked for their employers at least 500 hours per year.
- Permitting plans to offer “de minimis” financial incentives — for example, low-dollar-value gift cards — to employees who sign up for a qualified plan.
Emergency assistance for employees
Employers may now make their plans more attractive to employees by amending them to permit penalty-free (although taxable) distributions of up to $22,000 to participants who suffer economic losses from a federally declared disaster. Participants can spread the tax over three years or avoid it altogether by repaying the distribution to the plan within three years.
Employers may also amend their plans to create emergency savings accounts linked to the plans for non-highly compensated employees. Contributions to these accounts (up to 3% of salary) must be made on an after-tax basis, but they’re treated as contributions to the plan for matching purposes. Emergency accounts must maintain balances of $2,500 or less and permit withdrawals (which are tax- and penalty-free) at least monthly.
Two lesser-known SECURE 2.0 provisions that can help employers make their benefits packages more appealing to employees are:
- Relief for employees with student loans. Beginning in 2024, employers may amend their plans to treat qualified student loan payments as elective deferrals for matching purposes. That way, employees won’t be forced to choose between paying down their student loans and deferring salary to a qualified plan to get matching contributions.
- Employer Roth contributions. Employers may amend their plans (other than Savings Incentive Match Plan for Employees [SIMPLE] IRA plans) to allow participants to elect to treat fully vested employer contributions (including matching contributions) as after-tax Roth contributions.
A powerful tool
A qualified retirement plan can be an effective recruiting tool for companies struggling to attract and retain employees in today’s tight labor market. The improvements made by SECURE 2.0 can help companies set their benefit plans apart from the competition.
Are you required to amend your plan?
Many changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act are optional for employers, but some may require a plan amendment. For example, the law increases catch-up contributions to qualified plans for workers nearing retirement. Starting in 2025, employees ages 60 through 63 must be permitted to make catch-up contributions up to the greater of $10,000 (adjusted for inflation) or 150% of the regular catch-up amount. (Smaller catch-up contributions are provided for Savings Incentive Match Plans for Employees (SIMPLEs.) Some plans are written in a way that will automatically accommodate this change; others will have to be amended.
SECURE 2.0 also provides that, beginning in 2024, catch-up contributions by employees whose yearly wages exceed $145,000 (adjusted for inflation) must be made on an after-tax basis — in other words, to a Roth account. This provision will generally require a plan amendment.