A Business Owner's Guide To The SECURE Act 2.0
The Setting Every Community Up for Retirement (SECURE) Act, passed in 2019, was intended to help Americans increase their retirement nest eggs by changing some of the rules around saving and withdrawing money. Now, the recently passed SECURE Act 2.0 builds upon these retirement system improvements to further aid employees. What does your business need to know about SECURE Act 2.0 details? Let’s find out.
In this article, we’ll discuss what SECURE Act 2.0 includes and the impacts to you and your business now that it’s passed. After reading this, you’ll understand the key provisions of the legislation so you can be prepared to adapt your retirement plan policies to ensure compliance.
What is SECURE Act 2.0?
SECURE Act 2.0 refers to multiple pieces of follow-up legislation – Enhancing American Retirement Now (EARN) Act, Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (Rise and Shine) Act, and Securing a Strong Retirement Act – that build upon improvements to the retirement system implemented under the 2019 SECURE Act.
The legislation includes a collection of provisions. Here are some of the most important SECURE Act 2.0 details you need to know for your business.
- Auto-enrollment: Under SECURE Act 2.0, effective January 1, 2025, your plan must automatically enroll all new, eligible employees, although they have the option to opt out. In addition, the initial contribution must be at least 3% but not more than 10% of an employee’s pretax earnings, automatically increasing the amount by 1 percentage point a year until it reaches 10%. Small businesses with 10 or less employees and those that started less than 3 years ago qualify for an exemption.
- RMD updates: Under the original SECURE Act, the age for required minimum distributions (RMDs) from employees’ 401ks increased from 70 ½ to 72. SECURE Act 2.0 increases the age for taking RMDs to 73 starting January 1, 2023; in 2033, it will increase again to 75. It’s important to note that SECURE Act 2.0 also makes a change to RMDs for Roth 401ks; now, these accounts won’t be subject to RMD rules before the account holder dies.
- Catch-up contributions: In 2023, those 50 and up can make catch-up contributions to their 401ks of $7,500. Under SECURE Act 2.0, qualified individuals ages 60-63 can contribute the greater of $10,000 or an additional 50% of the regular catch-up contribution limit (indexed for inflation), starting in 2025. In addition, while catch-up contributions can currently be made on a pre-tax or post-tax basis, starting in 2024, SECURE Act 2.0 requires all catch-up contributions for those with wages over $145,000 (adjusted for inflation annually) to be deposited into a Roth account.
- Roth 401k matching: Currently, employers can’t make matching contributions on a Roth basis. Under SECURE Act 2.0, businesses can give employees the option of receiving matching contributions on a Roth basis.
- Part-time worker eligibility: Starting in 2025, SECURE Act 2.0 would allow part-time workers who work at least 500 hours eligible for an employer-sponsored plan after 2 years of service. Currently, they are eligible after three.
- Small business tax credits: Under the original SECURE Act, employers could get a tax credit for up to 50% of their 401k plan startup costs. Now, starting in 2023, businesses with up to 50 employees can receive a credit of 100% for administrative expenses, up to $5,000, for the first 3 years of a plan. There’s also an additional tax credit for employers with up to 100 employees based on a percentage of the amount employers contribute, up to a per-employee cap of $1,000. In addition, there’s a tax credit for employers with up to 100 workers who make military spouses eligible to participate in their retirement plan that’s equal to $200 per spouse plus up to $300 in employer contributions per individual for up to 3 years.
- Financial incentives: The law allows employers, starting in 2023, to give workers small financial incentives for contributing to a 401k. For example, this could be a low-dollar gift card or something similar.
- Student loan payment matching contributions: The SECURE Act 2.0 legislation includes a provision that allows companies to make matching contributions based on an employee’s qualified student loan payments. This would help employees who can’t contribute to their 401k because of their student loans. This part of the law takes effect in 2024.
- Emergency withdrawals: Starting in 2024, employees may make emergency withdrawals for personal or family emergency expenses up to $1,000 without the 10% tax penalty. This is allowed once a year.
- Linked emergency accounts: For plan years after December 31, 2023, plan sponsors can offer a pension-linked emergency savings account for non-highly compensated employees up to $2,500 that can be funded with Roth contributions.
- Saver’s match: Beginning in 2027, SECURE Act 2.0 will replace the current Saver’s Tax Credit for lower-income retirement savers with a limited federal matching contribution of 50% up to $2,000 per person directly into their accounts.
- Automatic rollovers: Currently, plans may automatically distribute small accounts of less than $5,000 to former participants. Starting in 2024, SECURE Act 2.0 allows employers to automatically transfer account balances of former employees up to $7,000 into a default IRA unless the participant elects otherwise.
When will SECURE Act 2.0 be implemented?
As you can see from the list of changes, the various provisions in SECURE Act 2.0 will be implemented at different times in the coming years. Some will take effect as early as 2023, such as the ability to provide small incentives for participation, while others, like the increase to age 75 for RMDs won’t happen until 2033.
The way the implementation dates are structured, you’ll have plenty of time to work with your third-party administrator and/or payroll company to institute any required changes to your plan and communicate with participants about new policies.
How will this impact my business?
SECURE Act 2.0 is designed to help kickstart savings for many employees to lead to greater retirement readiness. And this can be a critical factor in reducing employee financial stress – and improving productivity, engagement, and retention in the process. Yet, there may be some short-term costs to this longer-term upside.
For example, since features like auto enrollment and annual savings rate increases will be mandated, you’ll need to step up in other ways to differentiate your retirement benefits such as a more competitive matching formula. In addition, since you may need to expand plan access to previously non-covered employees, that may drive up costs as well. It’s important to keep in mind, however, that prioritizing the retirement savings needs of your employees can go a long way to positively impacting your workforce, and that can far outweigh these costs.
How to Best Design Your 401k Going Forward
With a number of changes contained in SECURE Act 2.0, it’s important to make sure your 401k reflects any required plan design features. Be sure to talk to your third-party administrator, who can help you avoid compliance missteps.