Signed into law in late December 2022, the Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0 Act) is a package of retirement reforms intended to make it easier and more affordable for small businesses to offer employer-sponsored retirement plans.
With only 26% of small businesses across the country offering 401(k) plans, SECURE 2.0 attempts to make recruiting and retention more competitive for small business owners who’ve mistakenly believed that their businesses are too small and that retirement plans are too costly.
This new legislation aims to finish the job of improving retirement outcomes started by the SECURE Act of 2019. Version 2.0 of the SECURE Act introduces several provisions intended to help small businesses establish and maintain employee retirement plans.
Here are five ways small businesses and employees may benefit from the SECURE 2.0 Act.
One of the SECURE 2.0 Act’s most significant benefits is the tax credits increase for employers offering retirement plans with 50 or fewer qualifying employees.
For retirement plans starting in 2023, the credit has been increased to 100% of qualified start-up costs with a cap of $5,000. Previously, employers with less than 100 employees were eligible for a three-year tax credit of up to 50% of administrative start-up costs, with an annual $5,000 cap.
The new legislation also offers a 100% credit for employer contributions (matching or profit sharing) made during the plan’s first year. The credit is up to $1,000 per employee earning less than $100,000 annually. This credit decreases by 25% each year for the following three years.
Employers with 51-100 qualifying employees can still qualify for a similar, but lesser, credit for employer contributions.
Catch-up contributions allow people ages 50 and older to set aside additional money over the standard maximum contributions to standard workplace retirement plans (i.e. 401(k)s and IRAs). Increased catch-up limits allow people to further strengthen their retirement funds before they leave the workforce.
Starting January 1, 2025, the SECURE 2.0 Act offers a new category of catch-up contributions for people ages 60-63: the greater of $10,000 or 150% of the standard catch-up contribution limit. Additionally, the maximum contribution will increase for inflation over future years. The contribution is currently limited to $7,500 annually.
However, effective for tax years after 2023, catch-up contributions will be designated as Roth contributions for any plan participant age 50 or over whose wages exceed $145,000.
Beginning in 2024, catch-up contributions to IRAs, currently limited to $1,000 per year, will be adjusted for inflation in increments of $100.
Individuals earning $145,000 or less, adjusted for inflation going forward, will be exempt from the Roth requirement.
Under the SECURE Act of 2019, employees had to work at least 1,000 hours in a year or three consecutive years of 500 hours to be eligible for a retirement plan. For plan years beginning after December 31, 2024, part-time employees may participate in a plan once they’ve worked at least 500 hours for two consecutive years. Service prior to 2023 is disregarded.
Auto-enrollment and escalation features have been proven to help increase participation in retirement plans and encourage employees to save more for retirement.
Starting in 2025, the SECURE 2.0 Act requires businesses offering new 401(k) and 403(b) plans to automatically enroll eligible employees, starting at a contribution rate of at least 3%.
This new legislation applies to employers with more than 10 employees who have been in business for at least three years.
Effective the first day of each plan year following the initial year of enrollment, deferrals must automatically increase by at least 1% of compensation, up to a maximum of at least 10%, but no more than 15%, for most plans.
Employees who don’t wish to participate in the plan can choose to proactively opt-out.
Starting January 1, 2023, the age limit for Required Minimum Distributions (RMDs) from traditional IRAs and workplace retirement plans will increase from 72 to 73.
This offers employees an additional year to increase the savings in their tax-free retirement accounts and avoid a taxable distribution. The first RMD can be delayed until April 1 of the year they reach age 73. After that, RMDs must be received by December 31 each following year.
Additionally, under the original legislation, if a retiree missed the RMD deadline, they would incur a penalty of 50% of the amount not taken on time. The SECURE 2.0 Act reduces the penalty to 25%, and in some cases, 10% if corrected within two years.