The SECURE 2.0 Act, which was signed into law in late December 2022, contains many provisions that can impact employers, employees, and retirees. We covered the key provisions in a previous article, SECURE Act 2.0 – Helping Employees and Employers With Retirement Savings. Now, we are going to concentrate on how the Act affects employers including new requirements and the potential for increased administration and compliance costs.
While some of the changes took effect immediately, others are phased in over several years. Employers should act now to assess how these new requirements and options may impact their employee retirement plans.
Plan Enrollment and Eligibility Changes
Under SECURE 2.0, any employer that establishes a new 401(k) retirement plan must automatically enroll employees as soon as they become eligible rather than allowing them to “opt-in.” (Employees may still “opt-out”)
This mandatory automatic enrollment requirement will take effect on Jan. 1, 2025, but it will apply to any new plan that was established after Dec. 29, 2022. Plans that were established earlier are exempt from the mandate, but they may choose to establish automatic enrollment if they have not already done so. Companies with 10 or fewer employees or that have been in business less than three years are also exempt.
For companies subject to the new mandate, each employee’s initial automatic contribution must be at least 3 percent of his or her eligible wages, up to a maximum of 10 percent. The contribution must automatically increase by 1 percent each year until it reaches at least 10 percent of eligible wages, up to a maximum of 15 percent.
Effective January 1, 2025, part-time employees will become eligible for a company’s retirement plan sooner. The new law reduces the qualification period from three years of consecutive part-time employment to two years. Employers should begin tracking hours for part-time eligibility this year (2023).
Potential New Employee Benefits
For the first time, employers are now permitted to offer de minimis financial incentives (such as gift cards) to encourage employees to enroll in a retirement plan. These incentives cannot be paid for with plan assets.
Beginning in 2024, student loan payments will qualify for matching employer contributions to retirement plans, meaning, employers may be matching payments they were not previously responsible for and opening up the number of qualified employees to receive a match. Also starting in 2024, employers with SIMPLE IRA plans should expect to make larger contributions to employee accounts.
The Act also gives participants greater flexibility in managing their retirement accounts. For example, effective immediately, employers may amend their plans so that employees can choose to have employer contributions made as Roth (after-tax) contributions instead of traditional pre-tax contributions. Also, employees can establish an “emergency savings account” funded with salary deferrals and not subject to withdrawal penalties.
Beginning this year, employers can also make Roth contributions to SIMPLE and SEP IRAs.
Incentives for Employers to Establish New Plans
SECURE 2.0 includes new incentives to encourage companies that have not yet established retirement plans to do so now. For example, during the first three years of a new plan’s operations, a business with 50 or fewer employees could be eligible for a tax credit equal to as much as 100 percent of the administrative costs of setting up the plan, up to a maximum of $5,000. That’s up from the previous 50 percent credit.
Small employers that join a multiple employer plan may also be eligible for this credit, enabling them to hold down costs by pooling resources with other companies.
For companies with 50 or fewer employees, the new law also allows a credit, of up to $1,000 per employee, based on employer contributions for the plan’s first five years. This incentive applies to existing plans as well.
Starting in 2024, employers that do not currently sponsor a retirement plan will be able to offer a simple “starter” 401(k) or “deferral-only” plan. Such plans do not include an employer match, so they are exempt from the traditional 401(k) testing requirements and other regulations designed to ensure employer contributions do not unfairly favor certain employees.
For sole proprietors, SECURE 2.0 now allows for retroactive first-year deferrals, which enable an owner to start a new solo 401(k) plan after the end of the tax year, and make a larger contribution than previously allowed.
Companies that sponsor plans should consult with their plan administrators to ensure that the new requirements and opportunities of SECURE 2.0 are addressed. Employers should consult with their tax professionals to determine the possible benefits of SECURE 2.0 incentives.
Please contact us to discuss how SECURE 2.0 could affect your business.