With the signing of the omnibus spending bill into law, employers and employees can take advantage of the expansion of credits and opportunities created for workplace retirement plans under SECURE Act 2.0.
With the signing into law of the omnibus spending bill that included SECURE Act 2.0 of 2022 on Dec. 29, 2022, businesses and their employees can now capitalize on added incentives related to their retirement plans.
Originally, the Securing a Strong Retirement Act of 2022 (SECURE Act 2.0) was passed in March 2022 with an overwhelming bipartisan vote of 414-5 by the U.S. House of Representatives while two separate bills on retirement were debated by the Senate. Components of each bill eventually were folded into the omnibus bill by the lame duck Congress.
SECURE Act 2.0 follows the initial phase by Congress to address the retirement crisis in the United States. Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law Dec. 27, 2019.
SECURE 2.0 is an attempt to build on the initiatives already started to help a wide range of Americans achieve retirement security and financial wellbeing. Its provisions include:
Eligibility Expansion for Small Businesses to Earn Tax Credit
Beginning in 2023, eligible businesses with 50 or fewer employees can qualify for a credit equal to 100 percent of the administrative costs for establishing a workplace retirement plan. The original SECURE Act gave startup businesses with up to 100 employees a tax credit equal to 50% of administrative costs, capped annually at $5,000. Eligible businesses with 51 to 100 employees remain subject to the original SECURE Act provision.
A New Credit for Employer Contribution Costs
Also beginning in 2023, eligible businesses with up to 100 employees might be entitled to a tax credit based on their employee matching or profit-sharing contributions. This credit, which caps at $1,000 per employee, phases down gradually over five (5) years and is subject to further reductions for employers with 51 to 100 employees.
Technical Correction for Small Businesses to Qualify for Startup Credit
If a business offers a retirement plan for the first time by joining a multiple employer plan (MEP) or a pooled employer plan (PEP), regardless of how long the MEP or PEP has existed, they should consult with their accounting professional to see if they are eligible for the credit.
Expansion of Auto-Enrollment
SECURE 2.0 requires automatic enrollment for new 401(k) or 403(b) plans beginning in 2025. The initial default rate must be between 3% and 10%, including annual auto-escalation of 1%, up to at least 10% but not more than 15%.
Automatic enrollment in a retirement plan is designed to make it easier for employees to participate. Employees who prefer not to participate can opt out. There is an exception to the requirement for small businesses with 10 or fewer employees, new businesses less than 3-years-old, churches, and governmental plans. To add even more convenience, businesses can integrate automatic enrollment with payroll.
Changes to Benefit a Multigenerational Workplace
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Today’s workplace is more generationally diverse than ever. Older employees are working longer, and Millennials make up roughly one-third of the American workforce. SECURE Act 2.0 addresses these age groups.
For older employees, the law raises the required minimum distribution (RMD) age from 72 to 73 beginning in 2023, and then to age 75 beginning in 2033. There is also a new catch-up contribution provision beginning in 2025: For those ages 60 through 63, the amount would be increased to the greater of $10,000 or 50% more than the regular catch-up amount for an employer-sponsored 401(k) and 403(b).
Since today’s workforce includes more part-time workers, they will be eligible to contribute to an employer-sponsored retirement plan. The Act requires employers to allow long-term, part-time workers to defer to their 401(k) plans.
Beginning in 2025, part-time employees are required to work two consecutive years and complete at least 500 hours of service in each year to be eligible, a change from the original SECURE Act’s three-years-of-service rule. The law also transforms the current Saver’s Credit that provides millions of low and middle-income individuals with an incentive to save for retirement each year to a Saver’s Match beginning in 2027. The Saver’s Match will be a federal matching contribution deposited to a taxpayer’s IRA or retirement plan.
Student Loan Payment Matching
Student loan debt, according to the Federal Reserve in 2021, impacts 45 million Americans whose combined debt for student loans is $1.75 trillion.
Starting in 2024, the law will allow employers to make matching contributions to an employee’s 401(k) per their plan provisions when an employee makes a student loan repayment, thus enabling the employee to pay off their student loan and save for retirement at the same time.
What employers need to know about the SECURE Act
First off, businesses seeking to lower their tax liability have a major enticement with the higher tax credit, plus there are additional credits available that could help further.
There are close to two dozen provisions in the SECURE Act, some benefiting employers, others employees. Here are some highlights:
- The maximum tax credit for employers who establish new retirement plans is now $5,000, up from $500.
- Small-business owners who implement automatic enrollment in the plan will be eligible for an additional credit of $500, which could help offset the costs of 401(k) and SIMPLE IRA plan administration. This credit is available to employers newly adopting plans and employers who convert an existing plan to an automatic enrollment design. The tax credit is available for three years beginning with tax years after 2019.
- Employers will have additional time to adopt a retirement plan. Beginning in tax years after 2019, the legislation allows a plan to be adopted as late as the tax filing deadline, including extensions, for the taxable year rather than by the last day of that taxable year.
- There is a fiduciary safe harbor to 401(k) plan sponsors who include annuities in offerings to plan participants. The employer would not be able to be sued if the provider of an annuity chosen for the 401(k) plan defrauds the participant or ends up insolvent.
- An Open Multiple Employer Plan (MEP) would allow two or more unrelated employers to join through a pooled plan provider to create economies of scale. There are specific guidelines that must be followed, including requiring the pooled plan provider to register with the Department of Labor and the IRS, be a named fiduciary, and act as the ERISA Section 3(16) plan administrator. This provision begins in plan years after Dec. 31, 2020.
