Just before the end of 2022 Congress passed a $1.7 trillion omnibus appropriations bill that President Biden signed into law shortly thereafter. Included in that whopping bill were a number of changes to retirement accounts that extend and expand on provisions passed as part of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. Dubbed SECURE 2.0, the legislative package went to President Biden’s desk with overwhelming bipartisan support.
Some may recall that the 2019 version of SECURE gave small businesses the ability to participate in pooled employer plans (PEPs). Similar to a “group 401(k),” PEPs allow unrelated employers to share the administrative costs of a 401(k) plan they can offer to their employees. SECURE 2.0 provides more new provisions that are intended to make it easier and more attractive for more employees to participate. Here are a few highlights:
- Employers can make matching contributions to plans based on qualified student loan payments by employees. This provision is intended to increase the ability to save for retirement for those who have until now been making student loan payments instead of funding their retirement accounts.
- Employers are required to automatically enroll employees in 401(k) or 403(b) plans, deducting from their payroll contributions of 3–10% in the first year, rising by 1% each year until a minimum 10% threshold is reached. Businesses with fewer than 10 employees and companies in business for less than 3 years are exempt. Employees can opt out, but research shows that few do.
- The Saver’s Tax Credit for qualified lower-income individuals will be extended, starting in 2027, to provide a tax credit equal to 50% of plan contributions with no reduction as income increases.
- Employer plans may now include an emergency savings provision that allows employees to set aside up to $2,500 that could be tapped for unexpected expenses. Contributions above the $2,500 amount would go into the employee’s regular retirement account.
- Beginning in 2025, catch-up contributions for employees ages 60–63 are increased from the current $6,500 to $10,000. For those 50–60, the levels remain the same as currently). Also, all catch-up contributions are treated under Roth rules (as after-tax contributions) except for workers earning $145,000 or less.
- RMDs start at age 73 in 2023, going up to age 75 in 2033.
Employers will need to pay close attention to a provision reducing the number of years required for part-time employees to become qualified to participate in a plan. SECURE 2.0 lowers the period from the current three years to two. However, the new law gives employers until January 1, 2024 to make the necessary changes. And on a more positive note, the package includes expansion of the startup cost credit for employers to include up to 100% of qualified startup costs. In other words, small businesses who want to launch a 401(k) can get a tax credit equivalent to the amount of their startup costs.
