Preface: There is always enough time to get those things done that God wants you to do. – Jim Collins
SECURE Act 2.0: Employer-Provided Retirement Plans
The SECURE 2.0 Act of 2022 (SECURE Act 2.0) is designed to build upon the provisions of the original SECURE Act to increase participation and boost retirement savings. The SECURE Act 2.0 does this by expanding upon automatic enrollment programs, helping to ensure that small employers can easily and efficiently sponsor plans for employees, and enhancing various credits to make saving for retirement beneficial to both plan participants and plan sponsors.
Automatic Enrollment
One of the most broadly applicable provisions of the SECURE Act 2.0 requires that, effective for plan years beginning after 2024, 401(k) and 403(b) sponsors automatically enroll employees in plans once they become eligible to participate in the plan. Under the requirement, the amount at which employees are automatically enrolled cannot be any less than three percent and no more than ten percent of salary. The amount of employee contributions is increased by one percent every year after automatic enrollment, increasing to at least 10 percent but not more than 15 percent of salary. Employees can opt out of the automatic enrollment if they choose or have such contributions made at a different percentage. The automatic enrollment provision is effective for plan years beginning after December 31, 2024.
Many employers have taken it upon themselves to automatically enroll employees in 401(k) and 403(b) plans since first allowed to do so more than 20 years ago, and this has, unsurprisingly, led to an increase in plan participation and retirement savings. However, under this provision, automatic enrollment is required. Exceptions to the automatic enrollment requirement are available for businesses with ten or fewer employees, businesses that have been in existence for less than three years, church plans, and government plans.
Catch-Up Limits
The annual amount that can be contributed to a retirement plan is limited, and this limitation amount is generally subject to annual adjustments for inflation. For plan participants aged 50 or older, the contribution limitation is increased (“catch-up contributions”). For 2023, the amount of the catch-up contribution is limited to $7,500 for most retirement plans, and $3,500 for SIMPLE plans, and is subject to inflation increases. Under the SECURE Act 2.0, a second increase in the contribution amount is available for participants aged 60, 61, 62, or 63, effective for tax years after 2024. For most plans, this “second” catch-up limitation is $10,000, and $5,000 for SIMPLE plans. Like the “standard” catch-up amount, these limitations are subject to inflation adjustment.
In addition, the SECURE Act 2.0 requires, effective for tax years beginning after 2023, that all catch-up contributions are subject to Roth (i.e., after-tax) rules, rather than only where allowed by the plan.
Small Employers
Currently, under provisions of the original SECURE Act, a small employer that establishes an eligible plan can claim a credit calculated as a percentage of start-up costs for the first three years. Under the SECURE Act 2.0, effective for tax years beginning after 2022, the length of time for which the credit can be claimed is extended to five years for employers with 50 or fewer employees. Additionally, the amount of the credit is increased for employers with 50 or fewer employees, with a cap of $1,000 per employee. The 100 percent credit amount is phased out for employers with 51 to 100 employees, and drops incrementally to 25 percent in the fifth year.
In addition, the SECURE Act 2.0 retroactively makes the start-up credit available to small employers that join a multiple employer plan (MEP) that is already in existence. Without this fix, the small employer would not be eligible for the credit if the MEP had been in existence for three years. The fix is effective for tax years beginning after 2019.
The SECURE Act 2.0 also provides a credit for small employers that make military spouses immediately eligible to participate in the employer’s retirement plan. The credit is effective for tax years beginning after 2022.
Additional Provisions
The SECURE Act 2.0 includes several other provisions meant to expand participation and boost retirement savings. These additional improvements include:
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- Allowing employers to make nonelective contributions of a uniform percentage to a SIMPLE IRA or SIMPLE 401(k) plan up to 10 percent of compensation, with an inflation-adjusted cap of $5,000. Contribution amounts to SIMPLE IRA and 401(k) plans are also increased in the case of certain smaller employers.
- Allowing employers sponsoring 403(b) plans, which are typically charitable organizations and other non-profits, to participate in MEPs just like sponsors of 401(k) plans (plan years beginning after 2022)
- Allowing plans to provide participants with the option of receiving matching contributions to a defined contribution plan on a Roth (i.e., after-tax) basis (after date of enactment)
- Allowing employers to make matching contributions to employee plans for the employee’s student loan payments (plan years beginning after 2023)
- Allowing employers to give employees de minimis low-cost incentives, like gift cards, to incentivize employee contributions to qualified plans (plan years beginning after 2022)
- Allowing employers a grace period to correct mistakes without penalty when establishing automatic enrollment and contribution escalation plans (after date of enactment)
- Reducing SECURE Act length-of-service requirements for part-time participants in sponsored plans from three years to two years (plan years beginning after 2024)
- Eliminating notification requirements to unenrolled plan participants, but requiring an annual notification to these participants of plan requirements and deadlines to encourage participation (plan years beginning after 2022)
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The changes under provisions of the SECURE Act 2.0 may affect the retirement plan options available to your employees. Please call our office if you’d like more information