Secure Act 2.0: Impact on Employers

In late December 2022 Congress passed a large omnibus budget bill which included the Secure Act 2.0. The Act includes many retirement plan changes that impact both individuals and employers over the next several years with the goal of improving and incentivizing retirement savings. The changes are complex and may be dependent on the number of employees in the business. Summarized below are a few of the major provisions impacting employers. Please note most employer plans will need to be amended to comply with some of the provisions.

THE SMALL BUSINESS START UP CREDIT IS INCREASED
Effective in 2023, employers with 50 or fewer employees can take the retirement plan start-up credit for up to 100% of plan start-up costs (was 50%) up to an annual cap of $5,000 for the first 3 years of the plan. Additionally, there is a tax credit for employer contributions for the first five years of the plan. The maximum credit is $1,000 per employee not earning more than $100,000 per year. The percentage of the credit reduces each year for the 5 years.

THE ESTABLISHMENT OF STARTER 401(K) PLANS
Beginning in 2024, employers who do not already offer retirement plans will be permitted to offer a new starter 401(k) plan to employees who meet age and service requirements. Employees would be automatically enrolled unless they opt out. The employee contribution percentage must be between 3% to 15% up to a maximum of $6,000, adjusted for inflation. A $1,000 catch-up contribution is also allowed for workers who are at least 50 years old participating in the starter 401(k) plan. Employer contributions to the plan are not allowed.

THE EXPANSION OF AUTOMATIC ENROLLMENT
Beginning in 2025, 401(k) and 403(b) plans will be required to automatically enroll eligible participants, though employees may opt out of coverage. There are many exceptions such as for small businesses with 10 or fewer employees and for new businesses less than 3 years old.

PART-TIME WORKER OFFERINGS
Starting in 2025, employers will be required to allow part-time employees (workers with over 500 hours per year for two consecutive years) to participate in their retirement plan. Employees with over 1000 hours of service must be included after one year of service.

SIMPLE PLAN CHANGES
Currently employers with SIMPLE plans must either make contributions for employees of 2% of compensation or match employee elective deferral contributions up to 3%. Starting in 2024, employers can make additional contributions to each employee’s account in a uniform manner up to the lesser of 10% of compensation or $5,000 indexed for inflation. Also, the annual contribution limits to Simple plans have increased dependent on the number of employees.

EMPLOYER MATCH FOR STUDENT LOAN PAYMENTS
Starting in 2024, employers will be able to “match” employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans. The plan must be amended for this change.

EMPLOYER MATCH TO ROTH ACCOUNTS
Employers will be able to provide employees the option of receiving vested matching contributions to Roth accounts (although it may take time for plan providers to offer this and for payroll systems to be updated). Previously, matching in employer-sponsored plans was made on a pre-tax basis. Contributions to a Roth retirement plan are made after-tax, after which earnings can grow tax-free.

HOW KATZABOSCH CAN HELP
If you have trouble understanding what adjustments you need to make, please contact your trusted KatzAbosch Advisor. Also, join us for a complimentary webinar on May 16th that will go into detail a little more with the items mentioned above. Register by clicking here or below.