Last year, President Biden signed the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act of 2022, a bipartisan retirement savings law that includes numerous retirement policy changes that will go into effect over the next decade. We wrote a blog to summarize some of the critical changes you need to be aware of for your retirement planning, but many of our clients still had some questions. We’ve compiled the answers to those into a Secure Act 2.0 summary below.
Secure Act 2.0 FAQs for Employers
What is Secure Act 2.0?
In December 2022, the Consolidated Appropriations Act of 2023 (HR 2617) was signed into law. The Act includes important provisions, collectively referred to as SECURE 2.0, which are intended to build upon the 2019 SECURE Act. These provisions have been designed to improve retirement outcomes for employees and make it more attractive for employers to offer retirement plans.
Will the government really pay me to set up a retirement plan for my employees?
Although employers won’t be paid by the government in hard cash, there are tax credits and incentives available. The new Act incentivizes employers through a wealth of additional tax incentives over the current ones, increasing the benefits of starting a 401(k) plan for small businesses.
Before Secure 2.0, employers with fewer than 100 employees were eligible for a tax credit of up to 50% of administrative costs within the first 3 years of starting their plans, with an annual limit of $5,000. Secure 2.0 increases the credit from 50% to 100% for eligible employers with up to 50 employees. An additional credit of up to $1,000 per employee is available for eligible employers with up to 50 employees, but phases out from 51 to 100 employees.
Is there any credit available for matching employees’ contributions to a retirement plan?
Employers that set up a new plan can claim a credit of up to $1,000 per employee on employer contributions (for businesses with up to 50 employees; lower credits are available for businesses with 51-100 employees). The credit gradually phases out over 5 years. Note that employers with existing plans are not eligible for this particular credit.
What types of plans qualify/are affected?
Eligible employer plans that may claim the credit include qualified employer plans under section 4972(d):
- 401(k) plan
- SIMPLE plan
- Simplified employee pension (SEP)
Other key plan changes
- Secure Act 2.0 requires employers with 401(k) or 403(b) plans to automatically enroll all new, eligible employees at a 3% contribution rate that increases by 1% annually until it reaches 10% (employees may opt out of coverage).
- Effective in 2023, employers will be allowed to create Roth accounts, open to after-tax contributions, for Savings Incentive Match Plan for Employees (SIMPLE) and Simplified Employee Pension (SEP) retirement plans.
- Employers may amend their retirement plans to permit employees to elect for employer matching and non-elective contributions to be made as Roth contributions, as long as they are 100% vested when contributed to the plan.
- Beginning in 2024, student loan payments can be treated as retirement contributions to qualify for matching contributions in a workplace retirement account.
- From 2024, Required Minimum Distribution (RMD) requirements will be eliminated for workplace-based Roth plans, resulting in Roth 401(k)s having similar treatment related to RMDs as Roth IRAs.
What does “small employers” mean in this context?
SECURE 2.0 increases the startup credit from 50% to 100% for small employers. In the context of the retirement plans startup cost tax credit, a small business is capped at 50 employees.
Is there a maximum number of employees to qualify for the credit?
SECURE 2.0 provides additional credit for employer contributions of up to $1,000 per employee. Employers with up to 50 employees are eligible for the full credit, which is phased out for employers with 51-100 employees.
What if I don’t have any employees? Can I still qualify for the credit for establishing a solo 401k plan?
To be eligible for the credit, employers must cover at least one non-Highly Compensated Employee (non-HCE). A non-Highly Compensated Employee (non-HCE) is an employee who:
- Does not own more than 5% of the interest in the business at any time during the year or the preceding year
- Did not receive compensation from the business of more than $135,000 in 2022 and $150,000 in 2023)
- Was not in the top 20% of employees when ranked by compensation
Due to the one non-Highly Compensated Employees (non-HCEs) requirement, an owner-only business is unable to take advantage of the startup tax credit by adopting a solo 401(k) plan.
Still have questions about the impact of Secure 2.0?
The SECURE 2.0 Act contains almost 100 changes to retirement savings plans. Additionally, some provisions may require amendments to existing retirement plans and offerings. We recommend that employers consult with appropriate legal counsel and financial professionals to identify any applicable changes and determine what optional provisions may be beneficial. Please reach out to one of our professionals so that we can help you understand how Secure 2.0 applies to your business.