The Focus - Our Tax E-Newsletter
The Secure Act 2.0: Key Take-Aways for Employers
Recently, we have seen a multitude of governmental changes directed to address many issues in our ever-changing economy. The “Retirement Crisis” is just one of those issues in which legislation has been passed in hopes of better preparing the American workforce for retirement. The SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed in 2019. In December of 2022, as part of the Consolidated Appropriations Act of 2023, many new provisions were added and passed by Congress in the form of SECURE 2.0. Last month’s article outlined some key takeaways for individuals. As a follow-up, below are some of the key takeaways as they relate to employers.
Automatic Enrollment for New Plans
For any new 401(k) or 403(b) plans established after the date SECURE 2.0 was enacted, December 29, 2022, plan sponsors are mandated to include an automatic contribution arrangement. For any new plan after December 29, 2022, Automatic Enrollment Provisions must be included, but it does not need to be effective until plan years after 2024.
In the first year of participation, the contribution rate must be at least 3% and no more than 10%, unless the participant elects to opt out. After the initial year of enrollment in the plan, automatic annual deferrals must increase by at least 1% of compensation, until at least 10% for plans with safe harbor contributions, but no more than 15% for most plans.
There are some exceptions to the new provisions. In the case of automatic enrollment, plans in effect prior to the December 29nd, 2022 enactment, SIMPLE match plans, governmental and church plans, plans of employers that have been in existence for less than three years and employers with fewer than 10 employees, are not subject to the automatic contribution.
Tax Credits for Small Employers
With a large portion of Americans working for small businesses, but only roughly 30% of those small businesses offering retirement plans, SECURE 2.0 offers incentives to those small businesses to provide them the ability to implement proper retirement savings plans for their employees.
Effective January 1, 2023, SECURE 2.0 increases the startup credit for employers with up to 50 employees from 50% to 100%. The limits on this credit are still the same, the greater of $500 or $250 per non-highly compensated employee with a max of $5,000.
In addition there is a credit for employer contributions which is available to new plans if the employer has less than 50 employees. The maximum credit is $1,000 for any employee that has FICA wages of less than $100,000 and the credit is 100% of contributions for years 1 and 2 and then it is gradually reduced over the next three years .
Part-Time Employees are Now Eligible
The previous provision of the SECURE Act of 2019 required three consecutive years of 500 hours of service for required participation for purposes of deferrals. The clock began on this in January 2021 so that qualifying employees could start entering the plans on January 1, 2024. SECURE 2.0 changed that three year time frame down to two years for entry into plans beginning with plan years after December 31, 2024. This signifies that the calculation period of 2023 and 2024, would provide entry into the plan for plan years beginning January 1, 2025 or later.
In short, the Act is intended on increasing retirement savings for the members of the workforce so that they will be properly set up for retirement. Many of the provisions are guided towards encouraging the employee to save more by raising annual contribution limits and loosening the restrictions on withdrawing their savings in the event of an emergency, sometimes without the 10% early withdrawal penalty. However, the act also provides tax credits and incentivizes small businesses to adopt a plan if they do not have one in existence.
SECURE 2.0's retirement plan rules will take effect in the near future. These new provisions can impact your business in many ways. Some of the SECURE 2.0 changes, like those listed above are mandatory, while other provisions can be plan specific, therefore it is imperative to work with your Retirement Plan advisor to make sure that you are compliant with any changes. If you have any questions please contact your tax professional at Dermody, Burke, and Brown, CPAs.
The information reflected in this article was current at the time of publication. This information will not be modified or updated for any subsequent tax law changes, if any.