Small business retirement plans are great benefits that encourage employees to start saving for life after the workforce. Do you offer your employees retirement plan options? If you do, you may be impacted by the SECURE Act 2.0.
The SECURE Act 2.0 is a continuation of the Secure Act of 2019, which gave employers new incentives to offer retirement plans. Now, the SECURE Act 2.0 promises to deliver even more. Passed by Congress at the end of 2022, the SECURE Act 2.0 is a new and improved version of the previous bill.
So, what’s inside the new bill? How will it encourage employers to offer plans to employees? And, how will it improve retirement savings for workers nationwide? Read on to find out.
What is the SECURE Act?
The SECURE Act stands for Setting Every Community Up for Retirement Enhancement Act.
This law applies to both 401(k) and IRA plans. Whether you offer employee retirement plans or not, you should understand the implications of the SECURE Retirement Act.
As a brief recap, IRA and 401(k) plans are retirement options that come with a slew of rules, such as contribution eligibility and limits, withdrawal requirements, and early-withdrawal penalties.
And now, under the SECURE Act, some of those rules have changed.
What does the SECURE Act of 2019 do?
The SECURE Act of 2019 became law in December 2019, and changes took place in January 2020. The SECURE Act of 2019 encourages small employers to offer employees retirement plan options and expands employees’ benefits and contribution opportunities. Take a look at what the SECURE Act does for both employers and workers.
1. Encourages small businesses to offer retirement plans
One reason for the SECURE Act’s arrival is to encourage small business owners to offer employees retirement plans. According to the Bureau of Labor Statistics, only 46% of employees in a business with fewer than 100 workers had access to defined contribution plans in 2018.
The SECURE Act aims to boost retirement plan offerings in small businesses. To do this, the act:
- Makes it easier for small business owners to offer employees retirement plans
- Increases the tax credit employers can receive for establishing a retirement plan
Two or more employers can come together to offer their employees retirement plan access through a multiple employer plan (MEP). Before the SECURE Act, each member of the MEP was responsible for having its own plan. But now, the SECURE Act will let all members of an open MEP work within one retirement plan. Keep in mind that this part of the SECURE Act won’t start until 2021.
If you implement a retirement plan, you can claim a business tax credit for 50% of its startup costs, up to $5,000 (up from $500). Here’s another piece of good news: you can claim an additional tax credit of $500 for three years if you include automatic enrollment in your plan.
2. Expands penalty-free withdrawal opportunities
Typically, retirement plan holders must pay a penalty of 10% (plus income tax) if they withdraw from their 401(k) or IRA accounts before they are 59.5 years old.
Before the SECURE Act of 2019, there were some exceptions to this rule. For example, account holders could make withdrawals without penalties to cover things like unreimbursed medical expenses or higher-education expenses.
But now, the SECURE Act lets account holders make penalty-free withdrawals if they have or adopt a child.
Account holders can withdraw up to $5,000 each following the birth or adoption of a child, without penalties. Account holders who repay the funds won’t owe income tax on the withdrawal.
3. Pushes back required minimum distributions (RMDs)
Prior to the SECURE Act, account holders were required to receive required minimum distributions from their accounts when they turned 70.5. These RMDs are the minimum amounts someone must withdraw from their account annually.
Under the SECURE Act, that RMD age has been pushed back to 72 years old. Now, account holders can wait until they turn 72 to begin withdrawing from their accounts.
So, what does this mean? This means that account holders can continue to grow their retirement fund amounts for another year and a half before withdrawing.
4. Removes age contribution restriction
The SECURE Act has also eliminated the age contribution restriction for IRA holders.
In the past, workers had to stop contributing to their IRAs when they turned 70.5. But now, under the SECURE Act, account holders can contribute to their IRAs as long as they are still working.
5. Increases annuities
Another change the SECURE Act brings is that it may increase annuities within 401(k) retirement accounts.
Annuities are insurance contracts that provide the account holder with steady cash flow from the insurer. Here’s how it works: you, the employer, deposit employee contributions with an insurer, who hangs onto the money and disburses them to the account holder at the appropriate time.
But, what happens if the insurer you choose doesn’t disburse the employee’s money down the line?
Before the SECURE Act, many employers set up 401(k)s without annuities to avoid potential lawsuits resulting from the insurer not disbursing the employee’s money.
However, the SECURE Act now provides a “safe harbor” for employers if they decide to set up annuities. Employers who meet certain requirements when selecting an insurer won’t be held liable if there are problems down the road.
6. Extends retirement plans to part-time employees
The SECURE Act also extends 401(k) eligibility to include more part-time employees. Prior to the SECURE Act, employees needed to work at least 1,000 hours during a 12-month period to contribute to a 401(k) plan.
Beginning in 2021, employees who work at least 500 hours in a 12-month period for three consecutive years can contribute to a 401(k) plan. These part-time employees must be 21 or older to contribute.
7. Removes the “stretch” IRA provisions
Here’s one provision of the SECURE Act that may throw some non-spouse IRA beneficiaries for a loop: the repeal of the stretch IRA.
In the past, beneficiaries who inherited a deceased account holder’s IRA could receive distributions indefinitely. These accounts could be passed from person to person without mandatory distributions.
Not anymore. Now, non-spouse beneficiaries must receive a full payout from their inherited IRA within 10 years of the original account holder’s death. This means that IRA funds cannot continue to grow indefinitely after an account holder has passed.
However, individuals who inherited an IRA before 2020 can continue stretching out the life of the account.
SECURE Act 2.0: What’s new?
SECURE Act 2.0, also known as Securing a Strong Retirement Act of 2022, aims to expand retirement savings. The president signed the bill into law on December 29, 2022. Many provisions took effect January 1, 2023. Other provisions won’t take effect until later years.
Again, SECURE Act 2.0 is a continuation of the SECURE Act of 2019. So, how does SECURE Act 2.0 expand on the 2019 bill and encourage employers to offer retirement plans and employees to sign up?
Here are some of the big changes you—and your employees—may be interested in.
1. Expanded tax credit opportunities for small businesses
Need a reason to offer employees retirement plans besides retention? SECURE Act 2.0 gives small employers several—in the form of tax credit opportunities.
SECURE Act 2.0 provides tax credits for:
- Administrative costs
- Contribution costs
- Military spouse coverage
Administrative costs
The SECURE Act of 2019 gave businesses up to 100 employees a tax credit of 50% of administrative costs, capped at $5,000 per year.
SECURE Act 2.0 takes things a little further. Employers with 50 or fewer employees can now claim a 100% tax credit to cover administrative costs up to $5,000 of establishing a retirement plan.
Employers with 51 – 100 employees can still claim a tax credit that covers 50% of administrative costs up to $5,000.
Contribution costs
Businesses with up to 100 employees may be eligible for a tax credit if they contribute to an employee’s retirement savings.
If you have 50 or fewer employees, you can claim a credit to cover up to $1,000 of contributions per employee.
The tax credit limit is phased down over five years and for employers with more than 50 employees.
Military spouse coverage
Small employers with fewer than 100 employees can also receive a credit of up to $500 for offering certain retirement plans to military spouses.
2. Auto-enrollment mandate
The SECURE Act of 2019 offered additional tax credits to small employers who included automatic enrollment in their retirement plans. SECURE Act 2.0 now requires most businesses with new defined contribution plans to automatically enroll eligible employees.
Under the auto-enrollment mandate, employers must enroll eligible employees at a rate of at least 3%, but not more than 10%. After the first year, the employee’s contribution rate increases by 1% each year, up to at least 10% but not more than 15%.
Employees can opt out or choose a different percentage of their wages to contribute.
The auto-enrollment mandate does not apply to all businesses. For example, there are exceptions for new businesses operating less than three years and small businesses with 10 or fewer employees.
3. Required minimum distribution age raised
Retirement plans require account holders to receive distributions from their accounts when they turn a certain age. The minimum amount someone must withdraw from their account annually is known as the required minimum distribution (RMD).
The SECURE Act of 2019 raised the required minimum distribution age from 70.5 to 72. And now, SECURE Act 2.0 raised it again—and will continue to raise it.
Thanks to the SECURE Act 2.0, here are the required minimum distribution ages by year:
- 73 years old: Beginning January 1, 2023
- 74 years old: Beginning January 1, 2030
- 75 years old: Beginning January 1, 2033
4. Student loan payment match
Do your employees have student loans? Are their student loan payments preventing them from starting a retirement fund? Not anymore.
Beginning in 2024, you can make matching retirement contributions for qualified student loan payments your employees make, up to a limit.
5. Roth account employer match
SECURE Act 2.0 also lets employers make matching contributions to Roth accounts. Employers can give employees the option to choose that part or all of their matching contributions be treated as Roth contributions.
However, don’t exclude these contributions from the employee’s gross income.
SECURE Act 2.0 summary
Retirement savings have gotten loads of attention in recent years. Here’s a snapshot of some of the biggest changes SECURE Act 2.0 is bringing:
- Employers with 50 or fewer employees can claim a 100% tax credit of administrative costs up to $5,000
- Businesses with 100 or fewer employees can claim a credit to cover up to $1,000 of contributions per employee
- Most businesses with new defined contribution plans must automatically enroll employees at a contribution rate of at least 3% (no more than 10%)
- The required minimum distribution age is rising (to 73 years beginning 2023 and 75 years beginning 2033)
- Employers can choose to make a retirement contribution matching student loan payments beginning in 2024
- Employers can make matching contributions to Roth accounts (but can’t be excluded from the employee’s gross pay)
There are several other provisions in the SECURE Act 2.0. For more information on Securing a Strong Retirement Act of 2022, you can check out the bill here.
Looking to start a new 401(k) plan? Patriot has partnered with Vestwell, a retirement platform trusted by small businesses across all 50 states, to offer payroll with seamless 401(k) integration. You can sign up here to get started or learn more!
This article has been updated from its original publication date of January 25, 2023.
This is not intended as legal advice; for more information, please click here.
