The Securing a Strong Retirement Act of 2022 (SECURE 2.0) has emerged as a significant milestone to improve small businesses’ access to retirement benefits. SECURE 2.0 builds on the initial 2019 SECURE law. The act focuses on retirement savings, such as 401(k) and 403(b) plans and individual retirement accounts (IRAs).
The comprehensive rule was enacted on Dec. 29, 2022, and many of its provisions apply specifically to small businesses with 100 or fewer employees. By embracing these new provisions offered through SECURE 2.0, small businesses can better support workers’ retirement plans.
This article explores key aspects of SECURE 2.0 that small businesses should be aware of and suggests how they can use them to their advantage.
Understanding SECURE 2.0 Provisions
Congress’s passing of SECURE 2.0 is meant to improve small businesses’ access to retirement benefits, improve retirement rules and encourage more retirement savings. The act contains more than 90 retirement-related provisions, so consider these seven favorable provisions impacting small businesses:
- Startup credit—The startup credit will cover 100% (up from 50%) of administrative costs up to $5,000 for the first three years of plans established by employers with up to 50 employees. Small businesses joining a multiple employer plan (or MEP) are also eligible for the credit. The tax credit offering incentivizes employers by limiting the administrative burdens of establishing and managing retirement plans.
- Starter 401(k) plans—Starting in 2024, employers who don’t already offer retirement plans can offer a starter 401(k) or safe harbor 403(b) plan to employees who meet age and service requirements. The starter plan provides an ideal first step for small businesses since employers aren’t required to match contributions. With this provision, even the smallest businesses can offer their employees something to help with retirement. Through this provision alone, the American Retirement Association estimates that 19 million workers will gain access to a workplace retirement plan.
- Automatic enrollment—Beginning in 2025, many 401(k) and 403(b) plans will be required to enroll eligible participants automatically; however, employees may opt out of coverage. Remember, there’s an exception for small businesses with 10 or fewer employees and new businesses under 3 years old. The expansion of automatic enrollment is meant to help workers – especially younger and lower-paid workers—save for retirement.
- Required minimum distribution (RMD)—At a certain age, savers must start withdrawing a minimum amount from specific retirement accounts, including 401(k) and traditional IRAs. Since Jan. 1, 2023, a provision for later-stage savers increased the RMD age to 73 – and, in 2033, the RMD age will increase to 75. Furthermore, starting this year, Roth contributions won’t be included when calculating the RMD.
- Part-time worker offerings—Starting in 2025, employers will be required to allow part-time employees with more than 500 hours per year after two consecutive years of service to participate in their retirement plan. Employees exceeding 1,000 hours of service will be included in plans after one year of service. This will increase the number of workers eligible to contribute to employer-sponsored retirement plans.
- Student loan matching—Individuals with student loans can balance saving for retirement and repaying student loans instead of choosing one or the other. Starting in 2024, when a borrower makes a qualified student loan repayment, their employer may match that amount by contributing to a 401(k) plan, 403(b) plan or SIMPLE IRA.
- 529 plans—A 529 plan (or college savings account) is a tax-advantaged plan used to pay for education expenses. Starting January 2024, 529 beneficiaries can roll up to $35,000 to a Roth IRA from a 529 plan if it’s been open for at least 15 years. Previously, 529 accountholders faced taxes and penalties for nonqualified withdrawals, so this change allows beneficiaries to roll leftover 529 funds (e.g., unused educational funds) to the beneficiary’s Roth IRA to help save for retirement.
SECURE 2.0 changes may help American workers save for retirement while balancing current expenses. In turn, these changes also allow small businesses to support their employees with retirement savings, which can improve their attraction and retention efforts.
Summary
With most American workers employed by small businesses, employers must be empowered with the tools and resources to offer workers retirement options. Although complex, SECURE 2.0 presents many opportunities for small businesses to strengthen their employee benefits and support the overall financial well-being of their workforce.
It’s critical for employers to stay informed on SECURE 2.0 changes and be proactive in their adoption. Contact us today for more workplace guidance.
