On December 29, 2022, President Biden signed the Consolidated Appropriations Act, which is part of the larger bill, the Securing a Strong Retirement Act, also known as the SECURE Act 2.0. These laws follow the Setting Every Community Up for Retirement Enhancement (SECURE) Act signed into law at the end of 2019. SECURE 2.0 covers numerous changes to retirement provisions designed to increase retirement savings, facilitate access to retirement savings, encourage employees to save for retirement, and lower employers’ cost of offering and funding retirement plans. The majority of the SECURE 2.0 provisions will become effective in 2024.
Provisions Impacting All Employers
For plan years beginning after December 31, 2024, an employer with more than 10 employees who has been in existence for at least three years and who is offering a new 4019k) or 403(b) plan, must provide automatic enrollment for new employees with start and salary reduction of at least 3% of compensation. The rate of salary reduction increases annually by 1% of compensation until reaching at least 10%, but no more than 15%. An employee may elect out of auto enrollment and/or auto escalations.
Designated Roth accounts in employer plans are encouraged under the new law. Roth accounts within 401(k) plans, 403(b) plans and 457 plans are no longer subject to required minimum distribution rules. This provision puts Roth accounts on par with Roth IRAs. Prior to SECURE 2.0, employees had to transfer their Roth accounts from the employer plan to a Roth IRA to escape required minimum distributions. Now employees can continue to compound earnings tax free after retirement within their employer’s plan.
Incentives to Participate
Prior to SECURE 2.0, an employer could not incentivize an employee to contribute to a retirement savings plan. For plan years beginning after December 29. 2022, an employer is allowed to provide financial incentives to encourage plan participation.
Encouraging Small Employers to Establish Retirement Savings Plans
For employers with no retirement plan, SECURE 2.0 provides for starter 401(k) or 403(b) plans. These starter plans limit salary deferrals to a maximum of $6,000 plus catch-up contributions for those over the age of 50. Automatic enrollment of employees is required, but an employee may elect out. These starter plans simplify administration by deeming that the discrimination tests are satisfied, although notice of the plan to employees is required.
For employers with 50 or fewer qualifying employees, SECURE 2.0 provinces an increased tax credit for starting a plan. For plans started in 2023, the credit is increased to 100% of administrative costs and ranges from $500-5,000. There is an additional 100% credit up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the first year of their plan. This credit decreases by 25% each of the following 3 years.
Employers with 51-100 qualifying employees can qualify for a similar, but lesser, credit for employer contributions. There are also additional credits for contributions for military spouses who are participating in certain employer plans.
Easing Top-Heavy Plan Rules
Many small employers do not adopt plans due to required top-heavy contributions. To increase participation in these plans, the top-heavy rules are modified for plan years beginning after 2023 to allow excludable and non-excludable employees to be tested separately, as is permitted for the 401(k) discrimination tests. This can encourage employers to offer plans to younger workers.
Solo 401(k) Plan
SECURE 2.0 provides parity to solo 401(k) plans with IRAs. A sole proprietor who is the only employee of the business can make a deferral election for compensation contributions into their 401(k) plan up until the due date (without extensions) for the tax year’s income tax return, but only for the first year of the plan. This extended time can encourage adoption of a plan and provides more information about the earnings of the business while the sole proprietor’s tax return (including the business’s income) is being prepared. This applies for plan years beginning after December 29, 2022.