On December 23, 2022, Congress passed the Consolidated Appropriations Act, containing numerous provisions aimed at retirement plan reform. This legislation is a follow-up to the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed in 2019.
Referred to as SECURE 2.0 Act of 2022, businesses and their employees can now capitalize on added incentives related to their retirement plans.
Tax Credit Expansion for Smaller Business
Beginning in 2023, eligible businesses with 50 or fewer employees can qualify for a credit equal to 100 percent of the administrative costs for establishing a workplace retirement plan. The original SECURE Act gave startup businesses with up to 100 employees a tax credit equal to 50% of administrative costs, capped annually at $5,000. Eligible businesses with 51 to 100 employees remain subject to the original SECURE Act provision.
Credit for Employer Contribution Costs
Starting in 2023, eligible businesses with up to 100 employees may be entitled to a tax credit based on their employee matching or profit-sharing contributions. This credit, capping at $1,000 per employee, phases down gradually over five (5) years and is subject to further reductions for employers with 51 to 100 employees.
Automatic enrollment for new 401(k) or 403(b) plans will be required beginning in 2025. The initial default rate must be between 3% and 10% , including annual auto-escalation of 1%, up to at least 10% but not more than 15% of the employee’s annual salary.
Automatic enrollment in a retirement plan is designed to make it easier for employees to participate. Employees who prefer not to participate can opt-out. There is an exception to the requirement for small businesses with 10 or fewer employees, new businesses less than 3-years-old, churches, and governmental plans. To add even more convenience, businesses can integrate automatic enrollment with payroll. Your HR and payroll teams will need to be ready to implement and provide communications to employees.
Benefits for a Multigenerational Workplace
With five different generations making up today’s workplace, there is more diversity than ever. Millennials make up roughly one-third of the American workforce, older employees are working longer and Generation Z is entering the workplace.
For older employees, the law raises the required minimum distribution (RMD) age from 72 to 73 beginning in 2023, and then to age 75 beginning in 2033. A new catch-up contribution provision begins in 2025: For those ages 60 through 63, the amount would be increased to the greater of $10,000 or 50% more than the regular catch-up amount for an employer-sponsored 401(k) and 403(b).
Changes are also in store for part-time workers, they will be eligible to contribute to an employer-sponsored retirement plan. The Act requires employers to allow long-term, part-time workers to defer to their 401(k) plans. To be eligible part-time employees will be required to work two consecutive years and complete at least 500 hours of service in each year starting in 2025, a departure from the original SECURE Act’s “three-years-of-service” rule. The current Saver’s Credit will also be transformed, the credit provides millions of low and middle-income individuals with an incentive to save for retirement each year to a Saver’s Match beginning in 2027. The Saver’s Match will be a federal matching contribution deposited to a taxpayer’s IRA or retirement plan.
Student Loan Payment Matching
The impact of student loan debt can be felt throughout the workforce, according to the Federal Reserve in 2021, 45 million Americans had $1.75 trillion in combined student loan debt.
Starting in 2024, the law will allow employers to make matching contributions to an employee’s 401(k) per their plan provisions when an employee makes a student loan repayment, thus enabling the employee to pay off their student loan and save for retirement at the same time.
Benefits For All
Though many of the SECURE 2.0 Act provisions won't be effective and fully realized for a few years, it's to every business's benefit to maximize the tax credits allowed. Sponsoring an employee retirement savings plan not only benefits your tax bill but also your employees —with available tax credits to offset start-up costs, there's no better time to get started.
Keep in mind that the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult a professional for specific information regarding your individual situation.