The SECURE 2.0 Act was enacted as part of the Consolidated Appropriations Act for 2023. It contains 90 sections affecting the design, administration, and tax treatment of employee retirement plans, among other things. It is intended to help address the “retirement crisis” in America by making it easier for employers to establish retirement plans and for employees to save for retirement. While the law is quite sweeping, below is a summary of 10 changes that employers of small businesses should note, remembering that much more guidance is needed to implement the SECURE 2.0. In fact, the American Benefits Council sent a letter to the Department of Treasury on February 7 with the headline, “Immediate Guidance Needs Under SECURE 2.0”. Five of the 10 provisions below were identified as having “Immediate Guidance Needs”.
1. Improved credit for small employer pension plan startup costs. The three-year small business plan startup credit has been increased from 50% to 100% of administrative costs, up to an annual cap of $5,000. This applies to employers with no more than 50 employees. An additional tax credit is provided based on a percentage of employer contributions up to $1,000 per employee.
2. Optional Roth treatment of employer matching or nonelective contributions. Employers are now permitted to provide employer contributions and nonelective contributions on a Roth basis at the participant’s option.
3. Roth for SEPs and SIMPLE IRAs. Effective for taxable years beginning after December 22, 2022, SEPs and SIMPLE IRAs may accept Roth contributions.
Effective for Taxable/Plan Years beginning after December 31, 2023
4. Roth tax treatment for catch-up contributions. All catch-up contributions from employees with compensation greater than $145,000 must be treated as Roth contributions.
5. Treatment of student loan payments as elective deferrals for purposes of matching contributions. Recent studies have shown that individuals with student debt tend to delay retirement savings. When an employee decides not to contribute to their retirement plan, they miss out on any employer matching contributions. Employers will be permitted to make contributions equal to the missed matching contributions, based on “qualified student loan payments”. A qualified student loan repayment is broadly defined as any indebtedness incurred by the employee solely to pay for qualified higher education expenses.
6. Penalty-free withdrawals for certain emergency expenses. Plans can offer distributions to be used for emergency expenses that are not subject to the 10% early withdrawal penalty. The emergency must be unforeseeable or immediate needs must be related to necessary or personal family emergency expenses. Eligible distributions cannot exceed $1,000 and are limited to one distribution per year.
7. Additional nonelective contributions to SIMPLE IRA plans. Employers can make nonelective contributions to SIMPLE (Savings Incentive Match Plan for Employees) plans above the minimum contributions for employees with at least $5,000 in compensation. The additional contribution must not exceed the lesser of 10% of compensation or $5,000.
8. Contribution limit for SIMPLE IRA plans. The SIMPLE IRA annual deferral limits have been increased by 10% of what otherwise would apply. In the case of employers with 25 to 100 employees, the increased deferral limit is permitted only if the employer increases its matching or employer contributions.
9. Starter (Deferral Only) 401(k) plans for employers with no retirement plan. Employers with no retirement plan will be permitted to sponsor a starter (deferral only) 401(k) plan. The starter 401(k) plan will require that all employees be auto-enrolled at a 3% to 15% compensation deferral rate. The annual limit on deferrals is the same as an IRA, $6,500 for individuals ages 49 and below and $7,500 for individuals ages 50 and above. The plan would automatically be a safe-harbor plan and would not be subject to top-heavy rules.
Effective for Taxable/Plan Years beginning after December 31, 2024
10. Higher catch-up contribution limits applied at age 60, 61, 62 and 63. Under current law, employees who have attained age 50 are permitted to make catch-up contributions. The limit on catch-up contributions for 2023 is $7,500 for 401(k) plans and $3,500 for SIMPLE plans. The limit on catch-up contributions for individuals who will attain age 60 but not age 64 during the plan year will be the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the regular catch-up amount.
As you navigate through these new changes, our team is here to offer guidance and advice. It’s never worth it just assume or guess, instead reach out with all of your questions today!