The SECURE 2.0 Act of 2022 is a significant new piece of legislation impacting retirement plans and plan participants. Most of the coverage in the media focuses on the provisions of this legislation that pertain to individual investors, though many of the most significant changes are ones impacting retirement plan sponsors. In other words, business owners need to pay attention to this new law. If you are an existing plan sponsor, these changes will require amendments to your plan design and document, careful coordination with your TPA, recordkeeper, and plan’s financial advisor, and communication with your employees. If you are a business owner considering offering a retirement plan, this Act aims to strongly incentivize you to get started. Regardless of whether you are an existing plan sponsor or just now considering the idea, we hope the following piece will help you understand the key provisions of this new legislation as it applies to you and your benefits program. Please note that we have also published a piece on key provisions for individual investors, and we encourage you to download it as a resource to you, your family, and your employees.
By the way, if you’re wondering why “2.0” is included in the name, it’s because this is a follow-on the SECURE Act (Setting Every Community Up for Retirement Enhancement) that was passed in 2019 and took effect on January 1, 2020. Some of the new provisions build on what was in “1.0,” while others are completely new. Some will take effect immediately, while others are years out (with most starting in 2024). As we go through each provision, we’ll note its effective date.
Feel free to continue reading here, but we encourage you to simply download this piece as a PDF due to its length and the likely need to reference it repeatedly in the months ahead.
Please note that any reference to a 401(k) account in this piece also refers to a 403(b), unless otherwise noted (one effort of the SECURE 2.0 Act was to better harmonize the features of 403(b) plans with 401(k) plans, with some minor exceptions). References to “workplace” retirement accounts generally refer to 401(k) and 403(b) accounts. While SIMPLE and SEP-IRAs are also workplace accounts, the rules for these are so distinct from the others, that we will refer to them directly whenever mentioned.
> NEW REQUIRED PLAN PROVISIONS
Automatic enrollment and auto escalation
Automatic enrollment and auto escalation are going to be required for most plans starting in 2025. This is designed to boost participation. Employees can still opt out of coverage at any time. For those that don’t, they must be enrolled with a contribution rate of at least 3% but not more than 10%. Each year thereafter that amount is increased by 1% until it reaches at least 10%, but not more than 15%. All current 401(k) and 403(b) plans are grandfathered, even for new employees hired after the 2025 start date. There is an exception for small businesses with 10 or fewer employees, new businesses (<3 years in existence), church plans, and gov’t plans. The reality is that many plans already utilize these features. Now, they will just be mandatory.
This is clearly designed to increase participation in workplace retirement plans. We have found most small business owners we work with currently elect against auto enrollment, preferring to instead allow employees to affirmatively opt into participation. However, we also foresee little resistance to this new requirement if it is the law. In terms of implications, it may marginally increase the cost of offering the plan, in the form of more dollars going towards matching contributions. If you find that this may be a financial challenge, you may want to revisit your plan design as it pertains to employer contributions. If you are strongly opposed to these features, you should implement your plan prior to 2025, as existing plans will be grandfathered in.
You will need to make changes that allow for broader participation by part-time employees. Currently, you must have a dual eligibility requirement under which an employee must complete either one (1) year of service (with the 1,000-hour rule) or three (3) consecutive years of service (where the employee completes at least 500 hours of service). This three-year timeframe is now reduced to just two (2), effective for plan years beginning after December 31, 2024. This new provision will be extended to 403(b) plans, which were previously not included in this dual eligibility requirement under SECURE 1.0 (2019).
While you may initially think this will significantly increase your cost of offering a 401(k) plan, it is critical to note that you can still exclude part-time employees from being eligible for employer contributions of any sort. In reality, this change has few practical implications for employers, other than a need to update their plan documents to reflect this new timeframe, unless the employer is set up to provide employer contributions to part-time workers. In that case, costs could increase significantly as more employees become eligible to participate. A minor implication may also be that you will have more employees with small balances, potentially putting you over the threshold that requires an annual plan audit and incurring the added admin costs that come with small balance accounts.
Catch-up contributions will be after-tax
Catch-up contributions to a workplace account will have to be done on a Roth basis, with one exception (those earning <$145,000 (indexed to inflation) can elect pre-tax treatment of these contributions).
This will have no financial impact on plan sponsors, except as it applies to their own contributions into the plan. If you as the plan sponsor are age 50+ and are making catch-up contributions, you likely enjoy the tax break that comes with these. Starting in 2024, this portion of your 401(k) contribution will have to be done on an after-tax basis. However, your regular contribution (up to the annual limit) can still be done on a pre-tax (Traditional) basis. From an administrative standpoint, you will need to coordinate with your TPA, recordkeeper, and payroll provider to ensure this change is properly accounted for in their systems when 2024 rolls in.
Some other minor (required) changes
Let’s look at some other required new changes to retirement savings rules. These are all administrative in nature and should not require any action on your part immediately. I have included them here more as an FYI, and your TPA will likely be reaching out in due time with regard to some of them.
- There will be a new exemption for certain automatic portability transactions. Currently, most plans opt to cash out departed employees whose account balance is <$1,000 and will automatically convert account balances between $1,000 and $5,000 into an IRA (removing these low balance accounts from the 401(k) plan, thus reducing ongoing administrative and compliance costs). Now, retirement plan service providers (“recordkeepers”) will be able to provide employer plans with automatic portability services. This would involve the automatic transfer of a participant’s default IRA into the participant’s new employer’s retirement plan, unless the participant affirmatively elects otherwise. (Effective: 2024)
- “Top heavy” testing rules are being amended to help remove the financial incentive to exclude certain employees from the 401(k) plan and thus increase retirement plan coverage to more workers. (Effective: 2024)
- Effective immediately, employees can now self-certify that “deemed hardship” distribution conditions are met, removing this burden from employers.
- Certain “unnecessary” plan requirements related to unenrolled participants will be eliminated, thus reducing some of the administrative burden. Work with your TPA to determine the exact requirements, as certain documents must still be provided in a timely and recurring manner. (Effective 2023).
- In a step backwards in time, Section 338 requires that you provide a paper statement at least once annually, unless the participant elects otherwise. This is effective in 2026.
- Also in the paperwork realm, a positive development is that the DOL and Dept of Treasury have been directed to amend regulation to permit a plan to consolidate certain required plan notices (within 2 years).
> NEW OPTIONAL PLAN PROVISIONS
Employer contributions as Roth
You will now be able to provide employees the option of receiving employer contributions on an after-tax (Roth) basis. You will still receive a tax deduction in full for these contributions. Employees will have to report these contributions as earned income, subject to federal and state income taxes (it is unclear if FICA taxes will apply).
You will need to work with your TPA and your payroll provider to implement this change, which is available to you immediately. This should be a relatively simple switch that provides employees with greater flexibility, something that they may appreciate. Please note that it is unclear if FICA taxes will be owed on these amounts, now that they flow through the W2. I presume they will not, as this would dissuade any business owner from wanting to offer this new optional feature. We will investigate this and inform you once we have clear guidance.
Emergency Savings Accounts
Effective: Unclear (but presumably 2024)
You will now be allowed to offer your non-highly compensated employees ‘pension-linked’ emergency savings accounts (ignore the term pension, as this really applies to defined contribution plans like a 401(k)). With this arrangement, employers may automatically opt employees into these accounts at no more than 3% of their wages, and the portion of the account attributable to the employee’s contribution is capped at $2,500 (or lower, at your discretion). Once the cap is reached, the additional contributions can be directed to the employee’s Roth defined contribution plan (if they have one) or stopped until the balance attributable to contributions falls below the cap. Contributions are made on a Roth-like basis (after-tax) and are treated as elective deferrals for purposes of retirement matching contributions with an annual matching cap set at the maximum account balance (i.e., $2,500 or lower as set by the plan sponsor). The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals.
Employers with a high number of low-wage workers often find that participation in the retirement plan is low. Employees will cite that it is simply too hard to save when current expenses and potential emergencies account for the vast majority of their earnings. This new change may help reduce the barrier towards thinking about long-term savings by making a portion of the account easily accessible for use in those low-probability, but potentially financially devastating, emergencies. This should not only help employers realize their goal of encouraging savings, but may also aid the business owner in passing certain plan compliance tests that will enable a great deferral allowance into their own account. Lastly, the increased participation that this may garner may increase overall costs to the plan sponsor in the form of additional matching funds that may be required.
Further on emergency savings
While these emergency savings accounts are the most powerful provision in SECURE 2.0 for accessing retirement funds for emergencies, you should note that the Act also expanded the list of scenarios in which participants can access retirement account funds penalty-free. This includes a new provision to access up to $1,000 for emergencies (and the definition of emergency is very broad). Therefore, you might find these other new provisions sufficient for the needs of your plan participants, elinimating the need to add these new ‘pension-linked’ emergency savings accounts.
Attract younger talent burdened by student loans
Starting in 2024, employers will be able to elect to make 401(k) matching contributions based on an employee’s student loan repayments.
Many younger employees have a difficult time getting started with retirement savings thanks to the overwhelming burden of student loan debt. This presents a double whammy, because they then also forego the benefits of employer matching funds into their 401(k). With this change, employees will be able to collect these matching funds based on their student loan repayments, giving them some early momentum in their retirement savings efforts. As we all know, “time in the market” is the most powerful tool in an investor’s toolkit, and this new provision supports just that. Just one last note – keen-eyed readers will note the word “elect” in the intro. This is key, as employers do not have to adopt this new provision. If you are a business owner looking to attract younger talent, you may want to get a head start on adding this provision to your 401(k) plan as soon as possible. You will need to work with your TPA and recordkeeper to enable this. Expect to hear from the recordkeeper as they roll out the tools that will make implementation of this new provision possible.
Some other minor (optional) changes
Let’s look briefly at two other optional new changes to retirement savings rules. We’ll just take a quick look, as these are either less impactful or apply to fewer plans. We’ll add the caveat that there are further details to most and we invite your questions if any topic piques your interest:
- You can now provide small immediate financial incentives for contributing to a workplace retirement plan. These incentives must be de minimus in value and not paid with plan assets. Gift cards are a prime example. The purpose here is to help boost employee participation. (Effective: 2023)
- Employers who employ military spouses will now be eligible for certain tax credits if they amend their plan to make the plan more friendly to these employees. Currently, many military spouses are unable to remain in a job long enough to meaningfully participate in the workplace retirement plan. These new credits are available for those that accelerate participation eligibility, vesting schedules, and employer matching / profit-sharing eligibility for all spouses of active-duty military members. There are a few key details on this, so reach out if you think you might want to include these provisions in your plan. (Effective: 2023)
> INCENTIVES TO START NEW PLANS
Tax credits for getting started
Make no mistake about it – this Act is strongly geared towards broadening retirement plan coverage across more businesses to cover more employees. Tax credits form a centerpiece of this effort. There will be an enhancement to the tax credit for small employer retirement plan startup costs. The current 3-yr small business startup credit is currently 50% of admin costs, up to an annual cap of $5,000. This percentage will be increased to 100% for employers with up to 50 employees (same annual cap). Except in the case of defined benefit plans (pension, cash balance plans), there will also be an additional credit that will generally be a percentage of the amount contributed by an employer on behalf of employees, up to a per employee cap of $1,000. This credit will be available in full for employers with up to 50 employees, and will phase-out for those between 51-100 employees. The applicable percentage slowly decreases over a five-year period.
The upfront cost and effort of implementing a 401(k) plan is frequently a barrier to getting started, especially for smaller and/or younger companies. These tax credits are meant to help neutralize the cost element of this hesitation. $5,000 per year should cover most, if not all, of the upfront costs incurred with your TPA and financial advisor, and the new credit for employer contributions should enable you to offer a generous plan design that helps meet your goals of employee recruitment and retention in a competitive labor market.
It's easier to get started!
“Starter 401(k)” plans (and Safe Harbor 403(b) plans) will now be available for employers with no existing retirement plan. These would generally require that all employees be default enrolled in the plan with a contribution rate of 3-15%. The limit on annual deferrals will be the same as that year’s IRA contribution limit.
Above, we mentioned ‘required effort’ as one of the barriers to employers offering a retirement plan for the first time. This effort stems from both the time required and the complexity that needs to be understood. These “starter” plans should help reduce this effort, allowing you a way to get started towards your goal of offering a retirement plan. The reality is that the lower contribution limits should still be sufficient for the vast majority of workers, though many business owners would prefer the higher limits afforded to them via a regular 401(k). You will have to weigh this to determine the best solution for your company. We don’t yet know exactly what these plans will look like and how they can be accessed, but we’ll stay on top of these so that we can present them as an option to you if they are the right fit for your needs.
MEPs and PEPs get a boost
Effective: 2023 (with parts retroactive to 2020)
There are minor enhancements to Pooled Employer Plans (PEP), which are 401(k) plans operated by an unrelated collection of businesses. These PEPs were a major feature of SECURE 1.0 passed in 2019, but have been slow to catch on in practice. One new change is that 403(b) plans will now be afforded the same access to PEPs and MEPs (Multiple Employers Plans) as 401(k) plans currently enjoy. Another important change is that the tax credit for small employer plan startup costs will be made available in full for employers joining a MEP/PEP. Under prior rules, an employer who joined an existing MEP/PEP could only receive this tax credit if they joined during the first three years of the collective plan’s existence (this is retroactive to 2020).
Smaller employers sometimes find the cost and administrative burden of offering a standalone plan to be too great to warrant the effort. MEPs and PEPs are designed to help lower costs and administrative efforts, and these minor changes should help to further incentivize the usage of these programs, especially since the changes to the tax credit rules increase the attractiveness of existing PEPs/MEPs alongside newer ones (as the tax credit is now the same, regardless).
> FOR THOSE OF YOU WITH SIMPLE-IRA PLANS
SIMPLE changes can go a long way
For those of you sponsoring SIMPLE-IRA plans, you will now be allowed additional nonelective contributions into the plan. Currently, you are required to make employer contributions to employees of either 2% of compensation or 3% of employee elective deferral contributions. You will now be able to make additional contributions to each employee of the plan in a uniform manner, provided that the contribution may not exceed the lesser of up to 10% of compensation or $5,000 (indexed). In addition, the employee contribution limit for SIMPLE plans will increase in 2024, with the exact amount determined by the number of employees in the business. Lastly, SIMPLE plan sponsors will now be permitted to replace SIMPLE retirement accounts with safe harbor 401(k) plans during a plan year.
SIMPLE-IRAs are often passed over by employers looking to offer a retirement plan due to the lower contribution limits and decreased flexibility. However, they are truly simple to administer relative to a 401(k) plan (and cheaper!) and could be a better option for many employers. These three changes, along with a few other minor tweaks found in SECURE 2.0, significantly increase the attractiveness of SIMPLE-IRAs, giving employers another valuable tool in their toolbelt.
> LET'S WRAP IT UP!
That’s a lot, and we’ve only touched on the highlights of what amounts to 92 different provisions. We hope you have found this helpful. If you are an existing client sponsoring a 401(k) plan, we will reach out to you to discuss potential plan design changes in light of these new rules. If you are a business owner considering offering a retirement plan for the first time, please reach out to us. We will be happy to help you think through your options and connect you with other excellent service providers (i.e., Third Party Administrator (TPA) and recordkeeper) to meet your needs. As always, we welcome your questions at any time.