If you haven’t fielded many questions from clients regarding SECURE Act 2.0, you will. That’s because this new law – the second phase of the original SECURE Act passed in 2019 – introduces a host of new changes to popular retirement savings plans. The bill passed the House on 12/23/22 by a 225-201-1 vote after passing in the Senate and was signed into law by President Biden on 12/29/22. Small businesses in particular will be impacted most by the changes that result from this law, including:
- Significantly expanded credits for employer plan startup costs that make a strong financial case for small businesses to offer these plans
- Automatic enrollment into 401(k) and 403(b) plans for participants as they become eligible
- Increased required minimum distribution age, from 72 to 75, allowing employees to save for retirement longer
- More opportunities for individuals 50 and older to set aside greater savings as they approach retirement
- Improved coverage for part-time workers in 401(k) plans
These are just a few of the impacts that will be felt by small-business clients – the law is extensive, complex, and contains a host of changes that firms, and clients alike will be navigating for years to come.
As advisors to their clients, it’s important for CPAs to have good answers to clients’ questions on SECURE Act 2.0 from the start. That’s why we’ve created this quick-reference guide to the questions you’re likely to hear first, as clients begin to plan for the impact of this important law. Take a few moments to scan these questions and answers right now, because your next call could be from an uncertain client eager for your insights.
How will this impact older employees who are nearer to retirement?
Employees nearing retirement age have a lot to gain from SECURE Act 2.0. In a nod to the fact that Americans are working longer, it increases the required minimum distribution age from age 72 to 73 in 2023 and to 75 in 2033 – three more years for employees to put their earnings into a plan, which means more time for it to grow through interest and potential investment gains.
Plus, employees who reach age 50 will be permitted to make “catch-up” contributions in excess of normal limits. In 2023, the limit on these contributions for a 401(k) plan is $7,500. This will be increased to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63. (SIMPLE catch-up contribution limits would also increase.)
How will automatic enrollment actually work?
This provision requires that, beginning in 2025, all new 401(k) and 403(b) plans adopted by employers with 11 or more employees to automatically enroll participants in the plans once they’re eligible – although employees can opt out if they so choose. The initial automatic enrollment amount is at least 3% but no more than 10% - each year after that, the amount must be increased by 1% until it reaches at least 10%, but not more than 15%.
There are exceptions to automatic enrollment for:
- Small businesses with 10 or fewer employees
- New businesses (that have been in business for less than 3 years)
- Church plans
- Governmental plans
What kind of incentives does this law create?
The most significant benefits will target plan startup costs. Beginning in 2023, the three-year small business startup credit is currently 50% of administrative costs, up to an annual cap of $5,000. SECURE Act 2.0 increases the credit to 100% for employers with up to 50 employees.
Plus, there is an additional credit (except in the case of defined benefit plans) – generally a percentage of the amount contributed by the employer on behalf of employees, up to $1,000 per employee. This credit is also limited to companies with no more than 100 employees but is reduced for employers with 51-100 employees. It operates on this schedule:
- 100% in the first and second years (first year is the year the plan is established)
- 75% in the third year
- 50% in the fourth year
- 25% in the fifth year
- No credits after the fifth year
Will SECURE Act 2.0 create new incentives for our existing plan?
Companies with existing plans will not benefit from these new incentives, which are reserved for those starting up new plans.
We have a lot of employees with student loans. How does this change our contributions on their behalf?
Many employees are overwhelmed with student debt, and as a result tend to miss out on their ability to benefit from matching contributions to their plans – because they’re not making contributions at all, directing any “extra” income to student loan payments. Beginning in 2024, this provision allows employees to receive matching contributions by repaying their student loans. Basically, student loan payments are treated as plan contributions for purposes of employer matching contributions. This is a big deal for those employees, and an attractive benefit employers can offer for recruiting and retaining them.
* * *
Like many important new laws, SECURE Act 2.0 is complex and packed with rules and details – far more than we’ve covered in this short article, where we’ve only covered some of the highlights. There are a number of other compelling benefits and advantages for small-business clients in this law, and we will be discussing them in more detail in future publications. To learn more about retirement solutions for your firm, visit aicpa.org/retirement.
