SECURE Act 2.0 (“the Act”) was included as part of the Consolidated Appropriations Act, 2023, which was passed by Congress on December 23, 2022, and signed into law by the president on December 29, 2022. The Act includes nearly 100 new enhancements and updates to retirement savings programs.
This second installment of our three-part series discusses the most important provisions of the Act affecting employer retirement plans.
Starter 401(k)/403(b) plans
The Act introduces new “starter” 401(k) and 403(b) plans. These plans are designed for employers that do not currently sponsor a retirement savings plan for their employees.
These “starter” plans have some unique characteristics that aim to reduce costs and administrative burdens on the employer. The plans are an employee deferral arrangement only, which means there is no employer match or non-elective employer contribution made. Each individual employer plan has a predetermined salary deferral percentage, between 3% and 15%, that is applied uniformly across all plan participants based on the terms of the plan.
All employees, except those not meeting the age and service requirements, are eligible to participate. Eligible employees are automatically enrolled but can opt-out or contribute a different salary deferral percentage if they elect. Annual salary deferral limits mirror current IRA limits.
- For 2023, salary deferral limits are $6,500 plus an additional catch-up of $1,000 for individuals over age 50.
An employer is eligible, with some exceptions, to offer a starter plan if neither the employer nor the predecessor employer maintains another qualified plan for the year in which the determination is being made.
Many workers do not currently have access to an employer-sponsored retirement plan and have not adequately prepared for their retirement years. These starter plans were designed to encourage more employers, especially smaller ones, to offer starter plans to their employees to save for their future.
Increased Credit for Small Employer Retirement Plan Start Up Costs
Another provision designed to increase employer adoption of retirement plans and to expand worker access to employer-sponsored retirement plans modifies and expands the “Startup Tax Credit.” This modification intends to encourage small businesses to offer and contribute to workplace retirement plans for their employees.
To be eligible, businesses must:
- Employ 100 or fewer employees who received at least $5,000 in compensation for the preceding year;
- Have at least one plan participant who was a non-highly compensated employee; and
- Not have offered a retirement plan to its employees in the three tax years before the first year eligible for the credit.
Beginning in 2023, for eligible employers with less than 50 employees, the Startup Tax Credit will be increased to cover 100% (up from 50%) of administrative costs up to $5,000 for the first three years of a plan. This could mean a total of $15,000 in tax credits over 3 years. The value of the credit is subject to phaseout rules for employers of 51-100 employees.
Retirement plan administrative costs include expenses to set up and administer a plan, as well as costs to educate employees about the plan. Eligible plans include a SEP, SIMPLE IRA, or qualified plans like a 401(k) plan.
The Act also provides an additional annual tax credit to eligible employers for employer contributions to retirement plans on behalf of the employee. The maximum tax credit is $1000 per employee for employers of 50 or fewer employees. The credit phases out gradually over five years and is reduced further for employers with between 51 and 100 employees.
The Act further clarifies and makes retroactive to 2020, a Startup Tax Credit for eligible employers who joined an existing Multiple Employer Plan (MEP).
Automatic Employer Plan Enrollment
Starting in 2025, SECURE Act 2.0 expands automatic enrollment in employer retirement plans by requiring 401(k) and 403(b) plans to automatically enroll employees into the plan. Employees will have the option to opt out of contributing to the plan or to elect a different contribution percentage.
- The minimum enrollment amount is set at a pre-tax contribution of 3%.
- The limit can be as high as 10% of eligible earnings.
This provision also requires an automatic annual increase in contributions. Each year, the contribution amount is increased by 1% until it reaches at least 10%, with a maximum of 15%.
If a participant does not specify an investment election, the balances that are automatically contributed are required to be invested within the regulations for qualified default investment alternatives (QDIA). Most commonly, QDIA’s are used as target date retirement funds and asset mix funds that base their investment allocations on the client’s age and expected retirement date.
There are some notable exceptions to the auto-enrollment requirements. These include:
- Small businesses with 10 employees or less
- Newer businesses that have been operating for less than 3 years
- Churches
- Governmental plans
- SIMPLE plans
The Act requires employers who offer a new plan beginning in 2025 or later to adopt the automatic enrollment requirements, but according to the current text in the bill, existing plans are not required to add an auto-enrollment feature.
Understand the SECURE Act 2.0 to Stay Prepared
SECURE Act 2.0 includes many provisions impacting employer-provided retirement plans. We have discussed some of the key changes above, but there are many more changes. We encourage you to read the rest of our three-part series to get vital information on retirement planning and/or contact our team if you have questions about how these or other provisions of the Act impact you.
- Part I: Key provisions impacting individual retirement savers
- Part III: 529 Rollovers, Early Retirement Account Withdrawals, and More
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