The SECURE Act 2.0 for employers was signed into law on December 29, 2022. It covers numerous changes to retirement provisions which are intended to increase retirement savings; facilitate access to retirement savings; provide employees the opportunity to save more and longer for retirement, at a lower cost; and lower employers’ cost of offering and funding retirement savings plans. The majority of the SECURE Act 2.0 provisions will be effective in 2024. NOTE: For information on SECURE Act 2.0 provisions for Individuals, click here.
Provisions that Impact All Employers
Mandatory Participation. For plan years beginning after December 31, 2024, employers with more than 10 employees, who have been in existence for at least three years, and who are offering a new 401(k) or 403(b) plan, must provide automatic enrollment for eligible employees with salary reduction of at least 3% of compensation; and automatic salary reduction increases annually by 1% of compensation until reaching at least 10%, but no more than 15%. An employee may opt out of auto-enrollment and/or auto-escalations.
Roth Accounts. Under the new law, designated Roth accounts in employer plans are encouraged. Roth accounts within 401(k), 403(b), and 457 plans are no longer subject to required minimum distribution (RMD) rules. This new provision puts Roth accounts on par with Roth IRAs and employees no longer must transfer their Roth accounts from the employer plan to a Roth IRA to avoid RMDs. Now employees can continue to compound earnings tax-free after retirement within their employer’s plan.
Part-Time Workers. The previous 2019 SECURE Act required plans to allow long-term, part-time employees to be eligible for an employer’s 401(k) plan with 1,000 hours or three consecutive years of 500 hours of service. Under SECURE Act 2.0, part-time employees are eligible to participate in an employer’s 401(k) or 403(b) plan with two consecutive years of service of 500 hours.
Incentives to Participate. For plan years beginning after December 31, 2022, and employer is allowed to provide de minimis financial incentives to encourage plan participation.
Overfunded Plan Option. Many employers have overfunded defined benefit plans and find it beneficial to transfer excess assets to an account to pay retiree health benefits. Those provisions, that were due to expire in 2025, are liberalized and extended until 2032.
Correcting Errors. Retirement plan rules are complicated, and errors can result. The IRS has an Employee Plans Compliance Resolution System (EPCRS) that allows for self-correction of many errors and rules, such as entering into a closing agreement with the IRS.
The new law streamlines corrections in several ways. If a plan inadvertently pays excess amounts to retirees, the plan no longer requires repayment and excess amounts can be rolled over without tax penalty. In addition, the law requires the expansion of errors that can be self-corrected, by mandating these provisions to be used at any time for any amounts, including errors regarding loans. The law also directs the IRS to address inadvertent failures regarding required minimum distributions and rollovers by beneficiaries who are not entitled to rollover such amounts. Plan amendments can also be adopted retroactively to increase plan benefits and avoid violation of rules. Because the regulatory provisions that allow for corrections for automatic enrollment and automatic escalation are scheduled to expire at the end of 2023, the law provides a 9½ month grace period after the end of the plan year in which mistakes were made for errors occurring after 2023.
Provisions Designed for Encouraging Small Employers to Establish Retirement Savings Plans
Starter Plans. For employers with no retirement plan in place, SECURE Act 2.0 provides for starter 401(k) or 403(b) plans. These starter plans limit salary deferrals to $6,000 maximum plus catch-up contributions for employees over age 50. Automatic enrollment is required, but the employee may opt out. These starter plans simplify administration by deeming that the discrimination tests are satisfied, and notice of the plan to employees is required.
Tax Credits. For employers with 50 or fewer qualifying employees, SECURE Act 2.0 provides an increased tax credit for starting a plan. For plans starting in 2023, the credit is increased to 100% of administrative costs and ranges from $500 to $5,000. Also, there is an additional 100% credit of up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the first year of the plan and the credit decreases by 25% for each of the next three years.
Employers with 51-100 qualifying employees can qualify for a similar, but lesser, credit for contributions. There also are additional credits for contributions for military spouses who are participating in certain employer plans.
Easing Top-Heavy Plan Rules. Many small employers do not adopt plans due to required top-heavy contributions. To encourage participation in these plans, the top-heavy rules are modified for plan years beginning after 2023 to allow excludable and non-excludable employees to be tested separately, as is permitted for the 401(k) discrimination test. This change can encourage employers to offer plans to younger workers.
Solo 401(k) Plan. SECURE Act 2.0 provides parity for solo 401(k) plans with IRAs. A sole proprietor who is the only employee of the business can make a deferral election for compensation contributions into their 401(k) plan up until the due date (without extensions) for the tax year’s income tax return, but only for the first year of a plan.
Cash-out Limit. If a plan participant is terminated from employment — whether he or she retired, quit, or was fired — a business may “cash out” the ex-employee’s interest if it’s below a specified level. Previously, the limit was $5,000. SECURE Act 2.0 increases the cash-out limit to $7,000, beginning in 2024.
Retirement Plan Database. SECURE Act 2.0 establishes a database that can be searched online and provides contact information for administrators of plans where a participant or beneficiary may have a benefit. This database will be created within two years of the Act’s implementation. Starting in 2025, sponsors must provide the appropriate information to the Department of Labor to be included in the database.
Learn More. Keep in mind that this is only an overview of key changes that will take effect in 2023 and 2024, but is not a comprehensive list. Other provisions in the law will apply in later years. We can guide you through the new Secure 2.0 Act law to ensure you are in compliance with the new provisions and also taking advantage of the available credits. If you would like more information on the Act, please contact our office to speak with one of our experienced advisors.