By Mark Prian
The original Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was designed to expand access to tax-advantaged retirement savings accounts, and it made changes to existing laws to ensure that older Americans are less likely to outlive their retirement assets.
The intent of this act was also to improve the way businesses provide retirement benefits to employees. In 2022, some long-awaited changes to the original act were introduced, and, in December, what is now known as SECURE 2.0 was passed by Congress and signed into law by President Biden.
SECURE 2.0 builds on the original objectives and makes some important adjustments to the 2019 legislation. With more than 100 provisions in the law, these new changes are bound to impact just about everyone who is saving for retirement. So, whether your employees are close to retiring or have many more years to save, here are some highlights you need to know.
Starting in 2023, the biggest change in SECURE 2.0 might be the adjustments to Required Minimum Distributions (RMDs). Under the 2019 act, a plan participant had to begin withdrawing retirement savings at the age of 72. The 2022 law increases this to age 73, that began on Jan. 1, 2023. By 2033, the starting age for RMDs will be 75.
Also starting this year, the penalties for failing to take the RMD are cut from 50 percent of the amount not taken down to 25 percent. If you correct this mistake in a timely manner within an IRA, the penalty drops to 10 percent.
Employers may now choose to offer matching or nonelective contributions as Roth contributions.
The legislation permits employers to offer small financial incentives, like low-dollar-amount gift cards, to help boost employee participation.
For new retirement plans, companies may be able to take advantage of tax credits on start-up administration costs. There may also be company tax credits available for each employee that enrolls. Limits do apply.
Starting in 2024:
If you have employees who are putting off participating in a retirement plan because they have student loans to pay back, starting in 2024 employers can “match” those employee student loan payments as contributions to a retirement account. This provision may help the employee save for retirement while getting out of debt.
Catch-up contributions for those participants over age 50 may be required to be Roth contributions. This is dependent on employee income.
RMDs will not be required for Roth 401(k) and Roth 403(b) accounts. Employees’ accounts can continue to grow tax-free.
Employees may claim a personal emergency withdrawal of up to $1,000. Restrictions apply.
A “Side-Car” Emergency Savings Account can be established within the plan. Employees can access this additional Roth savings account tax and penalty free.
Plan Force-Out and Portability rules, which guide how employers manage the retirement accounts of former employees, are also changing.
Starting in 2025:
Upcoming changes in catch-up contributions might help you reach your retirement savings goals faster. For employees ages 60 to 63, the catch-up limit increases to $10,000 effective January 1, 2025.
SECURE 2.0 expands automatic enrollment in retirement plans. The new legislation requires employers who introduce new plans to automatically enroll any eligible new employees. Small businesses with 10 or fewer employees are exempt, as are new businesses, defined in the bill as those which have been in business for three or less years.
Long-term, part-time employees will be allowed to save through the company’s retirement plan.
Starting in 2027:
The Saver’s Match program will reward low-to-moderate income workers for saving in a retirement plan. The Treasury will reward eligible savers with up to $1,000 in free match into their retirement account. The program currently in existence is the Saver’s Credit which allows for retirement savings-related tax credits.
One other interesting and potentially very helpful provision in the new law relates to lost 401(k) plans. If concern about dormant accounts due to staff turnover has kept you from offering your employees a retirement plan, this provision could help. For past employees who may have changed jobs and subsequently lost track of their 401(k) accounts, the new law establishes a retirement savings “lost and found” database to help people track down their missing and forgotten accounts. The database is anticipated to be up and running in about two years.
The original SECURE Act sought to make it easier for small businesses to create retirement accounts for employees, which was difficult and expensive in the past. With nearly half of all U.S. workers employed by small businesses, Congress recognizes that this is an important sector to reach and encouraging small businesses to offer retirement plans is critical. According to the U.S. Bureau of Labor Statistics, 67 percent of private industry workers have access to an employer provided retirement plan as of March 2020.
The intent behind the original SECURE Act was to encourage working Americans to plan for retirement. SECURE 2.0 builds on that by enhancing incentives for small business owners to motivate employees to participate. If you are interested in setting up a retirement plan for your small business, your financial institution is ready to help you get your employees on the road to saving for their retirement.