A quick SECURE Act 2.0 summary is nearly impossible to give. Like the original 2019 SECURE Act, the goal of the update was to increase the number of companies offering retirement plans and to increase employees’ participation in those plans. While the original SECURE Act brought forth new changes, SECURE Act 2.0 far exceeds the original legislation, at least as it relates to corporate retirement plans. The SECURE Act 2.0 bill is long—around 350 pages—and its impact is enormous.
Here are a few key items that employers should know about as a result of SECURE Act 2.0.
SECURE Act 2.0 Summary: Key Updates for Employers
Congress wants to incentivize companies to start retirement plans (almost half of American workers don’t have access to a company retirement plan) and increase employee participation by offering tax credits. For example, the SECURE Act 2.0 provides employers tax credits to offset the costs of setting up a 401(k) plan and credits for contributions to employees.
Companies can offset up to 100% of their initial plan set-up costs (up to a limit of $5,000) depending on how many non-highly compensated employees they have. These credits are available in the first three years of a new retirement plan. Please consult with your CPA or plan consultant to review your eligibility.
Additionally, companies with fewer than 51 employees can receive up to a 100% credit, with a maximum credit of $1,000 per employee, for employer contributions they make to an employee’s account. This credit can last up to five years, which could be a very significant amount over time (though you should recognize this credit decreases over those five years). Congress hopes tax credit incentives will boost initial retirement savings goals and that a longer time frame where the money is invested will yield larger retirement balances. Business owners should make sure they understand these retirement law changes and how to maximize the benefit to employees and themselves.
This tax credit is also available to employers that have between 51-100 employees, but at a reduced rate depending on their number of employees.
SECURE Act 2.0 retirement changes aren’t limited to new employers utilizing a 401(k) plan—those with established plans can expect changes as well. These changes affect both new and established plans:
1. Part-Time Employee Coverage: Under SECURE Act 2.0, part-time employees will have coverage if they meet certain requirements. Part-time employees who work more than 1,000 hours a year should already be covered. SECURE 1.0 required 401(k) plans to include any employees who work more than 500 hours in any three years after 2021 to be allowed to save into their plan beginning next year (2024). SECURE 2.0 retirement law drops that number to those that work more than 500 hours in any two years. Those employees may begin entering a plan in 2025. Employers really need to keep their eye on this provision and do as much planning as possible.
2. Catch-Ups Must Be Roth: Beginning next year, catch-up contributions, either for all your employees or for those who make more than $145,000, will have to be taxed as Roth. This change may require your plan to add Roth as a tax option if you don’t already have it. If you don’t have Roth as an option, catch-up contributions will not be allowed in your plan.
Employers are not the only ones affected by SECURE Act 2.0 changes—employees have important questions to be answered as well.
Key Updates for Employees under New Retirement Plan Laws
Employees we have heard from so far have grouped their questions around a couple key areas—student loan payments and employer contributions. Employers and business owners alike need to consider these options and consult professionals about implementing these options:
1. Student Loan Payments Under SECURE Act 2.0: Employers can now match student loan payments made by employees. Before, employers could only match contributions toward retirement plans. With recent retirement plan changes, employers can now contribute the employer match to an employee based on the student loan payments they make to their own student loans. Congress realized the student debt burden was affecting people’s ability to save while trying to pay off debt and wanted to allow for students to make progress on repayments but not have to fear falling behind regarding saving for retirement. Offering this could be a powerful tool in a tough labor market. Be aware of how this affects these employees’ savings limits and note that the match based on student loan payments needs to have the exact same rules as your regular match.
2. Employer Contributions as Roth Contributions Under SECURE Act 2.0: Employers can now offer employees the ability to receive their employer contributions as Roth contributions instead of pre-tax. These dollars would continue to be tax-deductible to the business, but would now be taxable as income for employees in the year they receive it. This seems like a great idea at face value, but the execution might require changes to things like paychecks and W-2s, especially depending on when deposits are made, that need to be reviewed before implemented. Employers can only do this on fully vested dollars—we don’t want employees paying tax on dollars they may not ultimately receive.
3. Distribution Flexibility Under SECURE Act 2.0: There are many new distribution options employers can add to plans—things like Qualified Birth or Adoption, Disaster Relief, Emergency Distributions, and Domestic Abuse Victims. These are all optional but employers should think through their effects and the value their employees would receive from the flexibility these options could add.
There are far more details under each of these options that require consulting with your 401(k) team. No employers should make any changes or assumptions based on initial reading of the law; all thoughts and changes should be discussed with your 401(k) team.
The SECURE Act 2.0 brought forth numerous and complex changes to the retirement landscape. Employers can expect changes to 401(k) testing, compliance issues, administrative frustrations, and employee questions. Because the landscape has changed so dramatically, they should secure expert help to help navigate the new legislation.
Matt Baisden (CFA, QKA) is a retirement plan advisor at Plancorp, a full-service wealth management company serving companies and families in 44 states and managing more than $5.5 billion of client assets. Matt’s team specializes in 401(k)s for businesses, managing Department of Labor test issues, resolving service provider failures, benchmarking fees, and designing profit-sharing to maximize key employee benefits for clients.