There is a significant correlation between having access to a workplace retirement savings plan and increased retirement savings among working Americans (about a 12 to 15-fold increase).
However, more than 40% of full-time private sector workers report not accessing a company retirement savings plan. People of color, especially Blacks and Hispanics, are disproportionately impacted by this.
The SECURE 2.0 Act of 2022 aims to alter this scenario by streamlining and clarifying plan laws and increasing retirement plan coverage and savings.
Several clauses make it easier for employees to join their companies’ plans and benefit programs.
The Senate Finance Committee claims that employees, especially minorities and those making less money, benefit significantly from automatic enrolment in 401(k) plans.
Many new 401(k) and 403(b) plan launched after the effective date will need to implement automatic enrollment for plan years beginning on or after January 1, 2024.
The minimum first automatic deferral is 3% of salary, while the maximum is 10%. Deferrals shall increase by at least 1% of pay, up to a total of at minimum 10%, but no more than 15%, on January 1 of each planned year following the year of enrollment.
For plans with specific safe harbor contributions and eligible automatic enrollment provisions, this gradual escalation clause has an initial 10% cap. In addition, programs must provide permitted withdrawals for up to 90 days following the initial automatic deferral; however, only if members opt out of automatic enrolment within a reasonable amount of time.
Tax breaks for small businesses
Even though over half of all Americans are employed by small firms, only approximately 30% of these organizations offer retirement plans. This is partly owing to the high costs associated with setting up and maintaining such programs.
With SECURE 2.0, businesses with fewer than 50 workers are eligible for a 100% increase in the starting credit. We’ll still have a $5,000 maximum.
However, employees with annual salaries of over $100,000 are ineligible for the new credit, which reduces the employer’s contribution to the employee by up to $1,000 in the first year and $0 in the fifth (indexed for inflation). This year, small businesses will be eligible for a more significant tax credit.
More than a dozen states have legislation that mandates private-sector firms that do not sponsor retirement plans to enroll their workers in a state-run IRA.
SECURE 2.0 allows companies to establish a simplified 401(k) or 403(b) plan for plan years beginning after December 31, 2023. Employers in states that mandate automatic individual retirement accounts (IRAs) could use the “starting plan” clause to establish a private-sector 401(k) or 403(b) plan that would count toward the state’s IRA mandate.
Without the administrative hassle and expense of a regular 401(k) or 403(b) plan, “starter plans” allow employees to defer up to $6,000 per year, plus an additional $1,000 in catch-up contributions. For instance, in the case of beginning plans, the employer is not obligated to make any payments or perform any specific kind of screening.
The yearly cap on IRA contributions is $6,500, which rises with inflation. The SECURE 2.0 base plan’s restrictions are not indexed but might be changed for uniformity.
Due to the combination of starter plans and the small company tax credit, there will be a 22% rise in the number of Black and Hispanic American workers with access to retirement plans.
Payments on Student Loans
The Internal Revenue Service gave its blessing to an adjustment to Abbott Laboratories’ 401(k) plan in 2018 that would have allowed the company to make matching contributions to participants based on employee repayments of student loans rather than employee deferrals to the plan. Many companies have used the PLR to justify implementing a comparable employee benefits package.
For plan years starting on or after January 1, 2024, employers are permitted to match qualified student loan payments (QSLPs) as if the QSLPs were elective deferrals, thanks to the PLR being codified in SECURE 2.0.
Safe-harbor matching requirements can be met by making matching contributions at the same rate and with the same vesting and eligibility restrictions as matching contributions on elective deferrals. The QSLPs is considered met if and only if the employee annually attests to this fact.
For plan years starting on or after January 1, 2024, plan sponsors may elect to include this provision in their 401(k), 403(b), government 457(b), or SIMPLE IRA plans. The IRS will make both implementing regulations and a model plan amendment available for interested plans to use.
A Temporary Solution to Long-Term Coverage Needs
To be eligible for deferrals in plan years starting after December 31, 2024, employees must work 500 hours in two separate 12-month periods.
To be considered “vested” after becoming eligible to participate under the part-time eligibility criterion, workers must work 500 hours in 12 months.
Workers under a collective bargaining agreement, nonresident aliens without a source of income, and some students are exempt from the SECURE 2.0 requirement. It applies to 401(k), and 403(b) plans under ERISA’s purview. Both conditions must be met at all times.
While the rule established by SECURE 2.0 will become effective for plan years beginning on or after January 1, 2025, the law established by the Original SECURE Act will remain in effect for plan years commencing on or after January 1, 2024.
Therefore, in 2024, under the original three-year rule, and in 2025, under SECURE 2.0’s two-year law, part-time employees may become eligible under a plan.
The first day of work is when employees’ hours should be recorded. If an employee needs to work more hours in the first year of employment, the employer might start counting hours from the first day of the plan year in subsequent years.
Steps to Take
SECURE 2.0 is a significant step forward in modernizing the retirement system. It provides financial incentives for businesses, especially those of medium or small size that do not already have a retirement plan, to set up and sustain such programs for their employees.
Using the incentives provided by law could boost morale, recruiting, and retention efforts.