SECURE 2.0 Act: What employers/business owners need to know
Zach D. Gildehaus, CFA, CFP®, CEPA
Analyst, Client Needs Research
The Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0) was signed into law on Dec. 29, 2022. This law contains more than 90 provisions designed to strengthen the retirement savings system by extending and expanding savings opportunities and easing administrative requirements. The effective dates vary greatly, with some provisions effective immediately and others deferred several years into the future.
The passage of SECURE 2.0 has several important changes that could benefit the financial strategies of you and your employees, including:
- New/enhanced tax incentives for starting retirement plans
- New starter 401(k)/403(b) option
- Auto-enrollment requirement for new plans
- Expanded coverage for part-time workers
- Higher limits and enhanced flexibility for contributions
- New or expanded penalty exceptions for early withdrawals
Given these changes, it is important to discuss your strategy with your financial advisor, recordkeeper/third-party administrator (TPA) and tax professional to see if any adjustments should be made.
The following are some of the highlights and what each potentially means to you
1. New opportunities and requirements for start-up plans
- Enhanced/new tax credits for start-up plans
- Beginning in 2023, the maximum tax credit available to employers with 50 or fewer employees for start-up costs incurred in its first three years is increasing from 50% to 100% of start-up costs (capped at $5,000).
- Plans started in 2021 and 2022 are also eligible for the higher crediting rate for the remainder of their three-year period.
- Beginning in 2023, a new tax credit of up to $1,000 per employee is available to certain employers for employer contributions to start-up defined contribution plans. The credit:
- Is available in full to businesses with 50 or fewer employees and phases down for businesses with 51–100 employees.
- Is determined by applying a crediting rate to the employer's contribution. The crediting rate starts at 100% and phases down over five years.
- Is not available for employer contributions to employees with wages above $100,000.
- Beginning in 2023, the maximum tax credit available to employers with 50 or fewer employees for start-up costs incurred in its first three years is increasing from 50% to 100% of start-up costs (capped at $5,000).
- Extended deadline for sole proprietors
- Beginning in 2023, 401(k) plans for sole proprietors and single-member LLCs have until the tax filing deadline (without extensions) to make first-year contributions (employer and employee) instead of calendar year-end.
- New starter 401(k)/403(b) option
- Beginning in 2024, there will be a new retirement plan option for employers without an existing plan.
- Employer contributions are not allowed, and employee contributions are limited to $6,000 (plus a $1,000 catch up for individuals who have reached age 50) in 2024.
- Beginning in 2024, there will be a new retirement plan option for employers without an existing plan.
- Auto-enrollment requirement
- Beginning in 2025, 401(k) or ERISA 403(b) plans established on or after Dec. 29, 2022, must automatically enroll employees when they become eligible unless the employee opts out.
- The initial enrollment amount must be at least 3% and increase by 1% annually until it reaches 10%.
- SIMPLE plans, church plans, new businesses (during first three years) and small employers (10 or fewer employees) are excluded from the requirement.
- Beginning in 2025, 401(k) or ERISA 403(b) plans established on or after Dec. 29, 2022, must automatically enroll employees when they become eligible unless the employee opts out.
What this means for you
- Starting and funding a retirement plan is an attractive way for business owners to save for retirement and diversify their net worth. It can also be a powerful tool for attracting and retaining talent.
- The new and enhanced tax credits can help offset the cost to start and fund a retirement plan by reducing your tax bill. It is unclear, though, as to whether an owner will be considered an employee and the business can receive a tax credit for employer contributions made on the owner's behalf. We are awaiting regulatory guidance on this issue.
- If you're a sole proprietor or single-member LLC, the extended funding deadline allows you to have a more complete picture of your income and tax liability before determining if it makes sense to begin and fund a new plan.
- The starter 401(k)/403(b) will offer a low-cost plan option with limited administrative requirements, but it will have limited ability to take advantage of some of the other credits. For example, given it does not allow employer contributions, the credit for employer contributions will not apply, and the tax credit for start-up cost will be less given the lower start-up costs of this plan.
- Lastly, if you're considering starting a new plan and you have employees, you'll want to carefully evaluate your matching strategy given mandatory auto-enrollment. Auto-enrollment generally results in higher participation and contributions, which can increase employer costs.
2. New requirements for plans
- Expanded coverage for part-time workers
- Beginning in 2024, part-time employees who are at least 21 years of age and have at least 500 hours of service in three consecutive years must be eligible to contribute to a 401(k) plan if one exists.
- Beginning in 2025, part-time employees who are at least 21 years of age and have at least 500 hours of service in two consecutive years must be eligible to contribute to a 401(k) or ERISA 403(b) plan if one exists.
- Changes to required minimum distributions (RMDs)
- The RMD age increases to 73 in 2023 and 75 in 2033.
- Beginning in 2024, RMDs will no longer be required from Roth employer plan accounts.
- Plan catch-up contributions limited to Roth
- Beginning in 2026, participants with wages above $145,000 will only be allowed to make catch-up contributions on a Roth basis.
- This does not apply to SIMPLE IRAs or service-based catch-up contributions to 403(b) and governmental 457(b) plans.
- Beginning in 2026, participants with wages above $145,000 will only be allowed to make catch-up contributions on a Roth basis.
What this means for you:
- These are not optional changes. If they apply to the plan type you offer, they must be adopted by the effective date.
- The inclusion of part-time employees may lead to higher business expenses as a result of increased participation, especially if your plan offers auto-enrollment and/or employer contributions. The impact will be dependent on the number of qualifying part-time employees in your business and the amount of your employer contributions. Work with your TPA to estimate these costs.
- While employer plans are not required to offer a Roth option, participants will not be able to make catch-up contributions if any participant in the plan has wages above $145,000 and a Roth option is not offered.
- You may need to amend your plan document to comply with these required changes. You generally have until Dec. 31, 2026 (2029 for governmental plans and 403(b)plans maintained by a public school) to do so. However, you can offer these features before amending your plan document as long as the plan operates as if the amendment is in effect.
3. New credit available for military spouse participation and employer contributions on their behalf
- Beginning in 2023, businesses with 100 or fewer employees can receive a nonrefundable tax credit for up to three years by providing special benefits to military spouses in their defined contribution plans.
- The maximum credit is $500 per military spouse, which includes:
- $200 per participating military spouse and
- 100% of employer contributions made on their behalf, up to $300.
- To qualify, military spouses must be eligible to participate and receive employer contributions within two months of hire with employer contributions vesting immediately.
What this means for you:
- Military spouses face a unique challenge when it comes to saving for retirement – they often do not remain employed long enough to become eligible for their employer's plan because of the redeployment of their spouse.
- Making these changes can provide you tax benefits, aid in the attraction of military spouses as employees, and help military families better prepare for retirement.
- These changes are optional. If you want to offer these benefits to military spouses, you will need to amend your plan document. You generally have until Dec. 31, 2026 (2029 for governmental plans and 403(b) plans maintained by a public school) to do so. However, you can offer these benefits before amending your plan document as long as the plan operates as if the amendment is in effect.
4. Higher limits and enhanced flexibility for contributions
- For 401(k), 403(b) and governmental 457(b) plans:
- Effective immediately, employer plans can offer participants the option to receive a match or nonelective contribution on a Roth basis.
- Beginning in 2024, employer plans can make employer matches for qualified student loan payments.
- Beginning in 2025, participants aged 60-63 can make higher catch-up contributions – the greater of $10,000 or 150% of the "age 50" catch-up limit.
- For SEP and SIMPLE plans:
- Beginning in 2023, SEP and SIMPLE plans can accept Roth contributions.
- Beginning in 2023, SEP and SIMPLE plans can offer participants the option to receive a matching or nonelective contribution on a Roth basis.
- Beginning in 2024, participants of eligible SIMPLE plans can contribute 110% of the normal contribution limits, including catch-up contributions.
- Beginning in 2024, SIMPLE plans can make additional nonelective contributions up to 10% of compensation or $5,000, whichever is less.
- Beginning in 2024, SIMPLE plans can make employer matches for qualified student loan payments.
- Beginning in 2025, SIMPLE plan participants aged 60-63 can make higher catch-up contributions – the greater of $5,000 or 150% of the "age 50" catch-up limit.
What this means for you:
- These changes are optional – you may choose whether to adopt them in your employer retirement plan.
- Most of these changes aren't effective until 2024 or later. Even those effective now may not be immediately available because it may take time for service providers to update their systems and processes to support these new features.
- The higher limits and increased flexibility can help business owners and their employees save more for retirement on a tax-advantaged basis. Adopting these features may also help to attract and retain employees. That said, some features, such as the employer match for qualified student loan payments, may increase costs to your organization.
- If you choose to adopt these items, you may need to amend your plan document. You generally have until Dec. 31, 2026 (2029 for governmental plans and 403(b) plans maintained by a public school) to do so. However, you can offer these features before amending your plan document as long as the plan operates as if the amendment is in effect.
5. Pension-linked emergency savings accounts (PLESA)
- Effective 2024, employer plans will have the option to include an in-plan emergency savings account that allows participants to save up to $2,500 for emergency expenses.
- The PLESA is a Roth account that must be invested in cash, an interest-bearing deposit account or investment product designed to preserve principal.
- Any eligible plan participant who is not a highly compensated employee may contribute to a PLESA.
- PLESA contributions count toward the annual plan deferral limit and must be matched at the same rate as other employee contributions.
- PLESAs must allow for distributions at least once per month. Distributions are tax-free and exempt from the 10% penalty.
What this means for you:
- This is an optional plan feature – you may choose to adopt it in your employer plan.
- PLESAs can be offered in addition to the penalty exception for emergency expenses described in the next section.
- Many Americans do not have adequate cash on hand to sustain relatively common emergency expenses. Adopting this plan provision may improve the financial stability of employees and help to attract and retain them.
- That being said, we have several questions about how this provision works and how it may impact compliance testing. We are awaiting further regulatory guidance on this issue.
6. New and expanded penalty exceptions:
SECURE 2.0 penalty exceptions
Penalty exception | Effective date | Availability | Limits |
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Qualified disaster distributions | Disasters occurring on or after Jan. 26, 2021 | Plans and IRAs | Up to $22,000 (lifetime) |
Expansion of Qualified Public Safety Employee (QPSE) exemption1 | Dec. 30, 2022 | Plans only | N/A |
Individuals with terminal illness2 | Dec. 30, 2022 | Plans and IRAs | N/A |
Personal or family emergency expenses | Jan. 1, 2024 | Plans and IRAs | One distribution per year, up to $1,000 |
Domestic abuse victims | Jan. 1, 2024 | Plans and IRAs | Up to $10,000 (lifetime) |
Premiums for qualified long-term care (LTC) contracts | Dec. 30, 2025 | Plans only | Up to $2,500 annually |
1 Only available upon separation of service.
2 While penalties don't apply, terminal illness is not a permissible reason for an in-service distribution. An employee must qualify for an in-service distribution for another reason, such as hardship or age 59 ½, or be separated from service.
What this means for you:
- SECURE 2.0 expands the situations in which you can avoid the 10% early withdrawal penalty. IRA penalty exceptions are automatically available to SEP and SIMPLE IRAs once effective.
- Employers that offer a 401(k), 403(b) or governmental 457(b) plan can choose whether to allow participants to take an in-service distribution for one of the applicable reasons. If you choose to allow them, you will need to amend your plan document. You generally have until Dec. 31, 2026 (2029 for governmental plans and 403(b) plans maintained by a public school). However, you can offer these features before amending your plan document as long as the plan operates as if the amendment is in effect.
Other notable changes that may benefit you:
- Extended deadline to make plan amendments: If you need to make plan amendments as a result of the SECURE Act (signed into law on Dec. 20, 2019), CARES Act (signed into law on March 27, 2020) or Tax Certainty and Disaster Relief Act (signed into law on Dec. 27, 2020), you generally have until Dec. 31, 2026 (2029 for governmental plans and 403(b) plans maintained by a public school).
- Ability to switch from SIMPLE IRA to safe harbor 401(k) in same plan year: Beginning in 2024, SIMPLE IRA plans can switch to a safe harbor 401(k) in the same plan year. This means you and your participants can more quickly take advantage of some of the additional features available to 401(k) plans, such as higher contribution limits, participant loans and elimination of the two-year withdrawal limitation that applies to SIMPLE IRAs.
Partner with your financial advisor and professional team
Together with your financial advisor, you can discuss how the above items may affect your current situation, your personal long-term financial goals and your organization's goals for attracting and retaining employees. Your financial advisor can help you determine if any adjustments need to be made to your strategy, whether because of the above rule changes or simply based on how you are progressing toward your goals, to ensure you’re on track toward retirement security. In addition, since many of these changes take effect over the next several years, it is important to partner with your financial advisor to periodically review your situation over time.
You'll want to work with your third-party administrator to estimate the potential costs of adopting the new rules, even for those changes that aren't effective until next year or later.
As with any decision involving taxes, consult with your tax professional on considerations and impacts to your specific situation, as your financial advisor cannot provide tax advice.
Timeline of SECURE 2.0 effective dates for employers and business owners
Changes | 2023 or earlier | 2024 | 2025 or later |
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New opportunities & requirements for start-up plans |
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New requirements for plans |
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Higher limits, enhanced flexibility for contributions |
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New & expanded penalty exception changes |
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Emergency savings account |
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Other notable changes |
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Zach D. Gildehaus, CFA®, CFP®, CEPA® Senior Analyst, Client Needs Research
Zach Gildehaus joined Edward Jones in 2013. He is a business owner strategist on the Client Needs Research (CNR) team, where he focuses his research efforts on strategies for charitable giving and business owners.
Prior to CNR, he was a senior analyst in Investment Manager Research (IMR), where he spent more than six years covering both active and passive strategies across several asset classes.
Important Information:
This is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.