Signed into law in December 2022, the SECURE 2.0 Act builds upon the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 to give employees more opportunities to save for retirement. It does this in numerous ways, allowing some employees to contribute higher amounts, delaying minimum required distributions, and creating incentives for employees to save as well as for employers to facilitate and match those savings.
The SECURE Act 2.0 creates significant changes for employers, including a requirement to automatically enroll employees in retirement plans, a new federal Saver's Match retirement contribution, and expanded tools to attract and retain quality employees by supporting their long-term wellbeing. In this article, we’ll look at some key provisions of the new law and their implications for businesses.
Automatic Enrollment in 401(k) Plans
Beginning in 2025, Section 101 of the Secure 2.0 Act requires new 401(k) and 403(b) plans to automatically enroll employees when they become eligible for them. Employees can opt out of participation, but most do not. Research cited by the Senate Finance Committee shows that automatic enrollment significantly increases plan participation.
The law also sets ranges for default plan contribution amounts, which increase during the initial year or more of plan participation:
- Initial default contribution rate of 3–10% of salary
- Each year, default contribution increases by 1% until it reaches at least 10% of salary
- Default contribution will not increase beyond 15% of salary
401(k) and 403(b) plans established prior to December 29, 2022, are grandfathered, so they will not have to begin automatically enrolling participants under this iteration of the act. The law contains additional exceptions for businesses with 10 or fewer employees, those that have been operating less than 3 years, and government or church plans.
Tax Credits for Plan Startup Costs
Under the previous version of the act, small businesses could claim a 50% tax credit for the administrative costs of starting a new retirement plan, up to a maximum of $5,000. Section 102 of Secure 2.0 increases this credit as of tax year 2023. Employers with 50 or fewer employees can now claim a credit for 100% of these costs (up to the same $5,000 maximum) for the first two years of a new plan. The credit decreases by 25% annually after that:
- 100% in years 1 and 2
- 75% in year 3
- 50% in year 4
- 25% in year 5
- 0% thereafter
Secure 2.0 also allows many of these small employers to earn additional credits for matching contributions, up to a $1,000 per-employee limit. Employers with between 51 and 100 employees can claim a phased-out portion of the startup credit based on employee count.
Emergency Savings Accounts
In light of data that shows U.S. workers struggle to meet emergency expenses, Secure 2.0 has created a new vehicle for emergency savings. Section 127 allows employers (if they so choose) to offer pension-linked emergency savings accounts for “non-highly compensated employees,” defined by the IRS as those who received less than a maximum amount of compensation in the previous year and own no more than 5% of the business. For tax year 2023, the maximum income for non-highly compensated employees is $150,000.
Employees are allowed to automatically opt in employees with a maximum contribution of 3% of their salary, which is deposited to the account after withholding. The emergency savings account balance is capped at $2,500 (or less, at the employer’s discretion); when that balance is exceeded, contributions can be stopped or deposited into a Roth defined contribution plan (if the employee has one). Employees can make up to four withdrawals per year from the emergency savings account without incurring any fees or other charges. When they leave employment, they can cash out the savings account or roll it into an IRA or Roth.
Matching Contributions
The Secure 2.0 Act contains several provisions related to matching contributions to retirement savings accounts. Below are some of the important changes that businesses should be aware of.
Roth 401(k) Matches
Employers will enjoy increased flexibility in their ability to match employee retirement contributions. Under the old law, matching contributions to Roth 401(k) accounts had to be made on a pretax basis and kept in a separate, pretax account. With the new law, employers will be allowed to make matching contributions directly to employees’ Roth 401(k)s, benefitting them with tax-free growth and distributions.
Saver’s Credit Becomes Saver’s Match
Beginning in 2027, the Saver’s Credit, which provides a federal tax credit of up to $2,000 for low- to middle-income taxpayers who contribute to certain retirement plans, will become the Saver’s Match. Instead of claiming the benefit as a tax credit, employees will see the federal contribution deposited directly to their retirement account of choice (excluding Roth accounts). The maximum matching contribution is 50% of contributions of up to $2,000 per individual, phasing out at individual income levels between $20,500 and $35,500 (double these amounts for joint returns).
Matching Contributions for Student Loan Payments
Legislative leaders have recognized that the burden of student loans prevents many college graduates from effectively saving for retirement. Section 110 of Secure 2.0 seeks to help alleviate that problem by allowing employers to match employees’ qualified student loan payments with contributions to their employee retirement accounts. However, total employer contributions cannot exceed the total amount of matching contributions allowed by the plan.
The Secure 2.0 Act has significantly expanded upon the law passed in 2019 to give U.S. workers more ways to save for retirement. This article highlights just a few of the provisions that will impact employers over the next few years. Employers must understand the obligations it imposes as well as the opportunities it creates to build a stronger workplace. Employers can empower workers, make their compensation go farther, and enhance workplace morale by taking strategic advantage of this new law.
Employer Solutions Staffing Group provides back-office solutions to assist employers who struggle with the costs and labor-intensive tasks required to manage employees. Providing support with compliance, human resources, payroll, benefits, and more, we can design and implement a retirement savings plan that meets the needs of your business and its employees. To learn more about what we do, explore our case studies or browse our blog.
