The expanded legislation gives HR professionals the tools to help their employees create a bright financial future. Specifically, 7 significant provisions will further employee savings goals and reduce administrative burdens.
On December 29, 2023, President Joe Biden signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 into law. This piece of legislation builds on the first iteration of the 2019 bill, both of which are intended to combat the increasingly urgent retirement crisis in the United States.
Broadly speaking, SECURE Act 2.0 could make it easier for plan administrators—which includes business owners and HR professionals—to provide a retirement benefit. It also expands the various tax credits offered to small businesses that start a plan in the first place. Before we go into the details of the bill, however, it’s important to understand why this legislation was important in the first place.
As of January 1, 2020, U.S. savers ages 35 to 64 are experiencing a nearly $4 trillion retirement savings gap, or the difference between what they already have saved and what they need to save in retirement.
This is only underscored by a prevailing inaccessibility to retirement plans. According to the U.S. Bureau of Labor Statistics from 2022, 28% of civilian workers and 31% of private workers lacked access to a retirement plan, and nearly half of both categories chose not to participate.
The uphill battle that is saving for retirement in America has only been exacerbated over the years by catastrophes like the 2008 economic crash, the COVID-19 pandemic, and post-COVID economic downturn. However, other obstacles are contributing as well, like:
While the American workforce can’t do much about how long people live and the uncertain future of government retirement aid programs like Social Security, retirement plan providers and employers can help Americans help themselves by making retirement plans more accessible across the country.
The SECURE Act 2.0’s predecessor–the SECURE Act–was first signed into law on December 20, 2019. This original piece of legislation made strides toward resolving America’s retirement crisis by:
To build on the efforts of the original SECURE Act, the SECURE Act 2.0 adds more than 90 provisions to address a variety of lingering retirement concerns, especially those that affect small businesses, which employed 61.7 million people in 2022.
Below are seven significant provisions of the SECURE Act 2.0.
SECURE 2.0 created and expanded several tax incentives for small businesses to start retirement programs. These tax incentives are designed to alleviate the significant financial burden that’s often associated with establishing a retirement plan.
Doubled tax credits for new plans: Small businesses with up to 50 employees can take advantage of a tax credit that covers 100% of plan start-up costs (up from 50% in the original SECURE Act) up to $5,000 per year for the first three years totaling $15,000 in credits. As outlined in the original SECURE Act, businesses with 51 to 100 employees will still have access to up to 50% of startup costs, capped at $5,000 per year for the first three years.
Added credits for employer contributions: Small businesses with up to 100 employees can access new credits for making employer contributions. Businesses with less than 51 employees qualify for up to $1,000 per employee making less than $100,000 in the prior year.
For eligible employers with 51 to 100 employees, the credit is reduced by two percentage points for each employee over the 50-employee mark for the preceding tax year.
This credit is phased out for all employers based upon the effective date of the plan. Employers are allowed to claim 100% of the credit in years one and two, 75% of the credit in year three, 50% of the credit in year four, and 25% of the credit in year five.
Expanded eligibility for start-up tax credits: Previously, start-up tax credits only applied to new plans. With SECURE Act 2.0, some employers with existing multiple employer plans will be able to take advantage of these start-up tax credits.
Continued availability of auto-enrollment tax credit: For the first three years of electing auto-enrollment, eligible businesses will be able to claim a $500 tax year per year.
In March 2022, the U.S. Bureau of Labor Statistics found that 72% of civilian workers have access to retirement plans with 56% choosing to participate. Auto-enroll has the potential to boost participation numbers and get more people into the habit of saving for retirement.
Starting in 2025, auto-enroll became mandatory for new plans that started after December 29, 2022, meaning any plan that was set up after that date will need to add auto-enroll by January 1, 2025.
Automatic contributions will be capped at 10% of employee compensation but cannot be less than 3%. Each year, contribution rates will be required to increase by 1% each year until the 10% cap is reached.
In 2020, Human Interest found that an employer is the number one reason people start saving for retirement. But not all employees take advantage of the opportunity to save for retirement even when a work-sponsored retirement plan is offered.
With the SECURE Act 2.0, employers will be able to incentivize employees to join the work-sponsored retirement plan by offering small, immediate incentives, like low-amount gift cards, to encourage employees to start saving through the employer-sponsored retirement plan.
The SECURE Act 2.0 was designed to expand access to retirement and makes a special emphasis on part-time workers. The SECURE Act signed into law in 2019 required employers to provide a retirement plan to employees who either completed one year of employment without exceeding 1,000 hours or three consecutive years of employment where they worked at least 500 hours.
The SECURE Act 2.0 will reduce that three-year rule to two years starting in 2025.
The SECURE Act 2.0 makes saving for retirement after the age of 60 more inclusive under the SECURE Act 2.0.
Broadened catch-up contribution age range: The SECURE Act 2.0 makes participants aged 60, 61, 62, and 63 (but not older than 64) by the end of the tax year eligible for catch-up contributions. Eligible participants will be able to save to the greater of $10,000 or 150% of the catch-up amount in effect for 2024, as indexed.
IRA catch-up contribution indexed to inflation: Previously, IRA catch-up contribution limits were fixed at $1,000 per year. Starting in 2023, this contribution limit will be indexed by inflation.
Increased mandatory RMD age: The required minimum distribution (RMD) age was increased from 72 to 73 in 2023 to give the workforce more time to save before they’re required to withdraw. In 2033, this legislation will require another RMD hike from 73 to 75. Failure to withdraw after you reach RMD age will result in a 25% tax penalty, down from 50% before the SECURE Act 2.0 was signed into law. Those who promptly correct a withdrawal failure will only be subject to a 10% penalty.
As of the end of 2022, 42.8 million student loan borrowers owe $1.76 trillion in federal and private student loan debt. With roughly 13% of the population owing money for student loans, some may be questioning whether to pay off debt or start saving for retirement.
Starting in January 2024, the SECURE Act 2.0 will enable employers to design a plan that will treat student loan payments like elective deferrals for matching purposes. The beauty of this plan is the ability for employers to match student loan repayments like they would contributions to a 401(k), 403(b), or SIMPLE IRA plan.
This may help expedite the process of paying off student loans for employees while saving for retirement at the same time.
One of the core pillars of the defined contribution plan design is the waiting period for withdrawing funds. With a 401(k), for example, you won’t be able to withdraw funds early without facing a 10% penalty (on top of taxes that apply to any withdrawal made from your retirement account).
However, the SECURE Act 2.0 alleviates some of these penalties in the event that you need to withdraw money for an emergency. Starting in 2024, active participants may be able to make penalty withdrawals capped at $1,000 for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” You’ll then have three years to pay it back.
The SECURE Act 2.0 surely benefits both business owners and employees, but another beneficiary derived from this law is HR professionals. Those managing administration of plans and human resources can benefit from this new law in a number of ways:
Reduced administrative burden: Plans that began after December 29, 2022, can allow hardship self certification, meaning plan sponsors are not required to certify that hardship withdrawal are being used for and not in excess of necessary coverage of a deemed hardship.
Reduced audit risk: The involuntary IRA limit for former employees has increased from $5,000 to $7,000 for distributions made after December 31, 2023. Now, any retirement accounts for individuals that are no longer employed at a business with a balance between $1,000 and $7,000 can be forced out into an IRA with consent of the account owner.
Reduced unnecessary plan notices: Plan administrators are no longer required to send plan notices to unenrolled employees for plans that began after December 31, 2022. Now, plan administrators are only required to send one notice a year reminding unenrolled employees of their eligibility and the deadline to opt into the plan.
While both the SECURE Act and the SECURE Act 2.0 made giant strides towards creating universal retirement access in America, they may not be enough.
While participation for those with access is hovering around 50%, that’s not the main issue. Employees can’t choose to participate or not unless a plan is offered in the first place, a responsibility that lies with the business itself. Now, with SECURE Act 2.0, there are even more financial incentives for small businesses to provide these benefits.
The SECURE Act 2.0 gives HR professionals to tools to help their employees create a bright financial future, like:
To learn more about starting an affordable, accessible retirement plan, consider Human Interest.