By Mark Baker, CPA
On December 23, 2022, Congress passed the $1.7 trillion omnibus spending bill that contained several accounting and tax-related provisions, including the SECURE (Setting Every Community Up for Retirement Enhancement) 2.0 Act of 2022. This Act aims to improve retirement savings by making it easier for employers to offer retirement plans to employees and for individuals to increase their retirement savings. This article will discuss selected provisions of the SECURE 2.0 Act and their potential impact on employers.
New 401(k) and 403(b) plans established after December 29, 2022 will be required to automatically enroll employees and include an "eligible automatic contribution arrangement" (EACA) which sets a contribution rate of at least three percent but no more than 10 percent. The contribution rate will automatically increase by one percent each year, up to a maximum of 15 percent (10 percent for 401(k) safe harbor plans). Even though employees are automatically enrolled, they can opt out. Participants must have the right to withdraw automatic contributions within 90 days of the first contribution without being subject to the 10 percent early withdrawal penalty.
This provision will be effective for plan years beginning after December 31, 2024 to allow employers and plan providers a transition period to develop automatic enrollment procedures.
Small businesses with ten or fewer employees and new companies in operation for less than three years are exempt from this requirement. Additionally, governmental plans and church plans are also exempt.
Coverage for Part-time Workers
The Act expands mandated 401(k) coverage for long-term part-time workers by reducing the required years of service from three years to two years. Prior to this change, the SECURE Act of 2019 required employers with a 401(k) plan to allow employees who have worked at least 500 hours for three consecutive years to participate in the plan. This provision will also apply to ERISA-covered 403(b) plans. It will be effective for plan years beginning after December 31, 2024.
Emergency Savings Accounts
In 2024, employers will have the option to offer an emergency savings account through a defined contribution plan for non-highly compensated employees. The account will be linked to the plan, and the employer can enroll employees at a rate of up to three percent of their salary, with a maximum balance of $2,500 (or lesser set by the plan sponsor). Contributions to the account will be made after tax and are eligible for employer matching. Any matching funds must be contributed to the employee's retirement account, not the emergency savings account. Employers must allow participants to withdraw funds at least once per month.
The Act allows employers to treat student loan repayments as elective deferrals for matching contributions. This means that starting from plan years after December 31, 2023, employees will be able to self-certify and receive matching contributions to their retirement plan for student loan payments made towards qualified higher education expenses. A qualified student loan payment is defined as any debt incurred by the employee solely for the purpose of paying for their own qualified higher education expenses.
Retirement Plan Database
The Act establishes a database that can be searched online and provides contact information for administrators of plans where a participant or beneficiary may have a benefit. This database will be created within two years of the Act's implementation. Starting in 2025, sponsors must provide the appropriate information to the Department of Labor to be included in the database.
The Act increases start-up plan credits for small employers. It increases the existing credit from 50 percent to 100 percent of qualified start-up costs for employers with up to 50 employees for the first three years after a plan is established.
The Act also provides for an additional employer credit for employers with up to 50 employees but is phased out for employers with between 51 and 100 employees. The amount of the additional credit generally will be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. The applicable percentage is 100 percent in the first and second years; 75 percent in the third year; 50 percent in the fourth year; and 25 percent in the fifth year. The credits also apply to new plans that join an existing plan, such as a Multiple Employer Plan (MEP) or a Pooled Employer Plan (PEP). These changes will be effective for taxable years beginning after December 31, 2022.
This article provides a brief overview of certain provisions of the SECURE 2.0 Act, but it is not a comprehensive list. If you would like more information on the Act, please contact Jackson Thornton to speak with one of our advisors.
Mark Baker, CPA is a principal with Jackson Thornton where he provides tax and consulting services to long term care facilities, physician practices and other healthcare operations.