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How Does the SECURE Act 2.0 Impact Small Businesses?

BECU Investment Services

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The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 includes over 90 retirement provisions, many of which could impact small businesses. Several of the provisions go into effect in 2024 and 2025. Business owners must understand how these provisions will affect their companies and employees.  We've highlighted some of the numerous changes that may potentially affect small businesses, including:

Changes Effective in 2024

  • Amendments to catch-up contribution rules
    • The SECURE Act 2.0 proposes that employees aged 50 and older can make additional catch-up contributions of up to $7,500 into their employer-sponsored retirement savings plan. Employers must adjust their retirement plan terms to account for this change and educate their employees about the amended rules.
  • Increased annuity options
    • The SECURE Act 2.0 expands the Required Minimum Distribution (RMD) exemption for Qualified Longevity Annuity Contracts (QLACs) by:
    • Eliminating the requirement that the QLAC premium not exceed 25% of the individual's account or IRA balance.
    • Increasing the QLAC dollar limit from $125,000 to $200,000 (indexed to the cost of living beginning in 2024).
      • The SECURE Act 2.0 also includes provisions to increase annuity options within individual retirement accounts (IRAs) and 401(k) plans. This development aims to give retirees an income stream during their retirement years through the annuity option within their retirement account. Business owners must familiarize themselves with new annuity options and potentially roll out new retirement plans or update their plan's strategies to include additional annuity options in early 2024.
  • New Roth 401(k) RMD rules
    • Beginning in 2024, RMDs will no longer be required from Roth accounts in employer retirement plans. Also, the penalty for failing to take an RMD decreased to 25% from 50% and 10% if corrected promptly for IRAs.
  • Employee student debt relief
    • Employers can now offer student debt relief through workplace retirement plans, such as 401(k)s, 403(b)s, 457(b)s, and SIMPLE IRAs by matching contributions toward an employee's student loan repayments. The employee elects the employer to match their loan versus their employer-sponsored retirement savings plan. However, the employee must continue participating in the employer-sponsored retirement plan to receive the employer's match toward their student debt.
  • SIMPLE IRA Nonelective Contributions
    • Before SECURE 2.0 was passed into law, employers had certain restrictions on contributions to SIMPLE plans. Effective in 2024, SECURE 2.0 will permit the employer to make a nonvoluntary, nonelective contribution to each eligible employee earning at least $5,000, along with the required nonelective or matching contribution. The additional nonelective contribution cannot exceed 10% of the employee's contribution up to a maximum of $5,000.
  • Employee emergency and savings accounts
    • Defined contribution retirement plans can add emergency savings account affiliated with a Roth account. Non-highly compensated employees can make Roth contributions to an emergency savings account linked to their retirement account. Participants can enroll up to 3% of their pay up to $2,500 (indexed, or lesser amount determined by the plan sponsor) on an after-tax Roth basis. An after-tax Roth basis means that contributions are taxed at the time of the investment, so earnings and eligible withdrawal are tax-free. Employees do have the ability to opt out if they choose.
  • Employee emergency personal expense
    • Employees will be able to withdraw up to $1,000 per year to cover personal and family emergency expenses, regardless of whether the person has reached 59 1/2, without being subject to the 10% excise tax. The employee may repay the employer retirement plan or an IRA within three years following the date of the distribution.
    • Suppose an emergency personal expense distribution is made in a year. In that case, no other distribution may be treated as an emergency personal expense distribution for a three-calendar-year period unless the distribution is repaid or the employee's yearly retirement plan contributions to all plans and IRAs equal or exceed the distribution amount.
  • Emergency 401(k) distributions
    • Starting in 2024, section 127 says employers can offer non-highly compensated employees (NHCEs) the option to link their retirement plan to an emergency savings account. The IRS defines a highly compensated employee as someone who owns at least 5% of the company or earns over $150,000. Yearly contributions are limited to $2,500 (or less, determined by the employer), and the first four withdrawals each year aren't subject to penalties or taxes.
  • Domestic violence provision
    • Employees under age 59 1/2 who are experiencing domestic violence can take an amount equal to the lesser of $10,000 or 50% of the individual's account balance during the one-year period beginning on any date on which the individual (or a member of the household) is affected by domestic abuse. This provision includes not only the IRA owner (employee) but also the individual's child or another member of the household. There is no rollover for this distribution, and it may be repaid to the IRA or the employer-sponsored retirement plan within three years starting on the distribution date.
  • Roth IRA employer contributions
    • Traditionally, employer matches are made with pre-tax dollars that go into an employee's pre-tax account, such as a traditional 401(k). Starting in 2024, employers can make matching contributions into an employee's Roth 401(k), where the monies will grow tax-free, with tax-free distributions in retirement. This new provision is optional, and employers may still elect to make pre-tax matches.
  • Starter 401(k) plan option and Safe Harbor Deferral – Only 403(b)s
    • A business that doesn't sponsor a retirement plan will be permitted to offer a starter 401(k) plan that is less costly to operate than a traditional 401(k). The starter 401(k) plan generally requires all employees to enroll at a deferral rate between 3% to 15% of compensation. Or, they have the option to set up a safe harbor deferral-only 403(b) plan.

Changes Effective in 2025

  • Automatic enrollment — Employers will be required to automatically enroll eligible employees in newly formed 401(k) or 403(b) plans beginning with a pretax contribution equal to 3% of their wages. The contributions will increase annually by 1% up to at least 10%, but not exceeding 15% of their earnings. Employees are allowed to opt out of the increases and contribute anything.
  • Automatic escalation — For newly established retirement plans after Dec. 29, 2022, the contribution percentage must increase by one percent on the first day of each plan year upon completion of a year of service up to at least 10%, with a 15% cap of eligible wages. Exceptions to this rule include businesses with ten or fewer employees, employers in business for three years or less, and church and governmental plans.
  • Part-time employee eligibility — The original SECURE Act enabled long-term, part-time workers to obtain 401(k) plans. Employers with a 401(k) plan were required to offer the plan to employees who completed either one year of employment (not exceeding 1,000 hours) or three consecutive years of employment with at least 500 hours of service or labor. SECURE Act 2.0 reduces the three-year rule to two years. Employees on the job for 500 hours per year for two consecutive years are eligible to participate in a retirement plan.

The proposed SECURE Act 2.0 is still a work in progress and will undergo changes in the coming years. Business owners must work with financial and tax professionals and their retirement plan sponsors to remain informed and prepared for each year's SECURE Act 2.0 provision rollout through 2033.

It is up to business owners to educate their employees and adjust their retirement plan documents to ensure they comply to avoid being penalized at tax time.

Consider consulting a financial advisor to help you understand SECURE Act 2.0 and to see if any of these new provisions can be applied to you and your retirement strategy.

Talk to a Financial Advisor

Financial advisors with BECU Investment Services are here to help. Our team will take the time to get to know you, understand your goals and plan and implement a financial strategy that's appropriate for you. Set up a complimentary consultation or call 206-439-5720.

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SECURE 2.0 Act Legislation Includes Significant Changes to Individual Retirement Accounts | HUB | K&L Gates (klgates.com)

Retirement Planning Tips in Your Mid-60s and Beyond (investopedia.com)

Catch-Up Contributions Improved Under SECURE Act 2.0 | Kiplinger

SECURE Act 2.0: Changes to Retirement Planning (2023) | Human Interest

Retirement Plans Startup Costs Tax Credit | Internal Revenue Service (irs.gov)

Consultant_SECURE_Act_Summary_Flyer.pdf (tiaa.org)

Nonelective Contribution: Definition and Benefits to Employees (investopedia.com)

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