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The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0, signed into law on Dec. 29, 2022, was created in an effort to close the retirement savings gap. The retirement gap occurs when the money you are on track to have when you retire is less than what you will actually need to retire comfortably. The SECURE Act includes over 90 new retirement provisions, many of which will have a significant impact on small businesses. Here's a brief summary of some changes:
Changes Effective in 2023
- Retirement plan setup cost tax credits — Eligible employers with up to 50 employees may be allowed to claim a three-year start-up tax credit equal to 100% of administrative costs for establishing a workplace retirement plan.
- New credit for employer contribution costs — An eligible business with up to 100 employees may qualify for tax credits up to $1,000 per employee. This will then phase out over five years (100%, 75%, 50%, 25%, and zero for subsequent years). For employers with 51 to 100 employees, there may be additional reductions. Contributions that are not covered by the tax credit should be deductible. Contributions where you receive a tax credit typically do not qualify for tax deductions.
- New options available for SIMPLE & SEP Roth IRAs — Prior to the SECURE Act 2.0, employers already offered Roth 401(k)s and 403(b)s. The new legislation includes two additional types of IRA retirement accounts:
- Savings Incentive Match Plan for Employees (SIMPLE) IRAs.
- Simplified Employee Pension (SEP) IRAs.
- Employers can now match Roth contributions — Before the passage of the SECURE Act 2.0, matching contributions could only be made to traditional pre-tax retirement accounts. Currently, employers can provide employees the option of receiving nonelective (funds employers contribute toward their eligible employees' employer-sponsored retirement plans regardless of contributions made by the employee), matching contributions to their Roth account.
- Tax credit for military spouses — Eligible small businesses that provide specific benefits for military spouses who are non-highly compensated employees can receive a tax credit. These benefits include:
- They are allowed to be 100% vested immediately in all employer contributions.
- Eligibility for any matching or nonelective contribution upon plan eligibility immediately instead of the two years of service requirement.
- They are eligible for plan participation within two months of their start date.
Changes Effective in 2024
- SIMPLE IRA employer contributions increased — Employers with SIMPLE plans currently are required to make contributions to employee plans of either 2% of their compensation or 3% of employee elective deferral contributions. In 2024, employers can make additional nonelective contributions to an employee's SIMPLE Plan up to 10% of compensation or $5,000 (indexed), whichever is less.
- Emergency savings contributions — 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. Employees do have the ability to opt-out if they choose.
- Starter 401(k) plan option — 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 that all employees to enroll in the plan at a deferral rate between 3% to 15% of compensation. The annual contribution limit equates to the IRA contribution limit. Employers are not allowed to make matching or nonelective contributions.
- Student loan matching contributions — Employers are permitted to make matching contributions under a 401(k), 403(b), 457(b), or SIMPLE IRA plan based on student loan repayments.
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.
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.
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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)
Nonelective Contribution: Definition and Benefits to Employees (investopedia.com)
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