American workers are struggling to save for retirement. In fact, only 43% of non-retired adults expect to be financially comfortable in retirement, according to a 2023 survey by Gallup. That same survey reveals that nearly half (48%) of workers expect that a workplace retirement plan such as a 401(k) will be a major source of retirement income.
So, it’s no surprise that 88% of today’s workers consider a 401(k) plan a must-have benefit when looking for a new job, according to a 2023 survey by Charles Schwab. Bottom line, if your business doesn’t offer a retirement plan, you’re at a severe disadvantage when it comes to recruiting and retaining employees.
The problem is offering a 401(k) plan for employees has been too costly for many small business owners. The SECURE 2.0 Act is new legislation that makes it much more affordable for small businesses to set their employees up for retirement. By taking advantage of this new law, many more small businesses will be able to compete for talent versus bigger companies and large corporations by offering the “must-have” benefit of a 401(k) plan.
What Is the SECURE 2.0 Act?
The SECURE 2.0 Act is a law that gives Americans more retirement savings options and flexibility. At the same time, the law makes it more affordable for small businesses to offer retirement plans such as a 401(k).
The SECURE 2.0 Act takes the original SECURE (Setting Every Community Up for Retirement Enhancement) Act and enhances it with new rules to incentivize workers and employers to invest more in their retirement.
Americans face hard economic decisions. We face questions such as:
Do I save for retirement or pay off my student loans?
If I put money into a retirement account, will I have enough money in my emergency fund?
I’d like to offer my employees a 401(k), but what if I can’t afford the administration costs?
As an employer, do I have to match employee 401(k) contributions?
The SECURE 2.0 Act gives both employers and employees better solutions to these common problems.
SECURE Act 2.0 Highlights
The legislation has many nuances and rules. Here are the most important aspects to know:
Big Tax Credits for Small Businesses
There are tax credits to help certain small businesses start an employer-sponsored retirement plan for their employees, such as a 401(k). A new tax credit helps small employers offset company contributions. Previously, employers with fewer than 100 employees were eligible for a three-year start-up tax credit of up to 50% of administrative costs, with an annual limit of $5,000.
This new law increases this credit to 100% of qualified start-up costs for new plans sponsored by employers with up to 50 employees. So, if you have 50 employees or fewer, the government is offering to pay for the entire cost of setting up a 401(k) plan, up to $5,000, with tax credits.
What’s more, the SECURE Act 2.0 offers a tax credit for employer matching or profit-sharing contributions for the first five years of the plan. The tax credit is for businesses with up to 100 employees. Note that this credit is reduced by 2% per employee over 50 employees earning less than $100,000/year. The maximum credit is $1,000 per year for each of those employees.
The match credit is then phased out based on the number of years the plan has been active:
100% in the first and second years
75% in the third year
50% in the fourth year
25% in the fifth year
Your Employees Can Invest in Retirement While Repaying Student Loans
When your employees make a qualified student loan payment, your business can make a matching contribution to the employee’s 401(k) plan based on the amount of the loan payment. By participating in this aspect of SECURE 2.0, your job openings become more compelling to the 43.5 million Americans who have an average student loan debt of nearly $38,000. Learn more about leveraging this aspect of the SECURE 2.0 Act to grow your business here.
Automatic Enrollment Is Now Mandatory
The SECURE 2.0 Act requires certain employers who establish a new 401(k) or 403(b) plan to automatically enroll all new employees. They must be enrolled at a rate of at least 3%, which would increase annually until they reach at least 10%. Your employees do have the option to opt-out. They may also elect a lower or higher deferral rate.
Increased Catch-up Contributions Limit
Currently, people who are at least 50 years old can put forth an extra $7,500 in catch-up contributions in most retirement plans. But beginning in 2025, the amount for employees ages 60 to 63 increases to $10,000.
Increased Required Minimum Distribution (RMD) Age
The RMD is the age at which workers must begin taking withdrawals from their retirement accounts. The SECURE 2.0 Act has raised the required minimum distribution (RMD) age from 72 to 73. And in 2033, the RMD age will be 75 years old. This enables people to continue growing their retirement accounts longer if they wish.
You Can Offer an Emergency Savings Plan for Employees
CNBC reports that 63% of employees are unable to cover a $500 emergency expense, citing a new survey from SecureSave. The SECURE 2.0 Act gives your business the option to offer an emergency savings account as part of your 401(k) program.
This would allow your employees to access the account to cover unforeseen expenses without facing taxes or penalties. Participants can contribute until the account reaches a balance of $2,500. If the plan provides for matching contributions, these emergency savings contributions would be eligible for a match as well. The goal is to encourage retirement planning while reducing dependence on high-interest credit cards to cover emergencies.
Attract and Retain More Part-time Workers With Your 401(k)
Currently, part-time employees can’t enroll in their employer’s retirement plan until they’ve been with their employer for at least 3 years. SECURE 2.0 reduces this eligibility waiting period to 2 years starting in 2025.
How the SECURE 2.0 Act Makes It Affordable to Offer a Retirement Plan for Employees
Before this legislation, eligible employers with fewer than 100 employees were offered a three-year start-up tax credit of up to 50% of administrative costs, with an annual limit of $5,000. The SECURE 2.0 Act legislation boosts this credit all the way up to 100% of qualified start-up costs for employers with a maximum of 50 employees. (This tax credit remains at 50% for employers with between 51 and 100 employees.)
Your Small Business Might Pay $0 to Offer a 401(k)
For many small businesses with 50 or fewer employees – the credit might cover all administrative costs for the first three years. Your business may also be eligible for an extra credit of up to $1,000 for each employee who earns less than $100,000 for employer contributions. The credit is available to companies with up to 50 employees at 100% for the first two years, 75% in year three, 50% in year four, and 25% in year five.
The result is that, as an employer, you can provide a matching contribution for employees, and the federal government will provide a tax credit of up to 100% of the contribution up to the prescribed limit.
Your Business Is Not Required to Offer a Matching Contribution
There is an option called a “Starter 401(k) plan. This is covered until Section 121 of the SECURE 2.0 Act. This is a simplified version of 401(k) and 403(b) plans beginning on January 1, 2024. With a Starter 401(k) plan, there is no requirement for employer matching or profit-sharing contributions. A Starter 401(k) plan may appeal to businesses with cost concerns.
It’s an incredibly competitive market for businesses to find the workers they need to operate and grow. If your business doesn’t offer a retirement plan, workers will look elsewhere. According to SCORE, just 28% of businesses with less than 10 employees offer retirement plans. Compare this to the 87% of businesses with over 100 employees that offer retirement plans.
SECURE 2.0 is bridging the gap by making it affordable for small businesses to offer the same retirement benefits as bigger companies. Of those who offer 401K plans, 94% said retirement benefits help drive recruitment. Don’t miss the tax credits available to your business. Your 401(k) costs may be covered entirely by this new law.
This information is provided with the understanding that Payroll Partners is not rendering legal, human resources, or other professional advice or service. Professional advice on specific issues should be sought from a lawyer, HR consultant or other professional.