The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) makes it easier for employees to save for retirement by increasing contribution limits and expanding hardship withdrawals. It also offers tax credits and other incentives for employers that adopt new retirement plans and authorizes plan enhancements that can help employers boost participation in existing plans.
Here are key provisions for employers to consider.
SECURE 2.0 expands the existing tax credit for small employers that start new retirement plans. Starting in 2023, employers with up to 50 (down from 100) employees may claim a credit equal to 100% (up from 50%) of their qualified start-up costs. The credit is generally capped at $5,000 per year.
These employers are also entitled to an additional credit of up to $1,000 per employee for employer contributions to the accounts of employees earning $100,000 or less. For employers with more than 50 employees, the credit is reduced by 2% for each employee in excess of 50, and fully phased out at 100 employees. The full credit is available in the year the plan is established and the following year. After that, it decreases by 25% each year and is eliminated after year five.
Boosting retirement plan participation by rank-and-file employees can provide many benefits. Examples include easier compliance with nondiscrimination requirements, improved employee satisfaction and retention, enhanced tax benefits, and cost savings. Previously, plans were prohibited from offering financial incentives (other than matching contributions) to encourage participation.
Now, however, SECURE 2.0 allows employers to offer participants "de minimis" financial incentives, such as low-dollar-value gift cards. Keep in mind that these incentives usually are treated as taxable income to the employee.
Employers may now amend their plans to permit penalty-free distributions, up to $22,000, for participants who suffer economic losses related to a federally declared disaster. Participants may spread the resulting income tax over three years. Or, if they repay the distribution within three years, participants may avoid tax altogether.
SECURE 2.0 also permits employers to establish emergency savings accounts for rank-and-file employees, linked to a 401(k) or similar plan. These accounts may accept only after-tax contributions (although they're considered contributions to the linked plan for matching purposes). Account balances must not exceed $2,500. And withdrawals, which must be permitted at least monthly, are tax- and penalty-free.
Other SECURE 2.0 provisions that can help employers attract skilled labor include:
These are only some of the employee-friendly provisions of the SECURE 2.0 law. Enhancing retirement benefits can be an effective tool for attracting and retaining skilled workers — a major benefit for manufacturers that are having a hard time filling open job positions. However, taking advantage of some SECURE 2.0 provisions may require plan amendments. Contact your CPA with questions or to review your plans and update if necessary.
If your company doesn't currently maintain a retirement plan, the new "starter 401(k) plan" is an option that can be easier and less expensive to administer than a traditional 401(k) plan. SECURE 2.0 authorizes these "deferral-only arrangements" starting in 2024.
Starter 401(k) plans must automatically enroll employees at a contribution rate of 3% to 15% of compensation (unless an employee elects otherwise). Employer contributions are prohibited, and employee contributions are limited to $6,000, plus $1,000 in catch-up contributions, for those 50 or older.
Plans that meet these requirements aren't subject to costly nondiscrimination requirements, such as average deferral percentage testing and top-heavy plan rules.
Get in touch today and find out how we can help you meet your objectives.
