In December 2022, the U.S. government passed a significant piece of legislation: the SECURE 2.0 Act.
The SECURE 2.0 Act put in place mandatory and optional provisions to help U.S. workers better prepare financially for retirement, at every stage of their employment journey.
This new law comes at a critical time for Americans:
- Many older U.S. workers who have not been able to save enough money to retire have delayed their transition into this next stage of life because of current economic conditions and record-high inflation. They’re unsure of what their financial future holds and their ability to maintain their standard of living without continued, predictable income.
- For many U.S. workers who are in earlier or middle stages of their careers, their ability to contribute to a retirement savings plan has been hindered by household debt and repayment of student loan debt. Student loan debt impacts more than one in four Americans and exceeds $1.6 trillion. Meanwhile, credit card debt tops $1 trillion. Prioritizing their debt reduction can cause these workers to miss out on the crucial first years – or even decades – of contributions to retirement savings plans. As a result, they don’t reap the benefits of compounding interest.
For many reasons, employees’ financial wellness – of which sufficient retirement savings are a critical component – is very important to a business’s long-term success.
In requiring employers to take actions that can improve their employees’ financial wellness, the SECURE 2.0 Act of 2022 enables business leaders to:
- Deliver additional financial benefits to round out an organization’s compensation strategy
- Remain competitive in an increasingly dynamic labor market
- Win the war for talent
In this blog, we’ll discuss:
- What the SECURE 2.0 Act of 2022 says
- The implications of this law’s passage for your business
- How small and midsize businesses and their employees can both benefit
Overview of the SECURE 2.0 Act of 2022
Expanding on the provisions laid out in the original SECURE Act of 2019, the SECURE 2.0 Act of 2022 contains more than 90 provisions and covers 358 pages.
At its most basic level, the law encourages people to not only save money for retirement, but to save more and also become financially stable in the present. To do this, the law makes broad changes to the foundation of retirement preparation in the U.S.: employer-sponsored 401(k) plans.
The SECURE 2.0 Act seeks to:
- Open access to 401(k) retirement plans to more people
- Provide greater opportunities to save
- Offer financial incentives to save while removing common barriers and penalties
So, what does the law require of employers?
Major highlights of the SECURE 2.0 Act are:
- Starting in 2025, long-term, part-time employees – those workers with at least two years’ tenure and who have worked a minimum of 500 hours – must be able to participate in their company’s retirement plan.
- All company retirement plans started in 2023 and thereafter must have an automatic enrollment and escalation provision – also known as “you’re in unless you’re out.” This means that employees are enrolled in their company’s retirement plan and contribute a specific percentage of their income unless they opt out. (The law mandates at least 3%.) And, every year, that percentage automatically increases unless the employee intervenes to make changes.
- Starting in 2025, workers between the ages of 60 and 63 can make higher “catch-up payments” of 150% of the regular catch-up amount annually to their retirement plan.
- High-income workers – those individuals earning more than $145,000 annually – who are at least 50, will soon be required to make any catch-up contributions to a Roth individual retirement account (IRA) account. This enables workers to pay taxes up front on the funds they contribute, and then grow and withdraw these larger funds at a later date tax free. The Internal Revenue Service (IRS) will begin enforcing this provision in 2026.
- Starting in 2023, the age at which workers must take a required minimum distribution from their retirement plan is increasing from 72 to 73. In 2033, this age will be 75. The intent is to help ensure that people don’t outlive their retirement savings and run out of money by being forced to withdraw funds too early.
- Starting in 2024, employees’ annual contribution limits to some SIMPLE 401(k)s or IRAs will rise. SIMPLE plans that qualify will have deferral limits 10% higher than the regular limits.
The SECURE 2.0 Act also allows employers to offer many optional financial benefits to their employees. Noteworthy examples include:
- Starting in 2024, companies are allowed to treat student loan payments as retirement plan contributions that are eligible for an employer match. This incentivizes workers to pay off debt and save for their future simultaneously.
- Starting in 2023, if a retirement plan allows for it, employees can elect for their employer match to receive Roth tax treatment. This means that employees pay taxes on the initial amount of the employer match, and then the money grows and is later disbursed tax free.
- Starting in 2024, eligible employees can create an emergency savings account within their retirement plan for unexpected expenses, if the plan allows for it. Annual contributions will be limited to $2,500. The intent is to make these funds more accessible than other plan assets – without tax penalty – when needed.
- Also beginning in 2024, employers who do not currently offer a retirement plan may initiate a “starter 401(k) plan.” Such plans allow for automatic enrollment of employees with a minimum contribution rate of 3% of income, but place a lower limit on annual contributions and prohibit an employer match. This option can serve as an alternative to state-run retirement plans and can be a great way for employers to venture into the 401(k) world.
Benefits for employers
Of course, there are some tedious logistical steps involved in achieving compliance with the SECURE 2.0 Act, such as adapting payroll and record-keeping systems. However, the benefits of the SECURE 2.0 Act for employers are tremendous in comparison.
First, it’s never been more financially advantageous to initiate a 401(k) retirement plan. Previously, some small and midsize employers may have had qualms about offering 401(k) retirement plans, especially as a potential recession has forced them to reassess budgets and trim costs.
The SECURE 2.0 Act greatly reduces the cost deterrent of setting up retirement plans by offering employers compelling tax incentives starting in 2023:
- Companies with fewer than 100 employees that establish a new 401(k) plan will receive a tax credit of up to 50% of the plan’s administrative cost for the first three years.
- Companies with fewer than 50 employees that establish a new 401(k) plan will receive a tax credit of up to 100% of the plan’s administrative cost for the first three years.
- Over the first five years of the retirement plan, companies with 100 or fewer employees can receive a maximum tax credit of up to $1,000 per employer match to each employee’s retirement account.
It’s important to note that these are tax credits, not deductions. Essentially, the U.S. government is paying employers to set up retirement plans and contribute to them.
These tax credits apply to companies starting their own 401(k) retirement plan or adopting an existing retirement plan sponsored by their professional employer organization (PEO) for the first time.
Secondly, employers can’t overlook the competitive advantage associated with enhanced financial offerings in their benefits package. It’s harder than ever to recruit top talent in our ultra-competitive job market, much less retain valued employees for as long as possible. Your company must deliver benefits that stand out from your industry peers and demonstrate a culture of caring for your people.
Most employees view a 401(k) as a standard offering, something that any reputable and attractive employer should provide. Meeting this minimum standard and complying with the required provisions of the SECURE 2.0 Act are undoubtedly important.
However, the optional provisions in the SECURE 2.0 Act present an opportunity to exceed expectations and deliver a superior employee experience. Giving employees more opportunities to boost the quantity of their savings and improve their current financial situation can be the differentiator between you and a competitor.
Ultimately, your company’s competitiveness in attracting and retaining talent depends on adopting a “total rewards approach.” This means that businesses aim to compensate employees beyond mere salary to protect and enhance their physical, emotional, social, professional and financial health. Alongside retirement savings and coinciding financial benefits, total rewards may include:
- Performance bonuses
- Insurance (medical, dental, vision and disability)
- Paid time off
- Flexibility in scheduling and work location
- Growth and development opportunities
- Wellness programs
- Other special perks
Employees who feel that they’re taken care of and valued – and who feel safe and secure in their financial health – are more engaged, focused, productive and loyal, and therefore more likely to stay put at your workplace and help contribute to its growth and success.
Summing it all up
The SECURE 2.0 Act has altered the retirement savings landscape by expanding benefit options to include student loan repayment, emergency fund support, broader catch-up opportunities, reduced exposure to tax penalties and more. In complying with the law’s requirements and implementing optional provisions, employers are eligible for generous tax credits.
Incorporating these financial benefits into a company’s “total rewards approach” can reduce employees’ financial stress, strengthen the employer-employee relationship, thus improving employee engagement and retention, and exponentially increase a company’s competitiveness in the job market. To learn more about providing a competitive benefits package, download our free magazine: The Insperity guide to employee benefits.