The 2022 Omnibus Package included legislation that strengthens the way Americans save for retirement, likely eliminating Main Streets across the country. The Ensuring a strong pension law by 2022 (SECURE 2.0) builds on the initial 2019 SECURE law, which revised the rules around retirement savings, including raising the age of required minimum benefits (RMDs) and allowing workplace savings plans to offer annuities.
The new law includes several provisions to strengthen the U.S. pension system, encouraging savings in the workplace, providing support for small businesses that want to help employees prepare for retirement, and increasing tax incentives for those already economically secure. to be. With all the new changes brought by SECURE 2.0, here are six things small business owners should know:
- Increases small business start-up credit: SECURE 2.0 increases startup credit to 100% (was 50%) of administrative costs to $5,000 for the first three years of plans created by employers with up to 50 employees. It also clarifies that small businesses participating in a multi-employer plan (MEP) are eligible for the credit. The tax credit provides a strong incentive for employers by reducing the administrative burden associated with preparing and managing retirement offers for employees.
- Expansion Automatic Enrollment: Beginning in 2025, 401(k) and 403(b) plans will be required to automatically enroll eligible participants, although employees can opt out of coverage. There is an exception for small businesses with 10 or fewer employees and for new businesses less than 3 years old. The expansion of automatic enrollment will help more employees save for retirement, especially younger, lower paid employees.
- Establishes Starter 401(k) plans: Beginning in 2024, employers who do not yet offer retirement plans may offer a starter 401(k) plan or safe harbor 403(b) plan to employees who meet age and service requirements. Through the starter plans, the annual deferral limit would be equal to the IRA contribution limit, and employers are not allowed to make matching or non-selective contributions to starter plans. The Starter Plan offers a great entry point for small businesses, especially considering that employers are not required to match contributions, meaning even the tiniest of small businesses can offer something to their employees.
- Changes in the offer of part-time workers: From 2025, employers will be required to allow part-time employees (employees with more than 500 hours per year for two consecutive years) to participate in their retirement plan after two years of service. Employees with more than 1000 hours of service must be included after one year of service. As the workforce now includes more part-time workers than in the past, this means more employees will be eligible for employer-sponsored retirement plans.
- Creates a tax credit for military spouses: SECURE 2.0 establishes a tax credit for employers with up to 100 employees who make military spouses eligible for their retirement plans within two months of their hiring date, ensure that each military spouse is 100% vested in all employer contributions, and guarantee that each military spouse is eligible for any matched or non-choice contribution they would otherwise not have qualified for until after two years of service. The tax credit equals $200 per military spouse plus up to $300 in employer contributions per person for up to three years.
- SIMPLE Choice-free deferral and catch-up limits for employees: The law also increases employee deferral limits for SIMPLE (Savings Incentive Match Plan for Employees) IRAs and catch-up limits by 10% for employers with no more than 25 employees. It also increases for employers with 26-100 employees if they pay non-optional 3% employer contributions or a matching 4% contribution.
A study of 500 small businesses nationwide found that only 26% of those surveyed offered a 401(k) retirement plan. Small businesses cited three main reasons for not offering subscriptions: 1) they believe their business is too small to qualify, 2) they cannot afford to match payments, or 3) offering subscriptions is too expensive to set up and manage. Since the majority of U.S. workers are employed by small businesses, it’s important that small employers get the resources they need to provide employees with retirement options. With the new provisions offered by the SECURE 2.0 law, there is optimism that small businesses will be better positioned to support employee retirement plans.