SECURE Act 2.0: What Employers Should Know
At the end of December 2022, the SECURE Act 2.0 cleared both houses of Congress as part of an omnibus end of year appropriation. The Act is a package of bills focused on retirement that expands on provisions from the original SECURE Act enacted in 2019.
SECURE Act 2.0 Provisions Employers Should Know
The SECURE Act 2.0 has several provisions that employers should be aware of. Here are some of the most important:
Automatic Enrollment in Retirement Plans
A critical provision of The SECURE Act for new 401(k) or 403(b) Plans beginning after 12-31-24, is automatic enrollment of new employees into the retirement Plan when they start working for the company (unless they opt out). The initial contribution is at least 3% but not more than 10%. The contribution increases at the rate of 1% per year up to a minimum of 10% and a maximum of 15%. The requirement does not apply to government plans, church plans, new businesses in existence less than three years or businesses that normally employee 10 or fewer employees.
According to Vanguard, automatic saving in workplace retirement plans has proven hugely successful, with 92% of employees continuing to save three years after enrollment compared to only 29% when enrolled voluntarily.
According to David Stinnett, Vanguard's head of strategic retirement consulting, the SECURE Act 2.0 is finally incorporating automatic best practices known to yield positive retirement savings results. These features are intended to simplify participation in plans and enable earlier savings.
Student Loans Linked to Retirement Plans
Another provision of the SECURE Act 2.0 for 401(k), 403(b) or government 457(b) with Plan Years starting after December 31, 2023, allows employers to make matching contributions to retirement plans equivalent to an employee’s qualified student loan payments. According to Bankrate, 26% of employees have deferred retirement savings to cover student loan payments.
The SECURE Act 2.0 would allow employers to match up to a set percentage of the employee's wages and channel the funds into a retirement plan. This provision could help young employees better save for retirement while paying off their student loans. In addition, employers may find that this opens up their recruiting pool to more young employees and make them attractive to millennial and Gen-Z talent.
Higher Catch-Up Contributions
Secure Act 2.0 also allows those aged 60 to 63 to contribute up to the greater of $10,000 or 150% of the standard Catch-Up amount for that year to 401(k) or 403(b) plans and $5,000 to SIMPLE IRA plans for Plan Years beginning after 12-31-24. Catch-up contributions for these plans stand at $6,500 and $3,000 for savers over 50 in 2022.
For Plan Years beginning after December 31, 2023, employees who earned more than $145,000 in the prior year, catch-up contributions will be taxed as Roth contributions, with income tax applied before investing for retirement. In addition, the IRA catch-up contribution limit of $1,000 will be indexed to inflation.
Making catch-up contributions more available to near retirees should help them save additional money for retirement and make the process easier. It incentivizes older workers to save more after their careers are established.
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Expanded Eligibility for Saver's Credit
The Saver's Credit changes from a credit to a Federal matching contribution of 10%, 20% or 50% (depending on income) of the first $2000 ($4000 for joint filers) that is contributed to the retirement account, and will phase out with higher earnings. It will go into effect in 2027.
This will make it easier for a higher number of lower-income households to save for retirement and offer them a much-needed incentive to do so. For employers, this could increase participation, leading to more engaged and productive employees as their financial concerns are put at ease.
Employers Have Time
The SECURE 2.0 Act is a great boon for employees, but employers will have some administrative responsibilities, although they should have until January 1, 2024, to work with all the stakeholders to ensure compliance.
Overall, the SECURE Act 2.0 should be a game-changer for retirement savings in the U.S., and employers should take advantage of this opportunity to better enable their employees to save and invest for retirement. Employers should consider how they can best incorporate these provisions into their benefits plans as soon as possible.
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