SECURE Act 2.0 and its Benefits for your Business
The SECURE Act 2.0, which became law on December 29, 2022, has made sweeping changes to 401(k) plans, particularly those sponsored by small businesses. It has introduced several provisions that are aimed at expanding coverage, increasing retirement savings, and easing administrative requirements. Employers of all sizes should understand the law’s provisions to ensure their 401(k) plan is ready to meet their effective date. Here is a summary of some of the major provisions.
Tax Credits for Small Businesses:
Increased tax credits for small businesses: One of the major provisions of the SECURE Act 2.0 is the expansion of tax credits for small businesses. Section 102 increases the tax credit for starting a new plan from 50% to 100% of eligible plan start-up costs for employers with up to 50 employees. Small businesses can earn an additional credit for making employer contributions, up to a per-employee cap of $1,000. This provision is effective for taxable years beginning after December 31, 2022. This change can help small employers offset the costs of starting a retirement plan and encourage them to offer retirement benefits to their employees.
Military spouse tax credit: Section 112 creates a tax credit for eligible small businesses that employ military spouses and allows the spouses to participate in the plans subject to special eligibility and vesting requirements. The tax credit equals the sum of $200 per military spouse and 100% of all employer contributions (up to $300) made on behalf of the military spouse, for a maximum tax credit of $500. This credit applies for 3 years with respect to each military spouse and does not apply to highly compensated employees. This provision is effective for taxable years beginning after December 29, 2022. This provision can help incentivize employees to participate in retirement plans and improve their financial well-being.
Plan Eligibility:
Automatic Enrollment for New Plans: Another significant provision is the requirement for new 401(k) plans to automatically enroll participants upon attaining eligibility. The initial automatic enrollment amount is at least 3%, but not more than 10%. Each year thereafter, that amount is increased by 1% until it reaches at least 10%, but not more than 15%. Plans established before December 29, 2022 are grandfathered. This provision is effective for plan years beginning after December 31, 2024. This change can help increase employee participation in retirement plans and improve their financial security. Employees who prefer not to participate can opt out.
Faster eligibility for long-term part-time employees: Under current law, employers must allow employees with at least 1,000 hours of service in a 12-month period or 500 hours of service in a three-consecutive-year period to join their plan – regardless of whether the employee has met the plan’s normal eligibility requirements. Section 125 reduces the three-year rule to two years. Section 125 is effective for plan years beginning after December 31, 2024.
Employee Contributions:
Mandatory Roth catch-up for highly paid individuals: Section 603 provides that all catch-up contributions to qualified retirement plans must be made on a Roth basis, except for participants whose prior year wages didn’t exceed $145,000. Section 603 is effective for taxable years beginning after December 31, 2023.
Higher catch-up contribution Limit: Section 109 increases the limit on catch-up contributions to the greater of $10,000 or 50 percent more than the regular catch-up limit ($7,500 for 2023) for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025. Section 109 is effective for taxable years beginning after December 31, 2025.
Employer Contributions:
Roth matching and nonelective contributions: Under current law, employers must contribute matching and nonelective contributions on a pre-tax basis. Section 604 allows participants to designate matching or nonelective contributions as Roth contributions when their plan allows. Section 604 is effective for contributions made after December 29, 2022.
Matching of student loan payments: Section 110 permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to “qualified student loan payments.” A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. For purposes of the nondiscrimination test applicable to elective contributions, Section 110 permits a plan to test separately the employees who receive matching contributions on student loan repayments. Section 110 is effective for contributions made for plan years beginning after December 31, 2023.
Plan Testing:
Top heavy rules for plans with excludable employees: Section 310 allows a top-heavy 401(k) plan that covers otherwise excludable employees (employees who have not attained age 21 or worked a year of service) to perform a separate top-heavy test for excludable and non-excludable employees. Section 310 is effective for plan years beginning after December 31, 2023.
Employee Benefit Plan Audit:
DOL audit requirements: The Department of Labor (DOL) has made some changes to the financial statement audit requirement for retirement plans. Starting from the calendar year 2023, the reporting requirements for your 401(k) plan participant count will be based upon the number of participants who have account balances in the 401(k) plan and not just on “eligible” employees. If your plan has fewer than 100 participants, you are not required to undergo an audit, and you can take advantage of the simplified Form 5500 and Form 5500-SF (short form) reporting. If your plan has more than 100 eligible participants with a balance as of the first day of the plan year, including terminated participants with a balance remaining in the plan, it must undergo an annual audit. However, if your plan has 80-120 eligible participants, trustee-directed plans, or plans experiencing a change in status during the year, additional rules exist.
Schedule a call today with a professional accountant: Our team of specialized professional accountants can help you navigate these new tax and retirement provisions of the Secure 2.0 Act. At EC Barrett, LLC, we understand the challenges plan sponsors face and will work with you to protect the plan’s integrity. We pride ourselves on providing personalized and cost-effective service to each of our clients. Our team of tax experts will work with you to understand your unique financial situation and help you make the most of the new tax provisions. Our experienced team will help you determine if your Plan is required to undergo a financial statement 401(k) audit. We are highly knowledgeable in audits of defined contribution plans (401k and profit-sharing plans), defined benefit plans (pension plans), employee stock ownership plans, and 403(b) tax-sheltered annuity plans offered to employees of educational institutions. EC Barrett, LLC maintains its membership with the AICPA’s Employee Benefit Audit Quality Center to ensure our audits are in compliance with the rules and regulations of the DOL.
Contact us today to schedule a free consultation with one of our experienced accountants.
*Please note that this is not a complete list of all the provisions of the SECURE Act 2.0.
If you have any further questions, please let us know!
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