American workers are set to be the key beneficiaries of the ongoing transformation of retirement savings plans, with small businesses playing a bigger role to make this a reality. On Tuesday, March 29, 2022, the House of Representatives turned up in a big way to pass the Securing A Strong Retirement Act of 2022 (SECURE 2.0) by a vote of 414 – 5.
The new legislation rides on a previous retirement legislation, The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), boosting all workers, including those working in small businesses, to live a secure retirement future. Among the key changes the bill will actualize are expanding retirement saving plans offered by small and large businesses and broadening the automatic enrollment.
The Senate, which is making the next move toward passing the bill, has unveiled the Retirement Security and Savings Act, which has the same features as those in SECURE 2.0. Workers can rest assured that both the House and Senate will work together with the future of the American worker at the forefront.
Some of the over 50 highlighted provisions under SECURE 2.0 that small business owners and plan administrators should watch out for include:
1. Expansion of Automatic Enrollment
Small businesses offering 401(k), 403(b), and SIMPLE plans are required to automatically enroll their employees. The enrollment starts with a contribution rate of 3% of employees’ pay, which will gradually increase by 1% every year until it reaches no more than 10%. Employees are also free to no longer participate in the plan. Those exempted from the rule include businesses hiring 10 or fewer employees, new businesses that have been running for less than three years, churches, and government plans.
2. Extension of Saver’s Credit
Small businesses would receive tax credits of up to $1,000 per employee to minimize startup costs for contributions made on behalf of the employee. Further, the tax credit will be increased from 50% to 100% to cover up to 100 employees from the previous 50 employee limit for small business startups. The allocations would be as follows: 100% in years 1 and 2, 75% in year 3, 50% in year 4, and finally 25% in year 5.
3. Incentivizing for More Plan Participation
The plan would allow employers to offer employees financial incentives such as small gift cards to encourage participation in 401(k) and 403(b) plans.
4. Allow Student Loan Payments to Qualify as Elective Deferrals
The SECURE ACT 2.0 will allow the employer to make contributions to match the qualified student loan payments for their employees.
5. Ease the Process to Enroll Military Spouses Into Employer Retirement Plans
Small businesses would claim tax credit per employee in exchange for; i) making it possible for military spouses to be eligible for plan participation within two months of employment, ii) ensuring they are eligible for matching or nonelective contributions, and iii) making sure 100% of military spouses are vested in all employer contributions. The tax credit would be $250 for every military spouse and 100% of employer contributions for the military spouse up to $250 each year.
6. Raising the Required Minimum Distributions Age
Under the SECURE Act, the retirement withdrawals by workers were delayed by two years from age 70 to 72. With the new provisions, this will further push them back up to age 73 starting in 2022, 74 by January 1, 2030, and 75 by January 1, 2033, which gives workers a long time to save more.
9. Reduced Eligibility Requirement for Part-Time Workers
The new proposal modifies the SECURE Act, where long-term, part-time workers are allowed by employers to defer to their 401k plans provided they’ve worked for three consecutive years with at least 500 hours of service annually. Now the three-year limit will decrease to two.
10. Securing Retirement Savings
Through the Act, a national online lost and found database will be set up for retirement savings. This will assist individuals to trace and receive their benefits lost due to a business changing names or merging with other organizations.
11. Lowered Penalty for Not Taking Minimum Distributions
The plan will reduce the excise tax from 50% to 25% for those who don’t take their minimum distributions. The tax will be reduced to 10% if there is a timely correction of the failure.
12. Amendment of the Employee Plans Compliance Resolution System (EPCRS)
The Act will permit plans to be put in place to enable the EPCRS to make self-corrections to errors made in the system, including IRA errors.
The above key provisions are aimed to expand the coverage, encourage and preserve retirement savings for all workers and help small business owners offset the cost of administering retirement plans.
What Next for Small Business Owners?
It now remains to be seen if the Senate adopts the House bill or enacts their own; either way, the expectation is that it will get many Americans to save more.
In addition, it will make it easy for employers to navigate the retirement rules, such as more time for employers to amend beneficial discretionary retirement plans and modernizing family attribution rules, which hugely affect small businesses and women business owners.
The upside is that the Act is designed to recognize the impact employers have over their employees’ retirement savings, more so small business owners, who may be limited compared to larger organizations.
This can be seen in how the plan capitalizes on aspects such as integrating 403(b) plans under PEP, including increased tax credits to make it cost-effective to manage 401k plans.
If you need help finding which plan makes sense for your company, schedule a plan discussion with us
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President