Congress recently passed the SECURE 2.0 Act, which allows businesses of any size to establish secure retirement savings plans for both their employees and themselves.
With greater flexibility in managing retirement accounts, small business owners can take advantage of these changes to benefit their financial stability. In this article, we'll delve into what the SECURE 2.0 Act means for small businesses, exploring the improvements it brings and how to take advantage of them.
What is the SECURE 2.0 Act?
In 2019, Congress passed the initial SECURE (Setting Every Community Up for Retirement Enhancement) Act which revised rules around retirement saving, including age limits for contributions and raising the age for RMDs (required minimum distributions). In late December 2022, Congress expanded on the initial revisions by passing SECURE 2.0 Act, which added additional provisions – this new bill offers businesses of all sizes the ability to set up secure retirement savings plans for their employees and themselves.
Important Provisions Business Owners Should Know
The SECURE 2.0 Act increases contribution limits, allows for tax credits to offset costs, and eliminates age restrictions – making it easier than ever for small business owners to provide secure retirement plans to both themselves and their employees. Additionally, the new legislation encourages long-term investing, which can lead to greater returns over time.
By taking advantage of these changes, small business owners can ensure they have a secure future ahead of them as well as provide necessary retirement benefits for their employees. Some of the provisions of the act went into effect immediately, but there are some that will roll out over the next 2-10 years. We’ve noted key dates below.
Increased Contribution Limits
The "annual contribution limit" governs the amount of money one can contribute to a 401(k) plan. As of 2023, the limit is $22,500 for individuals under 50 and $30,000 for those aged 50 and above. Employers may also provide matching funds to incentivize employee participation.
However, the total contributions made to the 401(k) plan by an employee and employer cannot exceed $66,000 unless the employee is 50 or older. In 2023, new catch-up contribution limits raised this amount to $73,500. The funds contributed to the 401(k) plan are invested in predetermined options and grow tax-deferred, meaning the earnings are not taxed until withdrawal.
Improved Catch-up Contributions
The SECURE 2.0 Act has brought significant changes to catch-up contributions, which are an essential part of retirement savings plans for those aged 50 and over. This new set of rules allows employees to make larger contributions to their retirement accounts, providing them with a greater opportunity to save for retirement.
Under the SECURE 2.0 Act, employees can now make catch-up contributions of up to $7,500 per year in their 401(k), 403(b), and governmental 457(b) plans. Additionally, starting in 2025, the bill adds an additional benefit for workers 60-63. They can contribute up to $10,000 or 150% of the standard catch-up limit. Whichever is the greater amount.
In addition, workers over 50 can add up to $7,500 to their IRA, which is $1,000 more than the standard contribution limit for those under 50. The new bill has added provisions to increase both 401(k) and IRA catch-ups as the cost of living increases.
The SECURE 2.0 Act has made catch-up contributions a more viable option for employees, as people are working later and pensions and social security are no longer providing them with greater opportunities to save for retirement, even as they are closer to retirement age.
Changes to RMDs (Required Minimum Distributions)
One of the most wide-reaching changes of the SECURE 2.0 Act is the change to required minimum distribution ages. These RMDs require people to take money out of their pre-tax retirement accounts in order to ensure that they pay income tax on the distributions. Currently, RMDs go into effect when a person turns 72.
The SECURE 2.0 Act includes provisions to increase that age requirement gradually between 2023 and 2034. Between 2023 and 2030, if you turn 73, your RMD is 73. After 2030, if you turn 74 before 2033, your RMD starts when you reach 74, and if you turn 74 after 2034, your RMD starts when you reach 75.
401(k) Auto-enrollment
One of the key changes is the expansion of auto-enrollment for 401(k)s. Under SECURE 2.0 Act, employers now have more flexibility when it comes to setting up auto-enrollment plans and can choose to automatically enroll their employees at a rate as low as 10%. This makes it easier than ever before for small business owners to offer secure retirement savings plans without needing to manually sign each employee up or worrying about them forgetting to opt-in.
Additionally, the new bill allows employers to match contributions dollar-for-dollar up to 5% of an employee’s salary – further encouraging involvement in secure savings plans by providing an added incentive. This is good news because 401(k)s are a great way to increase employee retention and help increase employee financial health. These changes go into effect in 2025, but some 401(k) plan administrators, like Penelope, already offer automatic enrollment benefits.
Financial Incentives for Employee Participation in 401(k) Plans
Starting in 2023, employers are now able to offer small financial incentives (like gift cards) to encourage employee participation. This can lead to increased financial wellness across your employees.
401(k) Hardship Withdrawals and Emergency Funds
Typically, if an individual chooses to withdraw money from their pre-tax accounts, they must pay a 10% penalty. This encourages people to use their 401(k)s for their intended purpose: retirement savings.
However, with SECURE 2.0 Act, individuals will now be able to withdraw up to $1,000 without penalty to cover hardship emergencies. Employers also have the option to offer automatic enrollment emergency savings accounts that employees who contribute 3% or less. This emergency account is capped at $2,500, but the benefit is that it encourages employees to contribute to their retirement who might otherwise decline to participate due to concerns about having enough emergency funds. This is another great way for employers to help their employees improve their overall financial health and morale by allowing them to save for retirement and emergencies.
SECURE 2.0 Act Tax Credits for Employers
The SECURE 2.0 Act has simplified the process for small business owners to ensure their financial stability through the provision of tax credits. The act offers tax credits to business owners with fewer than 100 employees who set up a 401(k) plan for the first time to encourage business owners to offer retirement plans and help offset the associated eligible start-up costs.
This has removed the need for employers to worry about potential losses due to upfront costs, enabling them to concentrate on providing secure benefits for their employees and securing their company's future. For businesses with fewer than 50 employees, these credits can make starting a retirement plan essentially free.
The tax credits include 100% of eligible start-up costs for businesses with 1-50 employees and 50% of eligible start-up costs for businesses with 51-100 employees. Both credits are capped at $5,000. Businesses that sign up for a plan that includes auto-enrollment are eligible for an additional $500 credit. Employers can also receive up to $1,000 in tax credits for their employer contributions. Additionally, the tax credits can be applied for three consecutive years, providing employers with sufficient time to secure the financial futures of themselves and their employees without the burden of a significant lump-sum expense. This means that employers can get up to $16,500 in tax credits for starting a new plan.
Benefits of the SECURE 2.0 Act for Small Business Owners
The SECURE 2.0 Act is an important piece of legislation that provides small business owners with a number of tools and incentives to secure the financial futures of themselves and their employees. By offering emergency funds, 401(k) hardship withdrawals, tax credits for employers, and catch-up contributions as part of their retirement savings plan, small business owners can now take advantage of these features to ensure secure retirement plans for their employees.
Take Advantage of the SECURE 2.0 Act for Your Business
With SECURE 2.0 Act in place, it's now easier than ever for small business owners to provide retirement plans to their employees and plan for their own financial future.
With the right plan and partner, businesses can benefit from improved employee engagement and loyalty while helping them build their retirement savings. Get started today with a free, no-obligation consultation with a 401(k) retirement specialist.
Penelope Team
Mia Taylor