The House of Representatives passed HR 2954—Securing a Strong Retirement Act—referred to as Secure 2.0, intending to help Americans save for their retirement. The Senate will now consider similar legislation, and Congress will later reconcile any differences in the two versions. This legislation would build on the changes made in the Secure Act of 2019.
A hallmark provision of the 2019 law made it easier for small businesses to set up “safe harbor” retirement plans. This change allowed smaller employers to avoid the burden of burdensome nondiscrimination testing for their 401(k) accounts. Those tests measure the savings participation rates of highly compensated employees compared to employees not in the highly paid group. The two groups can’t exhibit a substantial difference in contribution rates for the plans to qualify. Another test compares the fund assets of key employees to others. These tests are conducted annually, and if the program misses any benchmarks, it can result in the need for costly corrective actions or ineligibility of the plan.
Safe harbor plans are allowed to skip the annual nondiscrimination testing in exchange for the company making contributions to each employee’s account and having those contributions vested immediately. The employer can choose from several structural options for the matching of contributions. Your Taylor Benefits Insurance consultant can walk you through the right plan for your company. Here are some illustrations:
The new legislation would change the QACA option so that the annual increases in worker contribution levels would continue until the employee was deferring ten percent of their pay to the account (unless they opt out or choose a different contribution amount.) The law provides exceptions for the smallest employers and those with very new plans.
Secure 2.0 (as passed by the House) also increases the allowable catch-up contributions employees can make if they are nearing retirement age to $10,000 from the current $6,500 limit. However, starting in 2023, the catch-up contributions will be made on a Roth basis, meaning they will be taxed at the participant’s present tax rates but withdrawn tax-free after retirement. It will also delay the age for required minimum distributions (when individuals must take withdrawals from their accounts). Currently, the age is 72, and the new threshold will be 73 this year, rising to 74 in 2029 and 75 in 2032.
Employers often hear that their employees can’t afford to contribute even minimal amounts of their pay to retirement accounts until they finish paying their student loans off. Secure Act 2.0 addresses that concern by allowing employees to make contributions directed to their student loan debt but are still eligible for employer matching. This option could be pretty attractive to younger workers, who may also be intrigued by choosing that a portion or the entirety of their employer match be applied to a Roth 401(k) rather than a traditional account, trading the tax deferral for future value in retirement withdrawal.
The original Secure Act included a mandate that companies include long-term part-time employees in their eligible population for the first time. The workers would have to be employed for three consecutive years and record 500 hours each year to earn admission. Secure 2.0 shortens the eligibility requirement to two years, meaning that the first group could join their employer’s plans beginning in 2023.
Even with safe harbor provisions, some small companies lacked the resources to establish and administer a 401(k) plan for their employees. The Secure Act allowed unrelated businesses to pool their assets in a group plan managed by an external plan administrator, potentially adding a popular recruiting perk to their benefits package. Secure 2.0 extends this provision to nonprofit organizations.
Also, the legislation increases the tax credit for small businesses that offer new 401(k) plans to their employees. The currently eligible 50 percent of administrative costs will rise to 100 percent for the first two years and phase out in the third and fourth years. The size of the company eligible will also double, to as many as 100 workers. Finally, it eliminates penalties for employers who make inadvertent mistakes when setting up and administering their plans.
For small businesses and their employees, options allowing greater access to retirement savings are employee benefits worth exploring. Talk to your Taylor Benefits Insurance representative about the changes that make these possibilities more accessible.
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