Understanding, and managing, the 90+ new provisions is no small task
by Lance Schoening
Mr. Schoening is Director of Policy at Principal Financial Group. Visit www.principal.com.When the SECURE 2.0 Act of 2022 (SECURE 2.0) passed in the Omnibus Bill on December 23, there was an instant celebration across the retirement industry. And for good reason, given the anticipated benefits it offers to help working Americans establish a more secure retirement.
Plus, it’s not often we witness Congress advance two major pieces of legislation focused on the same issue just a few years apart.
However, once the calendar turned to 2023, all the enthusiasm naturally started to transition to questions, including what are the most immediate changes that took effect and how to approach entirely new requirements. Recordkeepers, plan sponsors and financial professionals all began to take stock of what this new law would mean to the future of retirement, analyzing the technical details and plan design considerations for the full swatch of provisions. No small task considering SECURE 2.0 is even larger than the SECURE Act of 2019 with more than 90 provisions affecting our retirement system.
As I’ve been working with colleagues and industry advocates to navigate the changes, several provisions have stood out as being critical to the evolution of workplace retirement plans.
Automatic Enrollment & Automatic Escalation
Automated features are becoming best practice for plan design, and SECURE 2.0 has set a requirement that most new 401(k) and 403(b) plans started on or after enactment of SECURE 2.0 implement automatic enrollment and automatic escalation by January 1, 2025.
The most direct benefit to automated plan features might be their effectiveness in helping enroll workers in retirement plans earlier in their careers. Our studies show that workers can experience positive savings momentum once they are in a retirement plan supported by automated features. In fact, according to surveys we have conducted, 81% of participants in plans serviced by Principal indicated auto-enrollment helped them start saving sooner for retirement[1] and, significantly, 90% of participants stay in the plan once they have been automatically enrolled.[2]
Key elements of this provision when designing the contribution plan are the minimums and maximums. The default automatic contribution rate for new plans must meet the requirement for eligible automatic contribution arrangement (EACA) and be at least 3%, but not more than 10%, while the automatic contribution increase is 1% per year up to a contribution cap of at least 10% until 2025 when the automatic contribution increase cap will move up to 15%. For safe harbor plans, the cap on permissible automatic contribution increase is 15%.
Participants must have the option to opt-out of the automatic increase at any point.
Student Loan Repayment Match
Employers concerned with the burden student load debt could have on their employees’ ability to save for retirement can treat student loan payments as elected deferrals. By doing so, the employer can then make a matching contribution to the defined contribution plan on the employee’s behalf.
This new feature, available in plan years starting in 2024, is significant on multiple fronts. The employee may no longer be conflicted between contributing to an employer-sponsored retirement plan or paying down student loan debt. This absolutely reduces an enrollment barrier for employees, helping them save earlier in their working years, and could be a competitive advantage for employers to recruit and retain talent.
Startup Plan Support to Small Businesses
In 2021, 99.9% of U.S. businesses were classified as small businesses, making it necessary to ensure employers of all sizes and types have the ability to offer comprehensive and equitable benefits programs. Two provisions in SECURE 2.0 that are effective immediately were geared to encourage and incent small businesses with 50 or fewer employees to start retirement plans for the first time.
A new enhancement was made to the tax credits intended to help cover the costs for small employers that choose to offer new defined contribution plans. Small employers with 50 or fewer employees can now count 100% of their qualified plan expenses toward the tax credit calculation (up to $5,000 per year), allowing more employers the ability to maximize the tax credit.[3] Additionally, there is a new credit that would offset as much as $1,000 of employer contributions for each participant in their first two years (phasing out over next three years). Small employers with 51 to 100 employees could also benefit from this new credit, but at a reduced rate based on total employees in excess of 50.
These changes collectively could help broaden coverage, increase retirement savings for employees who would otherwise not have had access, and further encourage small businesses with 100 or less employees to make employer contributions as part of their start-up retirement plan design.
Long-Term, Part-Time Eligibility
Another provision intended to provide more Americans with access to a retirement savings plan is the one stipulating eligibility for long-term, part-time employees. SECURE 2.0 reduced the three-consecutive-year eligibility rule for employees with 500 service hours down to two consecutive years while maintaining the mandate for employees with at least 1,000 hours of service in one year period.
The change does not take effect until January 1, 2025, meaning the two-consecutive-year requirement begins with employees who first achieve 500-plus hours in 2023. The three-year rule remains valid for employees who first achieved 500-plus hours in 2021 or 2022. Automatic enrollment, matching contributions, and testing are not required for qualifying employees but employers must inform them when they become eligible to enroll in either a 401(k) or 403(b) plan.
Catch-Up Limits Increased
The increased thresholds for catch-up contributions provided by SECURE 2.0 is a great thing for older workers who may have both the need and the capability to accelerate savings and build income for life in retirement. Being able to save more on a pre-tax basis puts more money to work, compounding and growing at a tax deferred rate.
The higher thresholds – $10,000 for all plans except SIMPLE plans, which will be $5,000 when this provision takes effect January 1, 2025 – applies only for individuals in the 60- to 63-year-old age band. The catch-up contribution amount could be higher if 150% of the indexed catch-up limit for taxable years after 2024 is more than the IRS stated indexed amount.
Additionally, any employer offering catch-up contributions in their plans must support Roth catch-up contributions on or before January 1, 2024. This is especially important for participants who make $145,000 or more per year since they will only be allowed to make catch-up contributions as Roth contributions.
MEP & PEP Options
Multiple provisions were included in SECURE 2.0 to increase the use of Multiple Employer Plans (MEP) and Pooled Employer Plans (PEP) as a means to both expand access to retirement plans and lessen administrative burdens that may make offering retirement plans difficult.
- Immediately at the start of 2023, 403(b) plans gained the ability to participate in MEPs and PEPs.
- Extending a provision from the SECURE Act of 2019, any small employer joining a MEP or PEP will be eligible for the three-year start-up tax credit (retroactive for taxable years beginning in 2020), regardless of how many years the MEP or PEP have been in existence.
Employer Contributions Treated as Roth
Retirement savers are becoming more sophisticated and, sometimes with the support of a financial professional, may be looking for additional tax strategies to diversify their income in retirement. SECURE 2.0 gives plan sponsors the ability to allow vested employees to receive employer matching and non-elective contributions on a Roth basis.
Be mindful, though. Even though this provision went into effect on December 30, there appears to be an error in the final language relating to taxation of the contributions. Plan sponsors with interest in this option should consider delaying adoption until further regulatory guidance is issued or a legislative fix is enacted into law.
Depending upon business type and employee count, there may be other provisions from SECURE 2.0 that have a more immediate or lasting effect. As noted, this was a massive piece of legislation that generally has something for every employer and employee that deserved the celebration it received. Therefore, the time and resources we are all now dedicating to digest and implement the new options and requirements should serve as a reminder of the significance SECURE 2.0 can have on the future of retirement in the United States to help build greater financial security.
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[1] Principal Retirement Security Survey (September 2022)
[2] Principal Retirement Income Solutions Data, March 2019
[3] Employers with 51-100 employees can utilize the tax credit under the SECURE Act of 2019, which is 50% of qualifying start-up costs for new employee retirement plan (maximum $5,000 per year)
