Americans are 12 to 15 times more likely to save for retirement if they have access to a retirement savings plan at work.
Yet more than 40% of full-time private-sector workers say they lack access to an employer-provided retirement savings plan. This particularly affects lower-income workers, and especially Blacks and Hispanics.
The SECURE 2.0 Act of 2022 aimed to change this picture by expanding retirement plan coverage, increasing retirement plan savings, and simplifying and clarifying plan rules.
Several provisions facilitate access and participation in employer-provided plans.
According to the Senate Finance Committee, automatic enrollment in 401(k) plans significantly increases participation, particularly among Black, Latinx, and lower-wage employees.
Effective for plan years on and after Jan. 1, 2024, most new 401(k) and 403(b) plans established after the effective date must include automatic enrollment.
The initial automatic deferral amount must be at least 3%, but not more than 10%, of compensation. Effective the first day of each plan year following the initial year of enrollment, deferrals must automatically increase by at least 1% of compensation, up to a maximum of at least 10%, but no more than 15%, for most plans.
This automatic escalation clause initially caps at 10% for plans with certain safe harbor contributions and qualified automatic enrollment provisions. Plans must also allow permissible withdrawals up to 90 days after the first automatic deferral, but only if participants elect to opt-out of automatic enrollment within a reasonable time.
Small Employer Tax Credit
Nearly half of all Americans work for small businesses, but only about 30% of small businesses offer retirement plans, primarily due to costs of establishing and maintaining them.
SECURE 2.0 increases the startup credit from 50% to 100% for employers with up to 50 employees. The $5,000 cap remains.
The new credit also offsets up to $1,000 of employer contributions per employee in the first year, phased down gradually over five years, though not for employees making more than $100,000 (indexed for inflation). The small employer tax credit increase was effective Jan. 1, 2023.
More than a dozen state laws require private-sector employers that do not sponsor retirement plans to automatically enroll employees in individual retirement accounts through a state-sponsored program.
Effective for plan years on and after Dec. 31, 2023, SECURE 2.0 permits employers to implement a starter 401(k) or 403(b) plan. The starter plan provision would allow employers in states that require auto-IRAs to satisfy the auto-IRA requirement via a private-sector 401(k) or 403(b) plan.
Starter plans are deferral-only safe harbor plans that permit employees to contribute up to $6,000 per year—with a $1,000 catch-up contribution—without the administrative burden or expense of traditional 401(k) or 403(b) plans. For example, starter plans do not require employer contributions or certain testing.
The IRA contribution limit is $6,500 and indexed annually for inflation. Under SECURE 2.0, the starter plan limits are not indexed, but might be revised for consistency.
Starter plans, coupled with the small employer tax credit, are estimated to produce a 22% increase in Black and Hispanic American worker access to retirement plans.
Small Immediate Financial Incentives
For plan years beginning on and after Dec. 29, 2022, employers can now offer “de minimis financial incentives,” such as gift cards or t-shirts, in connection with an employee’s participation in a 403(b) or 401(k) plan.
Student Loan Payments
In 2018, the Internal Revenue Service approved a proposed amendment to Abbott Laboratories’ 401(k) plan to allow a matching contribution based on student debt repayments rather than employee deferrals to the plan. Employers have relied on the PLR to justify a similar plan design.
SECURE 2.0 codifies the PLR, and, for plan years beginning on and after Jan. 1, 2024, employers may match qualified student loan payments as if the QSLPs were elective deferrals.
Matching contributions must be made at the same rate and with the same vesting and eligibility requirements as matching contributions on elective deferrals, and can be used to satisfy safe-harbor matching requirements. Employers can rely on employees’ annual self-certification that the QSLPs have been made.
This is an optional provision that plan sponsors can implement in 401(k), 403(b), governmental 457(b), and SIMPLE IRA plans for plan years beginning on and after Jan. 1, 2024. The IRS will issue implementing regulations and a model plan amendment for those plans wishing to adopt.
Part-Time, Long-Term Coverage
For plan years beginning after Dec. 31, 2024, employees who perform at least 500 hours of service during two consecutive 12-month periods must be eligible to participate for purposes of deferrals. Service before 2023 is disregarded.
An employee who becomes eligible to participate under the part-time eligibility rule must be credited with a year of vesting service for each 12-month period in which the employee completes 500 hours of service.
The SECURE 2.0 rule does not apply to employees covered by a collective bargaining agreement, nonresident aliens who receive no earned income, or certain students. It applies to ERISA-covered 403(b) plans, as well as 401(k) plans. Both rules are mandatory.
SECURE 2.0’s rule is not effective until plan years beginning on or after Jan. 1, 2025, but the Original SECURE Act rule still kicks in for plan years beginning on or after Jan. 1, 2024.
Therefore, part-time employees may become eligible under a plan due to the original three-year rule in the 2024 plan year and under SECURE 2.0’s two-year rule in the 2025 plan year.
Employers should start counting hours on the date an employee’s employment commenced. If the employee does not complete the required hours of service during the initial 12-month period of employment, employers can then use the first day of the plan year for hours counting purposes going forward.
SECURE 2.0 is one of the most significant pension reform bills in recent history. It offers incentives for employers, especially small to mid-size employers without a current retirement plan in place, to establish and maintain retirement plans.
Taking advantage of the law’s incentives could benefit employees and help with recruitment, retention, and overall morale.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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Tia L. Martarella is of counsel at Jackson Lewis, where she focuses on all areas of employee benefits law.