To help stem the tide of a concerning retirement savings crisis, Congress in 2019 passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which gave tax credits to employers who established retirement plans and provided employees with an avenue to save for retirement.
With an overwhelming bipartisan majority, the US House of Representatives recently passed a bill entitled Securing a Strong Retirement Act of 2022, commonly referred to as SECURE Act 2.0, designed to augment efforts of the original legislation. While the SECURE Act 2.0 has yet to become law and requires consideration by the US Senate, its powerful appeal in the US House of Representatives is a strong indicator of continued success as it passes through the legislative process.
As is the case with myriad employment-related rules and regulations, it behooves CEOs and leaders to get ahead of the curve and stay abreast of the possible implications related to the SECURE Act 2.0, especially given the tight timeline. Following are six key components of the bill that business leaders should keep top of mind.
1. Proactive Approach
There is no question that concerns about employees failing to take greater responsibility for their retirement savings have reached a fever pitch, which has caused officials to take a proactive approach. The government realized that people require a serious wake-up call and have sounded the alarm about the importance of employees investing when they are young and understanding the power of compound interest. Because there is a finite number of years to build a nest egg that enables people to maintain a similar lifestyle during retirement, workers who delay or forgo 401(k) plans will be sorely disappointed if they have to rely on Social Security.
Solid action by lawmakers via both SECURE Acts and the support of CEOs and business leaders will help to right the ship for a financially secure and fulfilling retirement. In fact, projections indicate at least a 10 percent increase in overall employee participation if the bill becomes law, which helps move the needle in a positive direction to advance retirement savings initiatives.
2. Better Employer Incentives
The SECURE Act 2.0 provides significant incentives for businesses that establish new retirement plans, including the doubling of tax credits and increasing the number of employees so more companies can qualify. For businesses with fewer than 50 employees, the current tax credit is equal to 50 percent of administrative costs, with an annual cap of $5,000, for three years. However, the SECURE Act 2.0 would increase this to 100 percent for companies with up to 50 employees.
It also creates a new credit that allows smaller employers to offset what they contribute to the plan, up to $1,000 per participant. This additional credit is available in full to employers with 50 or fewer employees, and a partial credit is available for employers with 51 to 100 employees. Penalties for some reporting mistakes will also be decreased, helping businesses avoid a negative impact on the bottom line.
2. Broad Generational Appeal
Today’s workforce is more diverse than ever before, with at least four generations collaborating in offices and remote environments throughout the country. With employees at different stages on their path to retirement, the SECURE Act 2.0 was designed to address the various groups reflected in the workforce. Because older employees are choosing to remain in the workforce longer, the bill raises the age for required minimum distributions from 72 to 75, based on a phased approach. Catchup contributions for employees aged 62 to 64 would be increased to $10,000 starting in 2024. However, beginning in 2023, all catchup contributions—affecting everyone age 50 and older—would have to be made to Roth accounts, allowing the money to be taxed sooner. The benefit of Roth accounts is that distributions are tax-free.
There is also relief in the bill for younger employees saddled with enormous student loan debt. The bill provides the statutory basis for employers to match contributions toward student loan payments, even if employees are not making retirement plan contributions. The SECURE Act 2.0 also addresses the influx of more long-term, part-time workers, those with at least 500 hours of service a year, by reducing the eligibility period for participating in a retirement plan from three consecutive years to two years, which is effective in 2023. With a broad generational appeal, retirement plans will effectively make a difference for all segments of the workforce.
3. Mandatory Enrollment and Escalations
The SECURE Act 2.0 simplifies saving for employees by requiring employers who establish new plans to automatically enroll new hires at a pretax contribution level of 3 percent of their pay. The levels would escalate 1 percent annually up to at least 10 percent; however, they cannot exceed 15 percent of pay.
Although employees have the option to opt-out of the program in theory, it is simpler to remain enrolled, which can lead to increased financial security—an “out of sight, out of mind” approach. With an automatic payroll deduction, employees do not feel the impact as much because the money was not available to them for other purposes in the first place. There are some exceptions, including for small businesses with 10 or fewer employees. Also, previously established plans are grandfathered in, so there is no mandatory enrollment requirement.
4. Preferred Employers
The SECURE Act 2.0 serves as a stark reminder that businesses offering retirement plans have a competitive advantage in the workplace and may become preferred employers. Their ability to attract and retain top performers not only helps solidify their talent pipeline, but it also boosts the culture with satisfied workers who are highly engaged. Companies with 401(k) plans stand out in the crowd by demonstrating their commitment to helping employees become more financially responsible with a secure future. As the timeline becomes shorter, businesses without retirement plans should make a strategic decision to enhance their employee value proposition with a 401(k) as they compete for talent.
5. Administrative Details
While there is less impact to the structure of existing retirement plans than there are to new plans, employers should take an inventory of all business units that will need to be notified, along with any communication materials that should be quickly updated if/when the law goes into effect. For example, language about catchup contributions should be revised so that employees remain properly informed, and payroll processing (internal or external providers) should be advised to ensure accurate deductions and the addition of eligible long-term, part-time workers. With advance planning and notices, businesses will experience fewer frustrations and a more streamlined process.
6. Appropriate Assistance
Many larger companies have in-house HR professionals or use the services of a comprehensive HR provider that handles HR administration and payroll processing, employee benefits, retirement services, and more. However, a word to the wise for companies planning to establish a retirement plan without the expertise of professionals: It is complicated and overwhelming and it’s wise to look into having proper support. New laws such as SECURE 2.0 demonstrate the advantages of professionals who can help you understand how to navigate an ever-changing 401(k) landscape while staying compliant and keeping employees engaged. While providers such as banks, attorneys, accountants, insurance brokers, and investment advisors may suffice, it may be more efficient and cost-effective to enlist an HR provider that handles investment selection, fiduciary liability, and payroll integration.
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It is looking likely that the 2.0 enhancements to the SECURE Act could be passed into law soon. Smart CEOs and HR leaders will stay abreast of this and related developments to understand the potential impact on their business and their employees.