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SECURE Act 2.0 for Businesses

Building on the 2019 SECURE ACT, the 2022 Securing a Strong Retirement Act (commonly referred to as SECURE 2.0) was passed to help boost savings in workplace plans, extend support to small businesses that want to help employees prepare for retirement, and increase tax incentives for small businesses. Here are some of the corporate highlights.

TAX CREDITS RISE

SECURE 2.0 increases the startup credit to cover 100% (up from 50%) of administrative costs up to $5,000 for the first three years of plans established by employers with up to 50 employees. It also clarifies that small businesses joining a multiple employer plan (MEP) are eligible for the credit.

AUTO-ENROLLMENT EXPANDS

Beginning in 2025, 401(k) and 403(b) plans will be required to automatically enroll eligible participants, though employees may opt out of coverage. There is an exception for small businesses with ten or fewer employees and new companies less than three years old. The expansion of automatic enrollment will help more workers save for retirement, particularly younger, lower-paid workers.

STARTER PLANS AVAILABLE

Next year, employers who do not already offer retirement plans will be permitted to provide a starter 401(k) plan, or safe harbor 403(b) plan to employees who meet age and service requirements. Through the starter plans, the limit on annual deferrals would be the same as the IRA contribution limit, and employers may not make matching or nonelective contributions to starter plans.

PART-TIME WORKERS BENEFIT

Starting in 2025, employers will be required to allow part-time employees (workers with over 500 hours per year for two consecutive years) to participate in their retirement plan after two years of service. Employees with over 1,000 hours of service must be included after one year of service.

SECURE 2.0 also made numerous changes to how company retirement plans operate. You’ll need to understand how these changes will impact your business—especially if you want to include a retirement plan in your employee benefits package.

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ClientLine Short Bits – Secure Act 2.0 for Individuals

At the end of 2022, Congress passed a new round of laws aimed at creating a secure retirement for Americans. Here are some of the highlights.

RMD AGE INCREASES

Beginning in 2023, the age to start taking required minimum distributions (RMDs ) from qualified retirement plans increases from 72 to 73. Then, beginning in 2033, it will increase to 75. You have until April 1 of the year after attaining that age to take your first RMD.

Starting this year, the penalty for failing to take an RMD is reduced from 50% to 25%. If the mistake is corrected in a timely manner, the penalty is reduced to 10%.

INFLATION ADJUSTMENTS

Beginning in 2024, the IRA catch-up contribution amount for taxpayers over age 49 and qualified charitable distributions (QCD) will be indexed annually for inflation.

EXPANDING EXCEPTIONS

Starting in 2024, there will be no early withdrawal penalty on distributions of up to $1,000 per year if needed to meet emergency expenses. There are limitations to taking more than one distribution in a 3-year period.

Starting in 2026, distributions of up to $2,500 per year will be allowed to pay long-term care premiums. Also, there are new exceptions for distributions to domestic abuse and terminally ill individuals. Allowed withdrawals for natural disasters, public service workers, private sector firefighters, and correctional officers have been expanded.

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2020 Tax Changes

2020 has been a big year for tax law changes. The SECURE Act is the most significant retirement reform law in at least a decade. The CARES Act provided tax breaks designed to help ease the economic burden of the Coronavirus and related shutdowns. These are just a few of the many changes affecting individuals this year:

  • The SECURE Act raised the required minimum distribution requirement (RMD) for traditional IRAs from 70½ to 72 for anyone turning 72 in 2020 or later. Then, the CARES Act suspended RMDs for 2020 without penalty.
  • Traditional IRA owners can now continue to make contributions past the age of 70½.
  • If you were impacted financially by COVID you can take higher than normal distributions from your retirement account this year — up to $100,000 — without penalties. You have three years during which you can pay the income taxes on the distribution or repay the money to the plan. Plan loan repayments are also delayed for one year.
  • Early withdrawal penalties on IRAs and 401(k) distributions of up to $5,000 are also waived for households with a new baby, including adoptions. Income tax is still due.
  • Effective in 2020, non-spousal heirs can no longer stretch IRA distributions over their lifetimes. Instead, funds must be distributed within ten years of the original owners’ death. (Some exceptions apply.)
  • The CARES Act suspended the limit on deductions for cash donations by people who itemize (gifts to donor-advised funds and private nonoperating foundations are excluded). A new “above-the-line” deduction for cash donations of up to $300 is available for nonitemizers.

As we head into the final quarter of 2020, now’s the time to schedule a year-end tax review. Some of these tax opportunities expire at year-end.

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Business Security

In last month’s ClientLine, we highlighted some of the Setting Every Community Up for Retirement Enhancement (SECURE) Act’s new headlines for business owners. This month, we share some of the details for you:

GREATER ACCESS

For the first time, small businesses can join a pooled employer retirement plan with two or more unrelated employers. Part-time employees will have more access, too: those who worked at least 500 hours in three consecutive years are newly eligible for qualified plan participation, but they don’t factor into existing top-heavy requirements.

ENHANCEMENTS

Employers will see other reasons to start a plan. The startup tax credit for newly established plans increased significantly, from the former cap of $500 up to $5,000. Eligible 401(k), SIMPLE IRA and other qualified plans can take another $500 credit for three years for auto-enrolling new employees. The safe harbor for the automatic enrollment escalation cap rises from 10% to 15% of pay, while certain penalties for failing to file plan returns increase.

ANNUITY SAFE HARBOR

Plan sponsors will find more streamlined administrative and compliance requirements, while they also have a new annuity safe harbor, which will protect employers from liability if the annuity provider they choose meets certain standards involving state insurance licenses, audited financial statements and adequate reserves.

Employers should also be aware of a change that benefits individual participants: an increase in the age when required minimum distributions must begin, from 70 1/2 to 72. This change applies only to people who reach age 70 1/2 in 2020 or later. Employees older than age 72 may continue contributing to employer plans.

Talk to your tax professional to learn how these changes might affect your company’s tax situation.

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SECURE for Business

The SECURE Act also creates big changes for companies offering qualified retirement plans. Here are a few of them:

Easier Access

More small businesses are eligible to start a qualified retirement plan for employees, as the new law allows two or more unrelated employers to join a pooled employer plan. More parttime workers are eligible to make elective deferrals, depending on their length of tenure, and plan sponsors have a new safe harbor when offering annuities.

New Credits

Employers will also see higher tax credits for plan startup costs and up to a $500 credit for startup plans that include automatic enrollment in 401(k) plans and SIMPLE IRAs. The safe harbor for the automatic enrollment escalation cap rises from 10% to 15% of pay, while certain penalties for failing to file plan returns increase.

Talk to your tax and plan professionals to learn more.