Fewer than half of Americans have retirement accounts, according to the US Census Bureau. Even among those who are close to traditional retirement age, the number of retirement accounts is still below 60%. With expanding lifespans and Social Security benefits in a forever-tenuous state, there have been heightened concerns around people’s ability to carve out a comfortable retirement for themselves. Relying on Social Security for all of your financial needs can prove to be a mistake; the average yearly benefit is just over $21,000. However, the average retiree household spends roughly $50,000 annually.
Legislators are turning to the private sector to help boost Americans’ savings, and are betting that access to retirement plans can help turn things around. The spotlight is especially focused on small businesses. While roughly half of Americans are employed by small businesses, only one-third of these employers offer retirement savings plans. There are a variety of reasons for this, but a lack of affordability is the one cited most frequently by small business owners.
That’s where the SECURE 2.0 Act comes in. The legislation is arguably the biggest enhancement to Americans’ retirement savings that has ever been passed. 2.0 builds on the original SECURE Act (Setting Every Community Up for Retirement Enhancement) from 2019. Though passed in 2022, SECURE 2.0 has a multi-year rollout; many important changes happen in 2024 and 2025. While not specific to small businesses, 2.0 has several implications for that cohort of the private sector.
Tax credits for operations, contributions, and employee enrollment
SECURE 2.0 covers 100% of retirement plan startup and administrative costs for businesses between one and 50 employees. Larger businesses are eligible to receive up to 50% of costs covered.
Employers who choose to make contributions to a new defined contribution plan are eligible for tax credits, depending on the number of eligible employees and how new the plan is. Small businesses with fewer than 50 employees can receive up to $1,000 per year per employee earning less than $100,000.
Businesses also get a tax credit for setting up auto-enrollment for their employees if they do so before 2025 (when it becomes a requirement).
401(k) flexibility
As of this year, employers that don’t have retirement plans in place now have access to a Starter 401(k), which is essentially a more streamlined version of a regular 401(k). Employers are required to auto-enroll their employees but don’t contribute to these plans themselves; employee contributions are capped at $6,000 (at least, for 2024). There is less IRS scrutiny for a Starter 401(k), as the plan isn’t subject to non-discrimination testing.
Importantly, 2.0 requires businesses to allow part-time employees who have worked over 500 hours for three consecutive years to participate in 401(k) plans. In 2025, the requirement will change to two consecutive years.
Pooled Employer Plans
While Multi-Employer Plans (MEPs) have been around for decades, The SECURE Act took things a step further and created Pooled Employer Plans (PEPs). PEPs make it easier for small businesses to give their employees access to retirement plans by allowing multiple, unrelated employers to pool together to offer a retirement plan. Administrative costs and risks are shared across all of the employers that create the plan. SECURE 2.0 loosened rules further; 403(b) plans can now participate in PEPs.
Additional changes
SECURE 2.0 made over 100 changes to the original SECURE Act. In addition to the ones listed above, other notable changes include:
- Catch-up contributions: Higher retirement catch-up contributions allowed for older employees.
- Penalty-free withdrawals: Starting this year, employees can withdraw up to $1,000 per year without the traditional 10% early distribution penalty, as long as the money is used for certain emergency expenses.
- Emergency savings accounts: Also in 2024, retirement plans can be linked to emergency savings accounts that allow lower-paid employees to make after-tax contributions.
While it’s a complex piece of legislation that will take some time to comply with, it’s clear that SECURE 2.0 is intended to lower the barriers that small businesses face when it comes to offering retirement accounts. Owners understand the benefits of offering such plans; nearly half link retirement plans to employee retention. They’re spot on with this observation – 89% of employees say they’d be more invested in remaining at their company if their employers provided financial benefits that met their needs. A majority of employees rank retirement planning benefits as high priority.
Awareness of SECURE 2.0 remains a problem; only 57% of business owners and 9% of employees are familiar with the legislation. Those numbers are skewed towards owners with more than 50 employees, meaning that the smallest businesses are far less aware of the new provisions. Ideally, the federal government will continue to educate owners about the benefits of 2.0, as well as compliance rules.
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