What’s SECURE 2.0? How will it affect small business owners and their employees in 2023 and beyond? Read on to find out 5 key takeaways and your next steps.
It’s no secret that many Americans are falling short with their retirement savings. In fact, 48% of Americans 55+ have no retirement savings at all.
Most business owners say that they want to provide retirement plans. However, a recent study revealed that only 26% of small business owners currently offer a 401(k) plan to their employees.
So, why aren’t more employers offering a retirement savings plan for their employees?
Small businesses cite three major reasons for not offering retirement benefits. 1) They think their business is too small to qualify for any type of retirement plan. 2) They aren’t sure if they can afford to match contributions. 3) They believe that plans are too expensive to set up and manage.
Enter SECURE 2.0. It’s set up to debunk misconceptions about the role of small businesses in individual retirement planning and incentivize entrepreneurs to expand benefits to their employees.
SECURE 2.0 builds upon the bipartisan SECURE Act from 2019, which made huge legislative changes to America’s retirement system. The initial law focused on making it easier for small businesses to offer 401(k) plans. It also required part-time workers to become eligible for retirement benefits, and it raised the age of required minimum distributions (RMDs).
Basically, both laws aim to strengthen the retirement system by partnering with America’s small business owners. However, there are several key differences in SECURE 2.0 that you want to discuss with your CPA before heading into this tax season.
5 Takeaways for Small Business Owners
1. Small Business Start Up Credit. SECURE 2.0 increases the startup credit to cover 100% of administrative costs related to administering and maintaining retirement plans for employees. This is a big shift from the initial SECURE Act (2019); it covered 50% of administrative costs, up to $5,000. The new law also clarifies that small businesses joining a multiple employer plan (MEP) are eligible for the credit.
2. Automatic Enrollment. Starting in 2025, businesses will be required to automatically enroll eligible participants in 401(k) or 403(b), if applicable. Employees may still choose to opt out of coverage. Small businesses with 10 or fewer employees are exempt, and new businesses less than 3 years old are also exempt.
3. Starter 401(k) Plans. Starting in 2024, small businesses are allowed to present a starter 401(k) or safe harbor 403(b) plan to employees who meet certain criteria. These plans work like traditional employer offered retirement benefit plans, except employers are not required to match contributions.
4. Part-Time Worker Offerings. Beginning in 2025, part-time employees must be allowed to participate in these employer sponsored retirement programs once they meet the requirements. This applies to workers with more than 500 hours per year for two consecutive years or employees with over 1,000 hours on the clock within one year.
5. Military Spouse Tax Credit. This new tax credit encourages employers with fewer than 100 employees to make military spouses eligible to participate in retirement benefit plans within 2 months of their hiring date. Additionally, military spouses are to become 100% vested in any employer contributions at two years of service–without regard to other company policies that may be in place. The tax credit is set at $200 per military spouse employee plus up to $300 in company contributions per person for up to years.
SECURE 2.0 Next Steps
SECURE 2.0 gives small business owners a lot to consider. It hopes to close the gap with new requirements and potential tax credits. All in all, these programs offer business owners an interesting option to help both their employees and their bottom line.
Wilke CPAs & Advisors pays close attention to legislative developments affecting small business owners. So, if you are considering changing your company’s retirement packages, contact us to talk about the tax incentives that may be available to you.
Ross Kelchner, Tax Manager at Wilke CPAs & Advisors