SECURE 2.0 Act: What Employers Need to Know About Retirement Plan Changes

Overview of SECURE 2.0

The SECURE 2.0 Act, signed into law in December 2022, contains over 90 provisions affecting retirement plans. Many provisions phase in over several years, with key deadlines in 2024 and 2025. Employers who sponsor 401(k), 403(b), or SIMPLE IRA plans must understand which provisions apply to them and when action is required.

Key Provisions Affecting Employers

Automatic Enrollment (Effective for New Plans After December 29, 2022)

New 401(k) and 403(b) plans established after December 29, 2022 must include automatic enrollment at a contribution rate of at least 3% but not more than 10% of compensation, with automatic annual escalation of 1% per year up to at least 10% but not more than 15%. Employees can opt out.

Existing plans are not required to add automatic enrollment, but it remains a best practice for increasing participation.

Exemptions: Plans maintained by employers with 10 or fewer employees, employers in business for less than three years, church plans, and governmental plans are exempt.

Increased Catch-Up Contribution Limits

Starting in 2025, employees aged 60 through 63 can make enhanced catch-up contributions above the standard catch-up limit. For 401(k) plans, the enhanced limit is the greater of $10,000 or 150% of the standard catch-up contribution limit.

Additionally, catch-up contributions for participants earning over $145,000 must be designated as Roth contributions. This Roth catch-up requirement was originally effective January 2024 but was delayed by IRS guidance to January 2026.

Small Employer Tax Credits

SECURE 2.0 significantly enhanced tax credits for small employers starting new retirement plans:

• Startup credit: Up to 100% of administrative costs (capped at $5,000 per year) for employers with up to 50 employees. Employers with 51-100 employees can receive up to 50% of costs.
• Employer contribution credit: A new credit for employer contributions to a new plan, up to $1,000 per employee, available for the first five years of the plan. This phases down for employers with 51-100 employees.

These credits make offering a retirement plan significantly more affordable for small employers.

Student Loan Matching

Employers may now treat employee student loan payments as elective deferrals for purposes of matching contributions. This means an employee who cannot afford to contribute to the 401(k) because of student loan payments can still receive the employer match based on their qualifying student loan payments. This provision is optional but can be a compelling benefit for younger workers.

Emergency Savings Accounts

Employers may offer pension-linked emergency savings accounts within their retirement plans. These accounts allow non-highly compensated employees to save up to $2,500 in a Roth after-tax account that can be withdrawn without penalty. This addresses the reality that many employees cannot contribute to retirement because they lack emergency savings.

Required Minimum Distribution Changes

The age for required minimum distributions increased to 73 in 2023 and will increase to 75 in 2033. This affects plan administration and participant communications.

Part-Time Worker Eligibility

Long-term part-time employees who work at least 500 hours per year for two consecutive years (reduced from three years under SECURE 1.0) must be eligible for elective deferrals. This took effect for plan years beginning after December 31, 2024.

Action Steps for Employers

1. Review your plan document. Work with your plan administrator and legal counsel to determine which SECURE 2.0 provisions require plan amendments. The IRS has provided an extended amendment deadline (generally the end of the 2026 plan year for most provisions), but operational compliance must begin when each provision takes effect.

2. Update administrative procedures. Ensure your payroll and recordkeeping systems can accommodate new provisions like enhanced catch-up contributions, Roth catch-up requirements, student loan matching, and part-time worker eligibility tracking.

3. Evaluate optional provisions. Decide whether to adopt optional features like student loan matching, emergency savings accounts, and Roth employer contributions. Consider which options would be most valued by your workforce.

4. Communicate with participants. Explain relevant changes to your employees, particularly new enrollment features, contribution limit changes, and any new benefits you adopt.

5. Claim available tax credits. If you are a small employer starting a new plan or recently started one, ensure you are claiming the full credits available under SECURE 2.0.

SECURE 2.0 is the most significant retirement legislation in decades. Employers who engage proactively with its provisions can both strengthen compliance and enhance the value of their retirement benefits.