How Secure 2.0 Helps Small Businesses Boost Retirement Benefits

It's about to get easier to offer a retirement plan for your workforce.

Thanks to the Secure 2.0 Act, a slew of retirement benefits are coming to businesses and workers that build on older legislation called the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019. While the original Secure Act tweaked the minimum age for contributions, among other measures, the revamped version ushers in new benefits and is meant to bolster retirement plans and get more Americans to save for their future needs.

Many Americans struggle to save for retirement--and in general--because of debt, stagnant wage growth, and general complacency around savings, among other reasons. A majority of working Americans (55 percent) report that they're behind on their retirement savings, according to a survey from Bankrate published last October.

Personal savings rates for Americans have fallen to an all-time low, according to the Bureau of Economic Analysis. We saved 2.3 percent last October, down from 7.3 percent recorded a year prior--but that figure was distorted by the pandemic, when people couldn't get out and spend.

Secure 2.0 is designed to get more people to save for retirement earlier in their lives and enjoy the fruits of compounding over a longer period of time.

Congress passed the Secure 2.0 Act in December as part of a larger omnibus spending package, which was signed into law by President Joe Biden days later. While not everything in the package takes effect immediately, here's what business owners should pay attention to.

401(k) automatic enrollments

Beginning in 2025, small businesses will be required to automatically enroll employees in 401(k) or 403(b) retirement plans, with a contribution rate between 3 and 10 percent.

While the current contribution limit for 401(k) plans is capped at $19,500 for employees, Secure 2.0 looks to raise that threshold to $26,000 in a continued effort to encourage retirement savings. "The whole motivation behind this is to have Americans build more of a nest egg," says Mike Trabold, the director of compliance at Paychex, a Rochester, New York-based payroll services company.

Businesses that are less than three years old, or those that employ 10 or fewer employees, are exempt.

But remember: With auto-enrollment, employers must clearly explain to their workforce the ability to opt out. Small businesses can work with their retirement account administrators to ensure that workers understand their account structure, according to Barrett Scruggs, a vice president at SoFi at Work, the San Francisco-based personal finance company's financial benefits platform.

Paychex's Trabold recommends business owners communicate their timeline of offering the plan, the minimum contribution rate, the opt-out option, and the deadline to do so.

Don't forget another significant change: You must extend retirement plan benefits to part-time employees who've been with the company for at least two years.

More tax credits and a new plan

Small businesses will receive even more help for costs associated with offering retirement plans. Secure 2.0 doubles the small-business startup credit to cover 100 percent of administrative costs, up from 50 percent, and is capped at $5,000.

Roughly one in four small-business owners offers a 401(k) plan, according to a 2022 survey from ShareBuilder 401k, which cites cost as a factor that prevents employers from offering retirement benefits. Many options in the benefits market aren't easily accessible for small businesses, according to John Arensmeyer, the founder and CEO of Small Business Majority, a Washington D.C.-based advocacy organization.

"The problem has been that the private sector plans really serve companies with more than 100 employees, and there hasn't been enough incentive for providers to come up with plans that are more suitable for [small businesses]," Arensmeyer says. "That's going to change now." He explains that Secure 2.0 creates a financial incentive for companies to develop plans and for brokers to sell plans that "are more appropriate for the market."

One such new plan is the Starter 401(k). Designed for small companies currently without retirement offerings, the plan is not subject to year-end nondiscrimination testing (an additional compliance measure that examines if a business is fairly distributing its plan) and caps annual contributions at the same amount as the individual retirement account (IRA) limit. The maximum contribution for an IRA account was $6,000 in 2022 and $7,000 for those older than 50.

While costs to start retirement plans vary on the basis of a business's size and the type of plan, the enhanced tax credits should cover a majority of an employer's out-of-pocket costs for the first three years, according to Paychex.

Matching student loan payments

Student loan debt is known to hamper savings--and it's also an impediment for many looking to start their own business.

But borrowers paying off their student loans could receive some extra help from their employer thanks to a provision that would invite small businesses to match student loan payments with pretax contributions. And, no, this isn't in lieu of a 401(k) plan--employees can take advantage of a retirement plan in addition to the student loan matching provision if their employer extends such a benefit.

Starting in January 2024, employers with fewer than 100 workers can match up to $5,250 each year. While the exact investment vehicle for the employer matches is not yet known, some type of retirement account is not too far from the mark.

In addition to addressing the larger national economic issue of retirement savings, Secure 2.0 is an opportunity for companies to improve their benefits package, which can attract talent. "There's a concerted effort through this legislation to really try to make it as easy as possible, economically, for a business to offer a plan," Paychex's Trabold says. "That being said, we would still imagine it's going to be difficult for some employers in the current environment to do that."

 

This article was written by Melissa Angell from Inc. and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.