The Consolidated Appropriations Act of 2023, signed into law on December 29, 2022, includes numerous provisions impacting retirement savings plans, (referred to as “SECURE 2.0”, collectively). SECURE 2.0, lauded as landmark retirement plan legislation, builds upon previous retirement plan legislation titled “Setting Every Community Up for Retirement Enhancement Act of 2019” (“Secure Act”). SECURE 2.0’s significant provisions provide many improvements and enhancements to employees as retirement plan participants and employers as retirement plan sponsors.
SECURE 2.0 amends both the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code of 1986 (“Code”). SECURE 2.0 and its myriad provisions are intended to bolster retirement savings opportunities, expand retirement plan coverage, and simplify plan administration for plan sponsors and fiduciaries. SECURE 2.0 requires the Department of Labor and the Department of the Treasury (through the Internal Revenue Service) to release regulations and guidance on many of the provisions in the coming months and years to ensure proper implementation and administration by retirement plan sponsors. The provisions have varied effective dates and some changes were effective upon enactment.
Since SECURE 2.0 includes over 90 provisions, this article will highlight and summarize several key provisions of particular interest to small employers, generally employers with up to 100 employees. SECURE 2.0 provide small employers with more opportunities than ever to create and tailor retirement plans for their employees to help them achieve a measure of financial security in retirement.
The following list is a summary of key SECURE 2.0 provisions impacting small employers:
1. Modification of credit for small employee plan startup costs
This provision increases the tax credit for start-up costs when small employers establish a new retirement plan. The start-up cost credit for new plans is increased from 50% to 100% for small employers with up to 50 employees, still subject to the $5,000 cap.
This provision also provides an additional credit for certain employer contributions up to $1,000 per employee with a phase-out for small employers who have between 50 and 100 employees.
The credit amount is phased out over time as reflected below:
|
Tax Year
|
Credit %
|
|
1 - 2
|
100%
|
|
3
|
75%
|
|
4
|
50%
|
|
5
|
25%
|
|
6+
|
0%
|
Effective Date: Taxable years beginning after December 31, 2022
2. Starter 401(k) plans for employers with no retirement plan
This provision permits an employer that does not sponsor a retirement plan to offer a starter “deferral only” 401(k) plan (or safe harbor 403(b) plan). A starter 401(k) plan (or safe harbor 403(b) plan) would generally require that all employees be default enrolled in the plan at a deferral rate of 3 to 15 percent of compensation. The limit on annual deferrals would be the same as the IRA contribution limit, indexed for inflation ($6,500 for 2023 with an additional $1,000 in catch-up contributions beginning at age 50. This provision aims to encourage small (or new) employers to establish a retirement plan for their employees.
Effective Date: Plan years beginning after December 31, 2023.
3. Application of credit for small employer pension plan startup costs to employers which join an existing plan
This provision amends the Secure Act to provide the startup tax credit to small employers joining a multiple employer plan (“MEP”) for three years, regardless of how long the MEP has been in existence.
Prior to this provision, the startup tax credit only applied for the first three years that a plan was in existence. For example, if a small business joined a MEP that had already been in existence for three years, the startup credit was not available. If the MEP had been existence for two years when a small business joined, the small business may have been able to claim the credit for only two years.
This provision corrects this issue so that employers joining a MEP are eligible for the credit for all three years.
Effective Date: Retroactive for taxable years beginning after December 31, 2019
4. Military spouse retirement plan eligibility credit for small employers
This provision provides small employers a tax credit for implementing certain eligibility and vesting provisions for military spouses. Since military spouses often do not remain in one job for long enough to vest in their employer’s retirement plan or in employer retirement plan contributions, this provision addresses these issues. The tax credit is available for employers with up to 100 employees if their retirement plan permits military spouses to be:
- eligible to participate in the plan within two months of hire,
- eligible for any matching or nonelective contribution that they would have been eligible for otherwise at two years of service, and
- 100% immediately vested in all employer contributions.
The credit is $200 plus up to $300 of employer contributions for each military spouse up to a $500 maximum for the first three years but does not apply to military spouses who are highly compensated employees. An employer may rely on an employee’s certification that such employee’s spouse is a member of the uniformed services.
Effective Date: Taxable years beginning after December 29, 2022
5. Application of top-heavy rules to defined contribution plans covering excludable employees
This provision permits top-heavy plans covering otherwise excludable employees (those who do not satisfy age/service rules) to perform separate top-heavy testing for non-excluded and excludable employees. Plans that are deemed top-heavy are required to provide employees with a nonelective contribution (generally 3% of pay), which can add up to a significant budgetary cost for small employers. This provision eliminates the financial incentive for employers, particularly small employers, to exclude employees from the retirement plan and increase retirement plan coverage for more employees.
Effective Date: Taxable years beginning after December 31, 2023
6. Reform of family attribution rule
This provision changes the family attribution rules under Section 414 of the Code in two ways when performing plan coverage and nondiscrimination tests for a plan. Under the Code, certain related businesses must be aggregated when performing the coverage and nondiscrimination tests. These aggregation rules are generally based on the degree of common ownership of the businesses whereby individuals will be deemed to own stock held by other individuals or entities.
The first change involves spouses with separate businesses who reside in a community property state. Prior to SECURE 2.0, even if spouses separately own 100% of their separate businesses, each spouse would be considered to own the other spouse’s separate business, and the businesses would be considered related in states with community property rules. This provision updates this rule and disregards community property laws for purposes of determining ownership, creating parity under this rule for businesses in community property states.
The second change involves disaggregation of the entities if the only common ownership is the indirect ownership of the entities by a child under the age of 21.
Prior to SECURE 2.0, if parents of a minor child (under age 21) separately owned 100% of their separate businesses, the businesses would still be considered related solely because the parents have a minor child together, regardless of the parent’s marital status.
These two changes to the family attribution rules under this provision will likely be beneficial to owners of closely held businesses, which are often small employers. They will likely provide more flexibility for plan design of entities separately and wholly owned by spouses, which are often small employers as well.
Effective Date: Taxable years beginning after December 31, 2023
7. Allow additional nonelective contributions to SIMPLE plans
This provision permits an employer to make additional contributions to each employee of a SIMPLE (Savings Incentive Match PLan for Employees) plan in a uniform manner, provided that the contribution may not exceed the lesser of 10% of compensation or $5,000 (indexed). SIMPLE plans are available to any small business, generally with 100 or fewer employees.
Effective Date: Taxable years beginning after December 31, 2023
8. Contribution limit for SIMPLE plans
This provision increases the annual deferral limit and the catch-up contribution limits for SIMPLE IRAs by 10% for employers with 25 or fewer employees. An employer with 26 to 100 employees is permitted to provide higher deferral limits as long it either provides a 4% matching contribution or a 3% employer contribution. This provision provides similar contribution limit changes for SIMPLE 401(k) plans.
Effective Date: Taxable years beginning after December 31, 2023
9. SIMPLE Roth IRAs
This provision permits SIMPLE IRAs to accept Roth contributions.
Effective Date: Taxable years beginning after December 31, 2022
Final Thoughts
The summary above provides helpful insight into several key provisions in SECURE 2.0 that will benefit small employers and/or their employees. Get more information on other key provisions of the SECURE 2.0 Act here.
Risk Strategies is following SECURE 2.0 developments closely and will continue providing guidance and updates when available. Contact us directly with any questions at benefits@risk-strategies.com
