According to Forbes, roughly half of Americans say they don’t have enough money saved to maintain their standard of living once they stop working. In an effort to address the issue, a bipartisan bill was recently passed.
On December 29, 2022, the Senate signed legislation building on the 2019 Securing a Strong Retirement Act. The new law, dubbed Secure Act 2.0, improves retirement-saving opportunities for workers in hopes employees will start planning for retirement well before leaving the workforce.
The newly signed bill significantly changes how 401(k) accounts are offered to full- and part-time employees, making things much easier for employers by allowing companies to offer a single retirement plan option. Expanding automatic enrollment, simplifying former retirement plan regulations and boosting small businesses' ability to offer workplace retirement plans are just a few of the changes being implemented under Secure Act 2.0.
With so many new changes in place, it’s essential to understand each update as these enactments could have a significant impact on both employers and employees. Here are a few of the major highlights of Secure Act 2.0:
Tax Credit Expansion
Secure Act 2.0 boosts tax incentives available to employers offering retirement plans, raising the credit for starting a plan up to $5,000. Small businesses with 100 employees or less that include automatic enrollment in qualified retirement plans could earn an additional tax credit of $1,000, which tapers down over the course of five years.
Sustainable Income For Employees
The new law encourages business owners to offer annuities in their 401(k) plans. Annuities are financial products provided by insurance companies that turn employee savings into guaranteed income streams during retirement. This change could help your employees build long-term financial security before reaching their golden years.
Required Minimum Distributions
The age to begin taking Required Minimum Distributions (RMD) from retirement accounts was raised in the updated Secure Act. RMD age increased from 72 to 73 starting on January 1, 2023, then will increase to age 74 on January 1, 2030. It will rise to age 75 on January 1, 2033. According to Forbes, required minimum distributions allow the U.S. Treasury to begin tax revenue collection from tax-deferred savings to keep them from becoming an estate planning device. Giving three extra years to wealthy retirees who don’t need RMDs for income helps employees by giving them more time to defer owed taxes while helping employers by lowering your tax liability.
401(k) Enrollment
Under Secure Act 2.0, employers are required to automatically enroll your workers into the company’s 401(k) or 403(b) plans at a rate of three percent of the employee’s salary. There would be an opt-out feature and employees can always contribute more, up to the annual federal limit. Auto-enrollment has the potential to assist employees in their future savings, assuming workers have enough funds to meet their day-to-day needs.
Increased Catch-up Contributions
Upon turning 50, employees are eligible to contribute more money to their 401(k). The tax deduction they can claim on these catch-up contributions could save employees substantial amounts of money on their annual tax bill, and allows them to invest more money as they get closer to retirement.
- In 2023: Limits are an extra $6,500 per year for 401(k) or 403(b) plans after hitting the $20,500 contribution limit for workers over age 50.
- In 2025: Workers who are between ages 60 to 63 will be able to contribute $10,000 in catch-up contributions, on top of the standard contribution limit.
Part-time Employees
Companies are required to allow employees who work roughly 10 hours per week for three consecutive years to contribute to a retirement account. Under Secure Act 2.0 the time frame would be reduced to two years. Offering retirement accounts to both full- and part-time employees can potentially help you recruit and retain talent, improve employee engagement, reduce tax liability, and benefit from business tax credits and deductions.
Given the upcoming changes, now is a good time for employees and business owners alike to connect with a financial advisor to implement an appropriate financial plan. To learn more, visit enterprisebank.com/personal/wealth-management.
