In 2019, Congress passed the SECURE Act (Setting Every Community Up for Retirement Enhancement) in an effort to encourage workers to save more for their golden years. In December of 2022, Congress added more provisions to the SECURE Act, with more set to roll out in the years to come. The latest edition of the act is SECURE 2.0.
What do all these new retirement provisions mean for you at this juncture in your career? Pango Financial aims to lay out all the changes in the new SECURE 2.0 Act and how they affect a variety of workers and business owners.
Automatic Plan Enrollment
Effective December 29, 2022, employers offering new retirement plans for their employees must enroll them automatically. The rate needs to be at least three percent but no more than ten percent of their wages. Employees may opt out of the plan, but they must do so affirmatively; otherwise, their employers will sign them up for a plan by default.
However, if your company employs fewer than ten workers or if you’ve been in business for under three years, you are currently exempt from this requirement.
Automatic Plan Escalation
If you started your employees on retirement plans after December 29, 2022, starting in 2025, contributions must escalate by one percent per year. This escalation should continue until plan contributions are between 10 and 15 percent of the employee’s eligible wages. Congress designed this change to encourage employers to help their employees save for their futures!
The exemptions discussed above still apply; if you have fewer than ten employees or have been operating for under three years, your business is exempt. Retirement plans affiliated with government or church jobs are also exempt from this escalation requirement.
Matching Student Loans
Part of the reasoning for all the changes in the SECURE 2.0 Act acknowledges the significant burden of student loans on North American workers. Many employees in this country have been forgoing retirement contributions in favor of paying off the money they borrowed for college! SECURE 2.0 allows you to treat loan repayments like retirement contributions to help employees build a nest egg while repaying student loans.
Starting in 2024, employers will have the ability to match their employees’ student loan repayment amounts as retirement plan contributions. Employers may ask employees to certify the remaining amount of their student loans every year to prove that they’re making those payments.
Required Minimum Distribution (RMD) Changes
If you’re familiar with the details of your retirement plan, you know there’s a certain age at which you must start taking distributions from it. At the beginning of 2023, Congress raised that age from 72 to 73. In 2033, that age will rise again from 73 to 75.
Previously, the penalty for failing to take a required minimum distribution at the appropriate age was 50 percent of that minimum amount. SECURE 2.0 reduced that penalty to 25 percent. If you correct the issue and start taking your distributions within two years of turning 73 years old, the penalty reduces to 10 percent.
More Participation Incentives
Before SECURE 2.0, the only incentive employers could offer for retirement plans was to match employee contributions. Now, employers can offer gift cards and other small perks to employees who sign up for a retirement account! The idea behind this change is to get younger workers started on their nest egg as early as possible.
Keep in mind your employees cannot pay for any incentives you offer using retirement plan assets. Employees: don’t use your 401(k) business financing to buy gift cards and other enticements! Employers: any financial incentives you offer should be de minimis or too minor in cost to require your employees to dip into their retirement savings to afford them.
Emergency Savings Accounts
Unfortunately, many workers in this country are only one or two financial emergencies away from bankruptcy. SECURE 2.0 aims to lessen financial stress on employees by making provisions for emergency savings accounts within retirement plans. This change will roll out at the beginning of 2024 and will help employees who do not receive high compensation to save up for emergencies.
Employees will have the ability to make after-tax contributions to an emergency savings account within their retirement account. This way, if they experience severe financial hardship, they can withdraw some money without incurring an early-withdrawal penalty. They will not have to substantiate their hardship claim or otherwise prove how badly they need the money.
More Catch-Up Contribution Opportunities
Employees aged 50 years and older now have more opportunities to make additional or “catch-up” contributions to their retirement plans. Effective in 2023, employees over the age of 50 can put up to an extra $7,500 in their 401(k) every year. In 2025, that amount will increase to $10,000 per year for employees between the ages of 60 and 63.
Going forward, the SECURE 2.0 Act will index the limits for catch-up contributions for inflation, meaning that the amount could continue to rise year after year. However, employees must make all catch-up contributions after taxes if their annual salary is more than $145,000.
More Eligibility for Part-Time Employees
Long-term part-timers often get left out of the conversation when it comes to retirement planning. Previously, part-time employees had to work between 500 and 999 hours per year for three consecutive years to qualify for a retirement plan.
Under SECURE 2.0, starting in 2025, that eligibility requirement will lower to two consecutive years. Part-time employees who are loyal to their company will get the opportunity to start saving sooner.
If you’ve heard about the new SECURE 2.0 Act but aren’t sure how it will affect you, keep this guide with all the changes you need to know easily available. SECURE 2.0 aims to strengthen the retirement system for everyone involved in it, whether you’re a small business owner or a longtime employee saving for retirement.
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