SECURE Act 2.0: What Employers Should Know
At the end of December 2022, the SECURE Act 2.0 cleared both houses of Congress as part of an omnibus end of year appropriation. The Act is a package of bills focused on retirement that expands on provisions from the original SECURE Act enacted in 2019.
SECURE Act 2.0 Provisions Employers Should Know
The SECURE Act 2.0 has several provisions that employers should be aware of. Here are some of the most important:
Automatic Enrollment in Retirement Plans
A critical provision of the Act is automatically enrolling new employees into a 401(k) or 403(b) when they start working with the company. The initial contribution would be 3% of their paycheck, with a subsequent annual increase of 1% until the maximum 10% contribution rate is reached.
According to Vanguard, automatic saving in workplace retirement plans has proven hugely successful, with 92% of employees continuing to save three years after enrollment compared to only 29% when enrolled voluntarily.
According to David Stinnett, Vanguard’s head of strategic retirement consulting, the SECURE Act 2.0 is finally incorporating automatic best practices known to yield positive retirement savings results. These features are intended to simplify participation in plans and enable earlier savings.
Student Loans Linked to Retirement Plans
Another provision of the SECURE Act 2.0 allows employers to make matching contributions to retirement plans equivalent to employee student loan payments. According to Bankrate, 26% of employees have deferred retirement savings to cover student loan payments.
The SECURE Act 2.0 would allow employers to match up to a set percentage of the employee’s wages and channel the funds into a retirement plan. This provision could help young employees better save for retirement while paying off their student loans. In addition, employers may find that this opens up their recruiting pool to more young employees and make them attractive to millennial and Gen-Z talent.
Higher Catch-Up Contributions
Secure Act 2.0 also allows those aged 62 to 64 to contribute up to $10,000 to 401(k) or 403(b) plans and $5,000 to SIMPLE IRA plans. Catch-up contributions for these plans stand at $6,500 and $3,000 for savers over 50 in 2022.
In 2023, catch-up contributions will be taxed as Roth contributions, with income tax applied before investing for retirement. In addition, the IRA catch-up contribution limit of $1,000 will be indexed to inflation.
Making catch-up contributions more available to near retirees should help them save additional money for retirement and make the process easier. It incentivizes older workers to save more after their careers are established.
Expanded Eligibility for Saver’s Credit
The Saver’s Credit, a tax deduction for lower to medium-income households when they save for retirement, will increase and be set at 50% rather than phasing out with higher earnings. It will go into effect in 2027. This will make it easier for more lower- income households to save for retirement and offer them a much-needed incentive to do so. For employers, this could increase participation, leading to more engaged and productive employees as their financial concerns are put at ease.
Employers Have Time
The SECURE 2.0 Act is a great boon for employees, but employers will have some administrative responsibilities, although they should have until January 1, 2024, to work with all the stakeholders to ensure compliance. Overall, the SECURE Act 2.0 should be a game-changer for retirement savings in the U.S., and employers should take advantage of this opportunity to better enable their employees to save and invest for retirement. Employers should consider how they can best incorporate these provisions into their benefits plans as soon as possible