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Thanks to retirement provisions recently passed by Congress, business owners and employers can offer stronger retirement savings plans to their employees. Given that financially secure employees tend to be more productive, this sets up an opportunity for business owners to create a win-win situation for everyone.
“In today’s highly competitive job market, employers are looking for ways to attract and retain top talent,” said Brian Trzcinski, a specialist in business markets for MassMutual. “I think many assume retirement savings plans are table stakes among small businesses, but the reality is only about one-quarter of small businesses offer them.”
The changes are contained in the SECURE 2.0 Act legislation that was included in omnibus budget legislation passed by Congress late last year. Why is it called the SECURE 2.0 Act? Because these measures build on the SECURE Act passed by Congress two years earlier. (Related: 3 key retirement rule changes from the SECURE Act)
Both measures aimed to introduce more flexibility and opportunity in retirement planning. But SECURE 2.0 contains new measures particularly designed to help small businesses establish programs to help their employees achieve financial wellness.
The retirement plan enhancements include provisions for:
- Automatic enrollment
- Catch-up contributions
- Student loan matching
- Part-time employee eligibility
- Emergency savings
- Required minimum distributions
Here’s a closer look at some key provisions and what employers need to know to ensure timely compliance and accurate communications with employees.
Automatic enrollment
The automatic enrollment provision ensures that everyone has an opportunity to participate in a company-sponsored retirement plan even if they missed the memo. While employers typically present plans that employees can sign up for, in the future, signing up will be automatic.
Starting in January 2025, businesses will be required to automatically enroll employees into new plans with a minimum 3 percent salary contribution. Each year, that contribution rate will automatically scale up by 1 percent until reaching at least 10 percent (or up to 15 percent maximum). Employees can opt out of either the enrollment or the annual increased contributions, but they will be enrolled by default.
Catch-Up Contributions
For those who started late or haven’t contributed enough to ensure a comfortable retirement, the amount of allowable catch-up contributions has been increased. This means that as retirement draws near, people can boost their retirement savings, which may be easier to do if they’ve increased their earning power over time.
The first part of this new provision is already in effect for 2023. For those who are 50 years or older, it increases the 401(k) catch-up contribution limit to $7,500. Starting in 2025, those who are 60–63 years old can increase their contributions further to $10,000 per year. Plan administrators will need to allow for this step up in allowable contributions in both 2023 and 2025.
The other important change is that on January 1, 2024, catch-up contributions for those who earned more than $145,000 in the prior year must be made as after-tax Roth IRA contributions.
Student Loan Matching
Many employees have had to delay 401(k) contributions due to the burden of student loans. This puts those with college debt at a significant disadvantage, missing what could add up to many years of growing retirement funds and the interest earned on them. This is where the new student loan matching provisions come in.
Beginning in 2024, student loan payments can now qualify for matching contributions into a workplace retirement account. This helps employers provide a stronger retirement benefit to attract and retain employees who otherwise would not have been able to begin contributing toward their retirement.
The only catch is that the onus is on the employer to require the employee to provide proof-of-loan contributions so that they can provide the proper matching amount. Employers will have to amend their plans to permit using student loan payments for match purposes, and of course, plan for the increased cost of matching contributions for student loan payments.
Part-Time employee eligibility
In the past, long-term part-time employees were at a disadvantage when it came to retirement benefits. Per the earlier SECURE Act, part-time employees were only eligible for benefits if they had worked from 500 to 999 hours in three consecutive years. If the hours worked fell below that level in any one year, the clock would start over.
The SECURE 2.0 Act loosens these restrictions. Effective for plan years beginning January 1, 2024, the required 500-plus hours must be completed by part-time employees for only two consecutive years instead of three. After the two-year requirement has been met, part-time employees will be invited to participate in the same retirement plans offered to those working full time.
Note, however, that employers must still meet the original SECURE Act criteria for three years of service, for example, when those years of service begin in 2021.
This provision also applies this change to ERISA-covered 403(b) plans for the first time, though only for service beginning in 2023.
This benefit may become crucial for business owners in the year ahead.
“With a potential recession looming, business owners may want to look at ways to cut costs,” said Trzcinski. “With payroll often times being a business’s largest expense, utilizing part time employees may be a good short-term solution to weather any tough economic conditions.”
Emergency savings
Currently, anyone under 59½ years old who dips into their retirement plan funds early pays a 10 percent penalty tax. Starting in 2024, this provision adds more flexibility by allowing one $1,000 withdrawal for emergency purposes per calendar year. However, if the withdrawal is not repaid, another withdrawal cannot be taken within three calendar years.
“While an employee should do their best not to sacrifice the value of their long-term retirement savings accounts, sometimes life happens,” noted Trzcinski. “This increased flexibility to access funds gives employees peace of mind knowing the funds are available should an emergency occur. Of course, paying back what is taken out is always the best approach when it comes to liquidating any portion of a retirement account.”
Another part of this provision allows employers to support an emergency savings plan benefit with automatic payroll deductions funding it up to a cap of $2,500, so employers should consider whether they’d like to offer this additional benefit.
Required minimum distributions (RMDs)
One of the pain points of retirement plans has always been the required minimum distributions at age 72 regardless of retirement or financial status. Now, new RMD guidelines offer more flexibility and more lenient penalty provisions so that those who’d like to keep more funds in their plans for longer can do so.
Starting in 2023, the RMD requirement will be delayed from age 72 to age 73. Additionally, penalties for not taking RMDs have been reduced from 50 percent to 25 percent in 2023. This 25 percent penalty will be further reduced to 10 percent if the RMD is withdrawn within two years of the year it was missed.
Additionally, Roth accounts in employer plans will be exempt from RMDs altogether starting in 2024. (Related: What to know about RMDs)
This marks a significant reduction in penalties that can help make employee retirement funds last longer into retirement, and is a key point for employers to communicate to employees.
Making the most of the SECURE 2.0 Act
In short, the SECURE 2.0 Act helps employers create and offer stronger plans with enhanced benefits to their employees. This can help attract and retain employees while also making it easier for these employees to set themselves up for the future.
For employers, this means understanding the new plan parameters and being sure to make administration changes before provisions of the act take full effect. Those who do so and communicate these benefits to existing and future employers gain an edge in a competitive marketplace.
For employees, it means understanding these new changes so that they can maximize both their plan contributions and the new flexibility around using funds both before and after retirement.
Contact us today to learn how MassMutual can help you navigate this new legislation in order to protect your business while empowering your employees.
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