SECURE 2.0 Act for Business Owners

On December 29th, 2002, you were likely preparing for New Year’s Eve while the SECURE 2.0 Act was signed into law. This follows 2019’s SECURE Act. Lawmakers will tell you the goal of this legislation was to increase the country’s retirement savings. Some changes will go into effect in 2023, but most of the changes will become effective in 2024. Here’s some highlights of items business owners can take advantage of. Also, checkout our post on changes affecting individuals (plan participants).

Overall, the possibilities for retirement plan participants have grown significantly. While this provides more options and flexibility for participants, additional administrative burdens for recordkeepers and employers will significantly increase. Costs to administer plans will surely increase. Many of these changes are optional for 401(k)s. Talk with your plan administrator about which ones you want to adopt.

SEP and SIMPLE ROTH options

Beginning in 2024 SEP and SIMPLE retirement accounts will allow ROTH contributions. This is HUGE! In the past, business owners were limited to starting a costly 401(k) plan or sticking with a ROTH IRA’s $6,000 contribution limit. With this change, business owners over 50 will be able to contribute $15,000+ to tax-free ROTH savings. Now the trick is to decide SEP or SIMPLE. Most business owners (and financial advisors) pick wrong.

First time solo 401(k)

New business owners can now procrastinate longer. Solo 401(k)s deadline to start and contribute has been extended to the tax return due date (usually April 15th). However, procrastination is only allowable for the first year of the plan. After that you’ve got to be on time!

New Retirement Plan Tax Credit

The tax credit for businesses with 50 or fewer employees choosing to start a retirement plan has increased its upper limit to 100% of administrative costs up to $5,000. In addition, there is an additional 100% credit of up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the first year of the plan. This credit decreases by 25% each of the following 3 years.

Employers with 51-100 qualifying employees can qualify for a similar, but lesser, credit for employer contributions. There are also additional credits for contributions for military spouses who are participating in certain employer plans.

Automatic Enrollment

Employers who start new retirement plans in 2023, will, beginning in 2025, be required to automatically enroll employees in their retirement plan at a rate of at least 3%, but not more than 10% of eligible wages. New companies (in business for less than three years) and employers with 10 or fewer workers are excluded from this requirement.

Employers will want to increase communication with plan participants to ensure employees choose to opt out if they don’t want their take home pay to decrease. Employees will have the opportunity to withdraw first time automatic contributions and any earnings within 90 days without penalty.

Automatic Escalation

Beginning in 2025, for new retirement plans started in 2023, contribution percentages must automatically increase by 1% on the first day of each plan year following completion of a year of service until the contribution reaches 10% - 15%. Exceptions apply for businesses with 10 or fewer employees, and employers that have been in business for less than three years.

On December 29th, 2002, you were likely preparing for New Year’s Eve while the SECURE 2.0 Act was signed into law. This follows 2019’s SECURE Act. Lawmakers will tell you the goal of this legislation was to increase the country’s retirement savings. Some changes will go into effect in 2023, but most of the changes will become effective in 2024. Here’s some highlights of items business owners can take advantage of. Also, checkout our post on changes affecting individuals (plan participants).

Overall, the possibilities for retirement plan participants have grown significantly. While this provides more options and flexibility for participants, additional administrative burdens for recordkeepers and employers will significantly increase. Costs to administer plans will surely increase. Many of these changes are optional for 401(k)s. Talk with your plan administrator about which ones you want to adopt.

SEP and SIMPLE ROTH options

Beginning in 2024 SEP and SIMPLE retirement accounts will allow ROTH contributions. This is HUGE! In the past, business owners were limited to starting a costly 401(k) plan or sticking with a ROTH IRA’s $6,000 contribution limit. With this change, business owners over 50 will be able to contribute $15,000+ to tax-free ROTH savings. Now the trick is to decide SEP or SIMPLE. Most business owners (and financial advisors) pick wrong.

First time solo 401(k)

New business owners can now procrastinate longer. Solo 401(k)s deadline to start and contribute has been extended to the tax return due date (usually April 15th). However, procrastination is only allowable for the first year of the plan. After that you’ve got to be on time!

New Retirement Plan Tax Credit

The tax credit for businesses with 50 or fewer employees choosing to start a retirement plan has increased its upper limit to 100% of administrative costs up to $5,000. In addition, there is an additional 100% credit of up to $1,000 per employee for employer contributions made for employees earning less than $100,000 during the first year of the plan. This credit decreases by 25% each of the following 3 years.

Employers with 51-100 qualifying employees can qualify for a similar, but lesser, credit for employer contributions. There are also additional credits for contributions for military spouses who are participating in certain employer plans.

Automatic Enrollment

Employers who start new retirement plans in 2023, will, beginning in 2025, be required to automatically enroll employees in their retirement plan at a rate of at least 3%, but not more than 10% of eligible wages. New companies (in business for less than three years) and employers with 10 or fewer workers are excluded from this requirement.

Employers will want to increase communication with plan participants to ensure employees choose to opt out if they don’t want their take home pay to decrease. Employees will have the opportunity to withdraw first time automatic contributions and any earnings within 90 days without penalty.

Automatic Escalation

Beginning in 2025, for new retirement plans started in 2023, contribution percentages must automatically increase by 1% on the first day of each plan year following completion of a year of service until the contribution reaches 10% - 15%. Exceptions apply for businesses with 10 or fewer employees, and employers that have been in business for less than three years.