One of the biggest challenges Americans face is saving enough money for retirement. Surveys show that there are nearly 40 million American households with no retirement savings and that many Americans have no more than $100 in savings. If an emergency arises, 57% of Americans can’t afford to pay a $1,000 emergency expense from savings.
The Secure 2.0 Act of 2022 (SECURE 2.0) is intended to address this challenge and provide Americans with more opportunities to save for a secure retirement. The above statistics helped the Secure Act 2.0 to gain bipartisan support and be signed into law by President Biden on December 29, 2022. The Secure Act 2.0 includes extensive provisions that will empower more employers and employees to increase retirement readiness and build a stronger financial future.
Seven benefit program changes from the Secure 2.0 Act of 2022
What employers need to know
There are a number of changes that will impact employers. Here are seven key provisions that will impact employer retirement plans.
1. Mandatory auto enrollment: Effective 01/01/2025
Automatic enrollment of employees in 401(k) and 403(b) plans is mandatory. Automatic minimum deferral during the first year must be between 3% - 10%, unless the participant elects otherwise, with automatic increases of 1% each year up to at least 10%. This can be increased up to 15% for plan years starting on or after Jan 1, 2025, unless the participant elects otherwise. Plans can permit employees to cancel automatic enrollment and withdraw contributions from auto enrollment within 90 days. Note, mandatory auto enrollment is not required for plans established before Dec. 29, 2022.
2. Catch-up contributions
- Effective 01/01/2024 Employees in a 401(k) and 457(b) plan whose wages exceed $145,000 (adjusted for the cost of living) for a prior plan year can only make catch-up contributions as Roth contributions (i.e., on a post-tax basis).
- Effective 01/01/2025 Employees between the ages of 60-63 will be able to contribute at an accelerated rate. Those who reach ages 60, 61, 62, and 63 before the close of the tax year can contribute up to the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the applicable catch-up contribution for 2024. The $10,000 will be adjusted for inflation annually beginning in 2026. This ends when an individual reaches age 64 before the close of the taxable year.
3. Emergency savings accounts: Effective 01/01/2024
Employers can choose to offer an emergency savings account for non-highly compensated employees, which would be linked to their retirement account. These employees can contribute up to $2,500 (as adjusted) to the emergency savings account, through post-tax contributions. Employer matches to the emergency savings account would follow the regular employer match and go into the individual account plan (not the emergency account).
4. Lower part-time employee eligibility requirements: Effective 01/01/2025
The look-back period for eligibility of part-time employees in a 401(k) or 403(b) plan will be two consecutive 12-month periods in which the employee has at least 500 hours of service. Employers are not required to make non-elective or matching contributions on behalf of such employees.
5. Employer matching and non-elective contributions as matching Roth contributions: Effective after 12/29/2022
Employers can permit participants to elect vesting employer matching and non-elective contributions as Roth contributions. A plan amendment would be required to initiate this change.
6. Match for student loan payments: Effective 01/01/2024
Employers may elect to make matching contributions to a defined contribution plan for qualified student loan payments. The employer must provide matching contributions for the student loan payment amount at the same rate and vesting schedule as the employer match for retirement contributions. Plans can treat all employees who receive employer matches for student loan payments as a separate group for plan testing purposes.
7. De minimis financial incentives: Effective for plan years after 12/29/2022
Employers may choose to offer de minimis financial incentives to boost participation in retirement plans.
Secure 2.0 is one of the broadest pieces of benefits-plan legislation to come along in decades. With so many changes, employers and plan administrators will have a myriad of unanswered questions about how to best incorporate these new requirements into their payroll systems and company retirement plans. Guidance is expected in the coming months.
Overall, Secure 2.0 was designed to help individuals save enough for a more secure retirement. These provisions will better enable employers to help their employees plan for and invest in their future.
Learn how UKG Solutions can provide employees with advance access to a certain amount of their accrued wages prior to getting their regular paychecks. It’s a tool to help address immediate emergency financial needs.
The 2023 Employment Law Review will prep you about potential changes taking place in employment law in 2023 so you can prepare your organization for compliance.