Americans, as a whole, aren’t saving nearly enough for retirement. In recent years, this has become a growing concern of Congress.
In response, federal lawmakers passed and President Donald Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019. Then, in December 2022, lawmakers passed and President Joe Biden signed into law SECURE Act 2.0. These laws introduce additional provisions intended to improve retirement outcomes for Americans. But what is the impact on companies?
Perhaps the most overlooked change of the SECURE Act of 2019 is the change in the counting methodology for determining the 100-participant threshold for “small” plans. Small plans — those with fewer than 100 participants — are not required to obtain an annual audit.
In the past, an employee was counted if they were eligible to participate in the plan even if they did not actively make contributions and have an account balance. The new regulations only count those individuals who have account balances within the plan. As a result, we likely will see a decrease in the number of companies who require an audit for the 2023 plan year.
The intent of this change was to reduce the financial burden for small plans and encourage more small employers to offer workplace retirement options.
Meanwhile, language in the SECURE Act 2.0 expands the eligible pool of employees. The provisions include:
• Plans adopted on or after Dec. 29, 2022, will need to automatically enroll new participants at a rate of at least 3% starting in 2025 and auto-escalate their contributions. This means that as soon as the employee is auto-enrolled in the plan, they will count as a participant with an account balance.
• Effective in 2024, plans no longer will be able to exclude participants who work fewer than 1,000 hours during a plan year. Instead, any employee who works more than 500 hours in three consecutive plan years will need to be offered participation in the plan. That threshold will be reduced to two plan years in 2025. Again, that likely will increase the number of participants with account balances.
Given that the pool of eligible employees might increase in the next two to three years, companies still might consider having an audit conducted for 2022 if they anticipate that they will meet the audit requirement when the SECURE Act 2.0 provisions become effective.
The new laws also allow companies to adopt new plan capabilities, which are meant to enhance retirement outcomes for participants.
They also could present opportunities for companies competing for employees. You might consider implementing:
• A match to employees on their reported student loan repayments. For purposes of determining the employer matching contribution, student loan repayments would be treated as elective deferrals.
• Allowing employees to choose if they would like to treat employer contributions as tax-deferred or as Roth.
• Emergency savings accounts as an extension of the 401(k) plan. Contributions to the account would be after tax and could include both employee and employer contributions. The account would be capped at $2,500, and withdrawals could be taken for any reason and be available to the participant monthly.
In the current economic climate, where nearly every company faces employment shortages, new or expanded retirement plan offerings could be a key in setting your business apart with job seekers.