By Ronald Ulrich, Vice President, Product Consulting and Compliance at ADP
The SECURE Act 2.0 and other legislation may be coming — and here's what you need to know about its potential impact on your business.
[NOTE: An updated article is now available: SECURE 2.0 Act of 2022.]
A House-approved SECURE Act 2.0 (now named SECURE 2.0) is on the horizon in the U.S., with 50+ provisions to help remove some of the barriers faced by employees trying to save for retirement.
As Congress gets back to business this fall to finalize the bill's specifics, here's a brief recap of the likely changes to company retirement plan requirements — and their benefits to employees and employers alike. The Senate is also working on provisions that will also be considered alongside the SECURE 2.0 Act.
Benefit #1 — Decrease employer costs and administrative burdens.
Sponsoring an employee retirement plan may get a bit easier and more affordable thanks to these aspects of the SECURE Act 2.0:
- Larger tax credit for small businesses. For employers with up to 50 employees, the bill increases the tax credit to 100% of qualified start-up costs, and provides for an additional credit for five years of up to $1,000 per employee equal to the applicable percentage of eligible employer contributions to an eligible employer plan (not including a defined benefit plan). This credit applies to employers with up to 50 employees and is phased out for employers with 51-100 employees.
- Less onerous administrative requirements. The new legislation has provisions to cut down on the paperwork required of plan sponsors and reduce penalties for certain reporting errors.
- Reduced reporting and disclosure notices. Within two years of the bill's passage, the U.S. Treasury and Department of Labor would require plans to consolidate multiple participant notices into a single document.
Related legislation known as the Starter 401(k) Act also addresses the retirement saving gap, simplifying the process for small businesses not currently offering a retirement plan.
Benefit #2 — Increase plan participation and allow workers to save more.
Research from the Federal Reserve found that 25% of working Americans have zero retirement savings.
With the well-documented link between financial stress and lower employee productivity, these SECURE Act 2.0 provisions would be a welcome sight:
- Requires automatic enrollment for certain employers with 401(k) or 403(b) plans. Employees would have the choice to opt out of enrollment.
- Increases the number of employees that qualify for the Saver's Credit. Designed for low- to medium-income households, the credit offers extra tax deductions when saving for retirement.
- Boosts catch-up contribution limits for employees ages 62-64.
- Helps those with student loan debt. The bill allows employers to match student loan payments, (up to a certain percentage of the employee's salary), and deposit the funds in their retirement account.
Benefit #3 — Strengthen retirement plans in general.
Several SECURE Act 2.0 provisions are designed to improve across-the-board plan effectiveness, such as:
- Improving access to annuities as a retirement savings vehicle by relaxing requirements on required minimum distributions (RMDs).
- Delaying RMDs, which now kick in at age 72, to age 73 by 2022, 74 by 2029 and 75 by 2032.
In addition, the Senate Finance Committee has formally introduced the Enhancing American Retirement Now (EARN) Act. With 70+ provisions, the EARN Act is also focused on helping small businesses offer plans and making it easier for employees to save.
Some brief highlights:
- Enhanced tax credits similar to SECURE 2.0
- Allowing 401(k) safe harbor plans to replace SIMPLE plans mid-year
- Penalty-free withdrawals up to $1,000 per year to cover personal or family emergency expenses
The Senate Health, Education, Labor and Pensions (HELP) Committee has also introduced retirement legislation called the "Rise and Shine Act" with provisions similar to other pending legislation.
Keep in mind that the SECURE Act 2.0, EARN Act, Rise and Shine and Starter 401(k) Act may be subject to additional changes until they're officially signed into law.
For information on how the legislation might impact your current retirement plan — or to start the process to offer a retirement plan — reach out to ADP today.
ADP, Inc., and its affiliates do not offer investment, tax, or legal advice to individuals. Nothing contained in this article is intended to be, nor should be construed as, particularized advice or a recommendation or suggestion that you take or not take a particular action. Questions about how laws, regulations, guidance, your plan's provisions, or services available to participants may apply to you should be directed to your plan administrator or legal, tax or financial advisor. ADPRS-20220913-3597