Thanks to the federal SECURE Act 2.0 retirement that is now law, employees, retirees, and small business employers can now enjoy more ways to save, have greater access to monies in emergency, and manage retirement savings better as they age.
With over 90 provisions, there are lots of changes that could affect your 401(k) and IRAs, as well as your business if you are a business owner. This new legislation provides some safety nets for emergencies, hardships, and other surprises. It also includes bigger startup credits to encourage small businesses to start a 401(k), higher catch-up limits for those 60-63 years of age, and an increase to the minimum age for required minimum distributions (RMDs). Let’s take a closer look at a few key updates.
Tax Credits for up to 100% of 401(k) Startup Costs
If you own a small business and you haven’t started a 401(k) plan yet, now’s a great time to do so. Starting in 2023, the following updated tax credits apply:
- Businesses with up to 50 employees are eligible for a credit of up to 100% of their 401(k) plan startup and administration costs. Those with 51-100 employees can receive credit for 50% of these qualified business costs (same as today). The startup credit for both is capped at $5,000 per year for three years, for up to a total of $15,000 in tax credits.
- There is also a new tax credit to help cover employee contributions. For the first 50 employees, you can receive up to $1,000 for each employee making under $100,000 per year. The credit starts at 100% for the first and second year, decreases to 75% for the third, 50% for the fourth, and finally drops to 25% for the fifth year. For employees 51-100, a lesser tax credit applies. If you have over 100 employees, you do not qualify for this tax credit.
These tax credits should more than cover your business costs as well as much of contributions as well. For employer contributions not covered by the tax credit, these can be tax deductible for your business. The new employee contribution credit is applicable to plans set up after December 31, 2022, and doesn’t apply to defined benefit plans.
Read our article that covers the small business 401(k) tax credits in deeper detail including hypothetical examples for more insights.
Important RMD and Other Updates for Savers Aged 60 to 75
A few major changes are in store for Americans approaching retirement age.
First, catch-up contributions are on the rise. Currently, employees aged 50 and up can make an extra $7,500 in annual contributions to their 401(k) plan. In 2025, employees aged 60, 61, 62 and 63 can now make a total of $10,000 in catch-up contributions per year (or 50% of that year’s catch-up contribution limit, whichever is greater). These new limits also apply to SIMPLE plans, which were previously capped at $3,000 annually.
Starting in 2023, the minimum age for Required Minimum Distributions (RMDs) will increase from 72 years old to 73 years old. This number jumps to 75 years old in 2033.
And finally, RMD requirements were eliminated for Roth 401(k)s. This means that participants in either a Roth IRA or a Roth 401(k) plan do not need to make a mandatory distribution of Roth monies. This becomes effective in 2024.
More Time to Set Up and Contribute to a Solo 401(k)
Good news for sole proprietors and single-member LLCs who didn’t set up their 401(k) by the end of their fiscal year. Starting in 2023, if you set up a new Solo 401(k) after the end of your taxable year but before your filing date, you can treat your plan as if it was established before year-end. That means plan sponsors can make contributions all the way up to their tax filing date to be applied to the “previous” year.
Emergency, Hardship and Disaster Relief
The SECURE Act 2.0 helps savers stay afloat when troubles arise by making it easy to access extra cash without a 10% early withdrawal penalty.
Starting in 2024, savers can enjoy penalty-free withdrawals for emergencies, up to $1,000 per year. Employees can choose to repay these withdrawals back into their plan, as long as it’s done within three years.
Also beginning in 2024, an employee can self-certify as a domestic abuse survivor, clearing the way to a penalty-free withdrawal up to $10,000 (or 50% of the participant’s account).
Those affected by a federally declared disaster can withdraw up to $22,000 from their IRA or employer-sponsored retirement plan, penalty-free. Funds withdrawn will be treated as gross income over a period of three years. These benefits are applicable to disasters that happened on or after January 26, 2021.
There’s now also a new option for employers offering a pension plan (as opposed to a 401(k) plan). These employers can elect to link their lower-income employees’ pension plans to a savings account. Typically, about 3% of employee compensation will be put into a separate emergency account, up to $2,500 per year. Then, if needed, an employee can make four withdrawals out of this account per year, penalty-free.
Expansion of Automatic Enrollment
The SECURE Act 2.0 encourages employees to participate in a retirement plan by expanding automatic enrollment. For plan years starting in 2025 or later, all 401(k) and 403(b)-eligible employees will be automatically enrolled – unless they decide to opt out. All 401(k) and 403(b) plans set up before January 1, 2025, are exempt. Other exceptions include small businesses with under 10 employees, new businesses under 3 years of age, along with church and government plans.
Other Important Updates
Here are some additional highlights from the new legislation.
Effective in 2023:
- Employers can offer added incentives to encourage employees to participate such as a small gift card.
- Small businesses providing retirement benefits to military spouses are eligible for a maximum tax credit of $500.
- Employers can convert a SIMPLE IRA to a Safe Harbor 401(k) any time during the year.
Effective in 2024:
- Student loan payments can be treated as elective deferrals for purposes of matching contributions into a 401(k) plan.
- Employers can transfer former employees’ retirement account balances from a workplace retirement plan into an IRA if their balance is between $1,000 and $7,000.
Effective in 2025:
- The Department of Labor will set up a “Lost and Found” database that will track all employee plans and administrator contact information, so you can find that old 401(k) you may have left behind.
- Part-time employees are encouraged to save in a 401(k) plan. The current rule requires those that work 500 hours for three consecutive years to receive access to a company’s 401(k). This changes to two consecutive years for plan years after December 31, 2024. Know that the 1,000-hour rule continues to apply (any employee that works at least 1,000 hours in a single year must be provided access to a company’s 401(k) plan).
Looking to the future, in 2027 a new “Saver’s Credit” will help individuals reduce up to $1,000 off their taxes ($2,000 for married filers).
Offering a 401(k) is a great way to attract new talent and help current employees stay financially healthy, while your business receives some great tax credits. If you want to learn more about ShareBuilder 401k plans, we’re here to help.