January 5, 2023
Secure Act 2.0 – Business Owners
Earlier this week we put out a summary of some of the changes that individual investors should be thinking about as a result of Secure Act 2.0 going into law. This article focuses on the changes that we think will be impactful to business owners going forward:
1) Small Business 401(k) Credits: For businesses with 50 employees or less, the credit for starting a new 401(k) plan has been adjusted from 50% to 100% of plan startup costs, up to $5,000/year for the first three years. There will also be a new tax credit starting in 2023 for employer contributions to employee accounts that earn less than $100,000, up to $1,000/employee. For the first two years of a new planning being established, the credit is 100% of employer contributions. Year three uses 75%, year four uses 50%, and the fifth year uses 25%. After five years of having a plan open, the credit goes to 0%.
2) Auto Enrollment and Escalation: For 401(k) and 403(b) plans established in 2023 or later, new employees must be auto enrolled in the employer’s plan, at a 3% minimum contribution amount. From there, the contribution amount will be increased by 1% per year until it reaches 10%, at which point the employer has discretion to limit contributions to 10% or continue increasing contributions up to a cap of 15% of the employee’s income.
3) Roth Catch-Up Contributions: For employed individuals over age 50, and with wages of $145,000 or more, catch-up contributions to an employer sponsored retirement plan must be made in Roth dollars starting in 2024. While having a Roth component has become a common feature for 401(k) plans over the years, there are still plans out there that haven’t made this change. As an employer/business owner, it will be important to make sure your plan has this feature for highly compensated employees over the age of 50.
4) Solo 401(k) Start Date: For the 2022 tax year and prior, if someone opened a solo 401(k) after the end of the calendar year, but prior to their tax filing deadline- they would still be out of luck for making employee contributions to the plan. Starting with the 2023 tax year, this is no longer the case. As long as your account is open prior to your tax filing deadline, you’ll be able to make your employee contribution for that tax year.
5) Roth Matching Contributions: Prior to Secure Act 2.0, all matching contributions in employer sponsored retirement plans had to be made pre-tax. Going forward, employees can opt to have their matching contributions be made as Roth contributions. Employers making nonelective contributions to their employees can also now do so in Roth dollars. However, these employer contributions can’t be subject to a vesting schedule and will be reported as income to the employee for taxation purposes.
6) Student Loan Matching: Starting in 2024, employers will be able to make matching contributions to their employees on the basis of how much they’re paying in student loans. For example, if a company offers a 100% match on up to 3% of employee contributions- if an employee can prove they’ve contributed 3% of their income to student loans, the employer can still provide the match. However, this provision will not be a requirement by the employer, but it will be subject to nondiscrimination testing to ensure that not only the business owners/highly compensated employees get this benefit.
7) Roth Simples & SEPs: SIMPLE & SEP IRA plans have always been pre-tax savings vehicles for small businesses and self-employed individuals. Starting in 2023, Roth contributions will be allowed in both of these plan types.
8) Simplifying Hardship Withdrawals: Starting in 2023, employees will have the ability to self-certify that their need for taking a distribution falls into one of the approved categories. Formerly, the plan administrator (typically the employer or someone who works at the company) would have had to sign off their approval for the reason. Hardship withdraws can also be taken out of employee AND employer contributions starting in 2024. Prior, only employee contributions have been eligible for these types of distributions.
Again, this isn’t a complete list of all of the changes brought forward by Secure Act 2.0, but a good starting point in terms of things that business owners might need to start thinking about. If you have questions about how any of these provisions might impact you, contact your Rockbridge advisor.