Understanding SECURE 2.0 Retirement Benefit Requirements
The following article first appeared on Whittlesey’s Insights page. It is reposted here with permission.
Enacted at the end of 2022, the SECURE 2.0 Act presents a more advanced version of the retirement savings enhancements initiated by the Setting Every Community Up for Retirement Enhancement Act of 2019, the SECURE Act.
Essentially, SECURE 2.0 gives employees better opportunities to build their retirement savings with more efficient tax management.
In some scenarios, the new legislation imposes additional prerequisites on manufacturing businesses (along with other employers), potentially raising the cost of providing a 401(k) plan or other defined contribution plan.
Conversely, some sections of the legislation are optional. However, both can assist your organization in retaining and attracting top talent to aid employers in this tight labor market.
Furthermore, if you operate a smaller manufacturing entity without a current 401(k) plan, you could qualify for a tax incentive that has become even more beneficial.
Newly Imposed Requirements
Post-2024, the following requirements will come into effect:
Automated Enrollment. For all 401(k) plans initiated after 2024, there must be an automatic enrollment procedure for all eligible employees.
Employees retain the right to opt out. If an employee does not opt out, automatic deferrals ranging from 3% to 10% will be enforced, following escalation provisions.
Inclusion of Part-Time Employees. Drawing from changes initiated in the original SECURE Act, the new law mandates businesses include a broader scope of part-time employees in their 401(k) plans.
Effective post-2024, part-time employees can contribute provided they’ve completed at least 500 service hours for two consecutive years (and are at least 21 years old), a decrease from the previous three-year requirement.
Vesting is determined based on the completion of 500 service hours annually.
Here are several ways SECURE 2.0 enables employers to amplify 401(k) plans:
Matched Employer Contributions. SECURE 2.0 empowers businesses to designate any matching contributions, along with fully vested employer non-elective contributions, as post-tax contributions to a Roth account.
This clause is immediately enforceable.
A Roth account enables future distributions to retired employees to generally be exempt from federal income tax. This can appeal to employees with high incomes that disqualify them from contributing to Roth IRAs or those concerned about incurring income tax on distributions during retirement.
Student Loan Repayments. According to the new law, manufacturing firms can opt to provide a matching contribution to their employees’ 401(k) accounts based on their student loan obligations.
This provision becomes active in 2024, encouraging employees to save for retirement while paying down their student loan debt.
Employers can utilize this relatively low-cost incentive to attract and retain employees struggling with student loan debt.
Emergency Withdrawals. Post-2023, manufacturing companies can adjust their 401(k) plans to permit members to extract up to $1,000 for urgent personal expenses.
These circumstances pertain to unexpected or immediate financial necessities linked to critical personal emergencies or urgent family-related costs.
For validating such withdrawals, the plan administrator can rely on an attestation provided by the employee.
A Worthwhile Credit
Under the original SECURE Act, manufacturing companies with a workforce of 100 or less could claim a three-year credit equivalent to 50% of the initial setup costs of a 401(k) plan, with a maximum limit of $5,000.
From 2023 onwards, firms with a maximum of 50 employees are now eligible to receive a credit that equals 100% of the setup costs, up to a maximum of $5,000.
This 100% credit is gradually reduced for companies with a workforce ranging between 51 and 100 employees.
There’s an extra credit of up to $1,000 per employee for employer contributions toward employees whose earnings fall under the $100,000 threshold.
Employers should be aware of these additional provisions:
Cash-out limit. If a plan participant’s employment is terminated, an employer may “cash out” the former employee’s interest if it’s below a specific threshold.
Previously, the limit was $5,000. SECURE 2.0 raises the cash-out limit to $7,000, beginning in 2024.
Increases catch-up contributions. As of now, 401(k) participants 50 years old or over can make an additional “catch-up contribution,” limited annually ($7,500 in 2023).
Starting in 2025, SECURE 2.0 raises the limit for those aged between 60 and 63 to either $10,000 or 150% of the regular catch-up contribution limit, adjusted for inflation post-2025. Note:
Participants earning over $145,000 in the previous year must make any age-based catch-up contributions to a Roth account beginning in 2024.
Remember that this is a broad overview of key amendments that could apply to your manufacturing firm’s 401(k) plan. There may be other stipulations impacting your business.
About the author: Brenden Healy is Whittlesey’s partner head of tax services.
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