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In the final weeks of 2022, Congress passed the Consolidated Appropriations Act of 2023, which was signed into law on December 29, 2022. While this was principally a bill dealing with the federal budget for fiscal year 2023, included within it was the SECURE 2.0 Act of 2022 (SECURE 2.0), legislation that impacts the retirement plan market in new and relatively dramatic ways. Lately, there have been few issues that generate bipartisan support in Washington, DC, but addressing the savings gap among working Americans is a priority for both major US political parties. SECURE 2.0 was produced soon after its 2019 predecessor, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), and was ultimately a bipartisan effort. Within its roughly 90 provisions, there is a strong emphasis on practical solutions to address the US retirement savings crisis.

Encouraging Employers to Offer Retirement Plans

A number of sections within SECURE 2.0 are centered around making it easier for employers to offer retirement plans. In particular, many of the provisions seek to address potential concerns small businesses (companies with 50 or fewer employees) may have related to the burdens of providing retirement plans to employees.

To ease potential financial barriers, SECURE 2.0 specifically includes the following changes:

  • Raising the tax credit offered to small businesses to cover the administrative costs associated with starting a plan from 50% to 100% of administrative costs (up to a $5,000 maximum); effective for tax years beginning after December 31, 2022
  • 403(b) plans can participate in Multiple Employer and Pooled Employer Plans (MEPs and PEPs), further expanding the ability of employers to leverage their combined scale for more enhanced services and efficient pricing; effective for tax years beginning after December 31, 2022
  • Allowing employers that join a MEP to receive a start-up tax credit for a full three years, starting with the date they join the MEP (currently the three-year start-up credit for participants in MEPs stops being applicable three years after general MEP inception); retroactively effective for tax years beginning after December 31, 2019

To reduce retirement plan administrative burdens on employers, SECURE 2.0 offers the following solutions:

  • Allows for employers that have never sponsored a retirement plan to offer a Starter 401(k) or Safe Harbor 403(b) plan, which are two new plan designs intended to simplify administration by not requiring matching contributions or nondiscrimination testing; effective for plan years starting after December 31, 2023
  • Expands the Employee Plans Compliance Resolution System (EPCRS) to allow for a plan sponsor to self-correct more types of accidental errors; effective immediately upon enactment
  • Directs the Department of Labor and Treasury Department to do a full-scale study of disclosure and reporting requirements and recommend to Congress areas where there is room for possible simplification; effective immediately upon enactment
  • Simplifies the hardship withdrawal process by allowing employees to self-certify that the necessary conditions are met to access plan assets for a financial hardship; effective for plan years beginning after enactment

If an employee does not have access to an employer sponsored plan, they are clearly at a disadvantage when it comes to saving and investing for retirement. The above measures should help expand this access and allow for more employees to have the opportunity to leverage a retirement savings benefit through the workplace.

Encouraging More Participation from Employees

The second area of focus in addressing the retirement savings gap is encouraging employees to increase their participation in employer sponsored plans. After all, the measures listed above will have little impact if retirement plans are not utilized after employers establish them. SECURE 2.0 provides many practical solutions that should support boosting participant savings. Among these are:

  • Requiring that new 401(k) and 403(b) plans include an eligible automatic contribution arrangement (EACA). Certain employers, including small and new businesses, will not fall under this requirement; effective for plan years starting after December 31, 2024
  • Allowing for plan sponsors to establish emergency savings accounts (“ESAs”) within defined contribution plans. Another provision includes allowing participants to access their plan balance for up to $1,000, penalty free, to cover emergency expenses; both of these provisions will be effective for plan years beginning after December 31, 2023
  • Raising the catch-up contribution limit for individuals aged 60-63 to the greater of $10,000 or 150% of the regular catch-up rate for 2024, indexed for inflation, which is applicable to individuals 50 years of age and over; effective for tax years beginning after December 31, 2024
  • Increasing the age for RMDs to 73 (starting in 2023) and to 75 (starting in 2033)
  • Providing a saver’s match for eligible employees (those below certain income thresholds) whereby the government matches 50% of an employee’s contribution up to a maximum of $2,000. Percentage matched is subject to a phaseout between certain income thresholds, and the match is deposited into the employee’s retirement plan (match can also be made into an IRA instead of an employer plan for eligible taxpayers who choose instead to contribute to an IRA); effective for tax years beginning after December 31, 2026
  • Allowing for employers to make retirement plan matching contributions on employee qualified student loan payments; effective for plan years beginning after December 31, 2023

Overall, SECURE 2.0 provides an opportunity for small businesses to benefit from reduced retirement plan costs and help their employees save and invest for retirement. It also provides current plan sponsors with a way to engage participants by offering new solutions to assist them with their financial goals.

Any new retirement plan or new provisions added to an existing plan are likely best implemented alongside a comprehensive employee education or financial wellness solution. For example, given that employees across all age groups face the burden of student debt, allowing for their qualified loan payments to count as contributions when calculating an employer retirement match, as referenced above, is a significant change. As a result, making student loan resources available through a participant education or financial wellness program can be an effective way to help employees navigate paying off their debt and saving for retirement at the same time.

Whatever your goals are, now is an ideal time to speak with your advisors about retirement plan solutions for your business or enhancements to your current retirement offering.

Authored by: Thomas Cooke CFA, Associate Director, Retirement Plan Services, UBS

For information on Retirement Plan Services, please visit our website.