Understanding the Secure 2.0 Act and Retirement Benefits

Hello. Welcome to SMB Matters.

I am Catherine Martini, Lead Compliance Consultant at TriNet, where I’m an expert in 401(k) plans. This podcast series takes a close look at the latest news and trends on a variety of topics related to running a successful small and medium sized business.

I’m excited to share some significant developments that are affecting the retirement landscape. Employee retirement plans are an important part of a comprehensive benefits package, especially if you’re trying to maintain top talent and create a scalable infrastructure. Many owners of small and medium-size businesses (SMBs) may find it difficult to offer retirement plans, whether due to administrative expenses, compliance requirements or business size. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in 2019 and generally sought to make saving for retirement easier for both employers and employees. Congress continues to pursue this goal with the SECURE 2.0 Act, which was signed on December 29, 2022, by expanding upon the original SECURE Act, but also adding new provisions and incentives. The updated SECURE 2.0 Act expands credits and incentives, making retirement benefits more accessible and easier to offer to employees.

The Secure 2.0 Act contains over 90 provisions affecting the entire retirement landscape. These provisions impact employees and employers across defined contribution and defined benefit plans, including, but not limited to, 401(k), 403(b), IRAs, and pension plans. It’s important to note that many of the regulatory agencies are still digesting all the new provisions and many are being reviewed for accuracy and interpretation. Therefore, some of these changes may take some time to be worked out. Since I can’t cover all 90 provisions in our 5-minute podcast, I’m going to focus on a few of the provisions that will likely see significant impacts in the retirement community.

Retirement plan sponsors can allow participants who are age 50 and older to contribute catch up contributions. These contributions are an additional contribution amount above the annual 402(g) limit, which is the limit on the amount of elective contributions that can be made to a retirement plan. For 2023, the catch-up contribution is $7,500. The Secure 2.0 Act increases this amount for certain participants. Effective January 1, 2025, catch-up contributions for participants in a 401(k), 403(b), government 457(b), or SARSEP plan will be increased to the greater of $10,000 or 150% of the regular age 50 catch up contribution amount for employees who reach 60, 61, 62, or 63 during the year. For participants aged 60-63 in a Simple IRA or 401(k) plan this contribution limit will increase to the greater of $5,000 or 150% of the regular age 50 catch-up contribution limit for Simple IRA or 401(k) plans. So for example, using the current catch-up contribution limit of $7,500 times 150%, the greater of the limit would be $11,250 for those who are aged 60-63 during the year.

Another significant change to catch-up contributions as a result of Secure 2.0 will affect certain higher waged participants in 401(k), 403(b), and government 457(b) plans. SECURE 2.0 will require catch-up contributions to be classified as Roth contributions for participants that earned over $145,000 subject to FICA in the prior calendar year. This provision was slated to be effective on January 1, 2024, however, in August of this year, the IRS announced a two-year transition period for this provision, which is now to be effective on January 1, 2026. This has been a welcome relief to many plan sponsors allowing more time to consider options for implementation. Retirement plan sponsors will need to work with their service providers for further guidance. Amendments to add a Roth feature may be needed for current plans that offer catch-up contributions.

Auto-Enrollment

Another significant upcoming change as a result of the Secure 2.0 Act will require retirement plan sponsors to offer an automatic enrollment feature. An automatic enrollment feature automatically enrolls participants upon meeting the plan’s eligibility requirement at a rate determined by the plan’s documents. Effective January 1, 2025 all new 401(k) and 403(b) plans established after December 29, 2022 will require these plans to automatically enroll participants at a minimum initial rate of 3% of compensation, but no more than 10%. Additionally, this rate must be increased on the first day of each subsequent plan year following each completed year of participation in the plan at a rate of at least 1% until it reaches 10% or 15% for certain safe harbor plans. The participant has the option to change their contributions or opt out of participation all together.

For employers that join a Multiple Employer Plan, such as a TriNet sponsored plan, the Act states that these automatic enrollment provisions will also apply. Again, as a reminder, this feature is only for new plans established after December 29, 2022. So any plans, whether they part of a multiple employer plan, a single employer plan, or otherwise, established prior to this date will not be subject to this automatic enrollment provision. There are some exceptions to these requirements within the provision, such as some employers who join an existing Multiple Employer Plan, such as the TriNet sponsored plans, therefore, we recommend that you consult with your service provider to determine appropriate next steps for your plan.

Thanks for listening to SMB Matters. If you enjoyed this show, please leave a review on Apple Podcasts, Spotify or wherever you listen to your podcasts. And please share it with a colleague or make sure to subscribe to our newsletter at TriNet.com/Insights. While you're there, you can learn more on this topic by reading our blog. Also, we’d love to hear from you, so please feel free to drop us a line at SMBMatters@TriNet.com. SMB Matters by TriNet is committed to providing small and medium-size businesses with timely and relevant insights. Thanks again for listening.

Legal Disclaimer:

This podcast is for educational purposes only. With decades of experience supporting small and medium-size businesses, TriNet has unique insight into HR best practices for businesses. TriNet does not provide legal, tax or accounting advice. The materials in this podcast and the options and opinions expressed herein may not apply to your company or scenario, so you should consult with your own advisors on how best to proceed. Reproduction in part or in whole is not permitted without express written authorization from TriNet.