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How the SECURE Act 2.0 affects small businesses

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MoMo Productions/Getty Images

American workers and their families gained new retirement savings opportunities when the SECURE Act 2.0 was signed into law in late 2022. The law builds on another retirement game-changer, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the original SECURE Act).

However, individuals seeking to boost their nest eggs aren't the only ones who should be paying attention to the new law. The SECURE Act 2.0 affects small businesses as well, providing new tools and incentives to benefit both employers and employees. Here are some key provisions that small business owners should know about.

Secure Act 2.0 changes for small businesses in 2023

Tax credits for retirement plan setup costs

It costs money to set up a retirement plan, manage it and educate employees about their options. Beginning this year, however, eligible employers with up to 50 employees may be able to claim a three-year start-up tax credit that equals 100% of administrative costs—up from 50%—that is capped annually at $5,000.

Small businesses may also qualify for an additional credit of up to $1,000 per employee, which will generally be a percentage of the amount contributed by the employer on behalf of employees. The full additional credit is limited to employers with 50 or fewer workers and phases out for those with 51-100 employees.

Military spouse tax credit

Many companies require employees to work a certain amount of time before becoming eligible for an employer-sponsored retirement plan or vesting in employer contributions. Yet reaching that milestone of time isn't always possible for individuals who frequently need to relocate because their spouses are serving on active duty in the military.

The SECURE Act 2.0 provides a tax credit for eligible small businesses that do the following for military spouses who are non-highly compensated employees:

  • Make them immediately eligible for plan participation within two months of their start date
  • Upon plan eligibility, make them eligible for any matching or nonelective contribution that they would have qualified for otherwise at two years of service
  • Allow them to be 100% vested immediately in all employer contributions

The tax credit applies for three years for each military spouse and is capped at $500. It equals the sum of $200 per military spouse and 100% of all employer contributions made on their behalf up to $300.

Roth options available for SIMPLE & SEP IRAs

Employers already can offer workers the option of owning Roth versions of 401(k)s and 403(b)s, which have different tax advantages than their traditional counterparts.

The new law adds two kinds of workplace individual retirement accounts (IRAs) to the list of plans that can be funded on an optional Roth basis: Savings Incentive Match Plan for Employees (SIMPLE) IRAs and Simplified Employee Pension (SEP) IRAs. Contributions to these Roth accounts will be made after taxes and be included in the employee's annual taxable income.

Matching Roth contributions are now allowed

Before SECURE Act 2.0, matching contributions could only be made to traditional retirement accounts that are pre-tax. Employers can now give employees the option of receiving matching and nonelective contributions to their Roth retirement account. The employer Roth match will be taxable to the employee in the year it's made.

SECURE Act 2.0 changes for small businesses in 2024

Option for starter 401(k) plans

Beginning in 2024, businesses that don't sponsor a retirement plan will be able to offer a starter 401(k) plan that is easier and less costly to operate than a traditional 401(k) plan. The starter 401(k) generally requires that all employees are enrolled in the plan by default at a deferral rate of 3% to 15% of compensation. The limit on annual contributions will equal the IRA contribution limit, and employers can't make matching or nonelective contributions.

The American Retirement Association estimates that the starter 401(k) provision coupled with the enhanced retirement plan startup tax credits will enable more than 19 million new American workers to participate in the workplace-based retirement system.

Alternatively, businesses can offer a starter safe harbor 403(b) plan that has similar guidelines.

SIMPLE IRA employer contributions increased

Currently, employers with SIMPLE plans must make contributions to employees of either 2% of their compensation or 3% of employee elective deferral contributions. Starting in 2024, employers will be able to make additional nonelective contributions to each employee of the SIMPLE plan up to 10% of compensation or $5,000 (indexed), whichever is less.

In addition, annual employee contribution limits for SIMPLE IRA plans will increase next year:

  • For employers with 25 or fewer employees, the annual deferral and catch-up contributions will increase by 10%.
  • Employers with 26-100 employees can provide higher deferral limits only if the employer either provides a 4% matching contribution or a 3% employer contribution.

Student loan payments and matching contributions

Some individuals don't contribute to an employer-sponsored plan because they're directing extra cash toward paying down their student loans, and that means they miss out on employer matches.

That could change beginning in 2024. Employers will be able to make matching contributions to an employee's 401(k) plan, 403(b) plan or SIMPLE IRA when participants make payments on their student loans. Employers can contribute to their workers' retirement plans even if the individuals aren't making contributions.

Emergency savings account contributions

Starting in 2024, employers can choose to allow non-highly compensated employees to make Roth contributions to an emergency savings account that links to their individual retirement account. The contributions are treated as elective deferrals for purposes of retirement matching contributions. (Matching contributions will go into the retirement account rather than the savings account.)

Businesses can automatically enroll employees into the accounts at no more than 3% of their salary, though workers can opt out. The participant's contribution is capped at $2,500 unless employers set a lower limit, and employees must be allowed to make withdrawals at least once a month.

SECURE Act 2.0 changes for small businesses in 2025

Auto-enrolling employees in retirement plans

Employers will need to automatically enroll eligible employees in newly established 401(k) or 403(b) plans beginning in 2025, starting with a minimum pretax contribution equal to 3% of their wages. Contributions will increase by 1% each year until the employee contributes at least 10%, but not exceeding 15%, of their earnings. Employees can opt out of contributing as well as the scheduled increases.

The automatic enrollment provision does not apply to companies that are less than three years old and businesses with 10 or fewer employees.

Part-time employees will be eligible to participate in retirement plans sooner

Employers must currently allow eligible long-term, part-time workers to participate in their 401(k) plans, but the legislation helps many employees gain coverage faster.

Beginning in 2025, part-time employees aged 21 and older who work at least 500 hours in each of two consecutive 12-month periods will generally be eligible to participate in 401(k) plans. This is a change from the existing requirement of three consecutive years of service. (Clocking in at least 1,000 hours per year will remain another way to gain eligibility.) The new part-time coverage rules also extend to 403(b) plans that are subject to ERISA.

Get help understanding how SECURE Act 2.0 impacts your business

While the SECURE Act 2.0 IRA and 401(k) provisions (among others) in the legislation will likely have a big impact on workplace retirement accounts, the details can be tricky. Contact a local Thrivent financial advisor to get a better handle on when and how your business can implement the sweeping new changes.

Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.