Be Secure 2.0

How The SECURE 2.0 Rules Will Change Your 401(k)

The government understands that Americans need more retirement options than just Social Security. So in 2019, Congress passed the SECURE act to incentivize employers to offer retirement plans and thereby, make it easier for Americans to save money for retirement. Realizing that parts of the SECURE Act law was unclear and ineffective, Congress passed the SECURE 2.0 Act in 2022 to correct their errors and expand retirement savings options. SECURE 2.0 contains more than 90 provisions aimed at increasing Americans retirement savings including the expansion of auto-enrollment plans requirements, tax credits for small businesses, and the ability to convert 529 college savings accounts to a ROTH IRAs.

The provisions have been rolling out over a four year period so here are some of the key provisions went into effect for 2024 and some that start in 2025:

1) Starter 401(k): The Starter 401(k) allows employers who have not sponsored certain types of retirement plans within the same year to set up a simplified 401(k). Under this new plan, employers are not permitted to contribute, and employees will be automatically enrolled in the plan at a minimum contribution of 3% of their pay.

Employee contribution limits for the Starter 401(k) are much lower than a traditional 401(k) and even lower than a traditional IRA. In 2024, employees can contribute a maximum of $6,000, with a $1,000 catch-up for those 50 or over into a Starter 401(k). This limit is lower than the traditional IRA limits of $7,000, with the same $1,000 catch-up for those 50 or over. If you are not ready for a practice 401(k), you and your team are better off with individual IRAs with one exception (see below).

If your state mandates that employers offer a sponsored plan or use the State-ROTH IRA option, the Starter 401(k) might be a good option for your practice. If your practice is in one of these mandatory retirement plan states, you might consider a Starter 401(k) if you can not afford to make the matching employer contributions.

2) Auto-enrollment: The SECURE 2.0 rules will now require many 401(k) plans established after December 28, 2022 to include automatic enrollment, along with auto-escalation, beginning January 1, 2025. The initial auto-enrollment default must be between 3% and 10%, and the rate must increase every year by 1% until the participant hits at least a 10%, and no more than 15%, contribution. Congress created this feature to increase participation as those that fail to take action will automatically begin to save for retirement.

From a practice perspective, there is an exception for small businesses with 10 or fewer employees, or new businesses in existence less than three years, but the IRS has not released any further guidance. As such, we encourage all plans to adopt the auto-enrollment and auto-escalation requirements to ensure full compliance.

From the team members perspective, every eligible team member will still be able to opt-out or set their own contribution rate at any time. This auto-enrollment and auto-escalation only affects those who don’t set their own contribution level and even those who are auto-enrolled can adjust their contribution level at any time.

3) Tax credits: The original SECURE Act increased the Retirement Plans Startup Cost Tax Credit to the greater of $500 or the lesser of either $250 for each eligible non-highly compensated employee (limited to $5,000). The credit applies for up to three years and was limited to 50% of eligible startup costs, which include ordinary and necessary costs to both set up and administer the plan, as well as educate employees about the plan.

SECURE 2.0 removes the 50% cap for qualifying businesses with up to 50 employees so that 100% of startup costs could potentially be covered. The maximum credit is still $15,000 over three years. SECURE 2.0 also provides an additional credit for employer contributions, up to $1,000 per employee for employers with up to 50 employees.

Please note that the costs and contributions related to the credit are exempt from being business deductions (can’t have your cake and eat it too). Since credits can be limited by taxable income, it can be more advantageous to take the deduction over the credit.

4) Student loan matching: Starting in 2024, employers now have the option to make a matching contribution to a retirement plan based on payments that employees make towards qualified student loans. The match must follow the same formula and vesting schedule as the plan currently has for their normal matching contribution. The contribution will be deposited into the employee's retirement account (not additional payments towards the student loan).

Qualified student loan payments can include payments made by an employee for student loans made on behalf of the employee, the employee's spouse, or dependent.

As employers will need to rely on the employee's certification that loan payments are being made and there are additional testing requirements for this optional provision, we are not recommending adding this option to your 401(k) plan at this time.

5) 529 college savings accounts: Unrelated to your 401(k) plan but important if you have children or grandchildren, SECURE 2.0 created an exit option for 529 funds that are not spend by the beneficiary on qualified education expenses.

A 529 plan is a tax-advantaged savings plan used to pay for education expenses. Typically, a parent owns the account and their child is the beneficiary. Beginning January 2024, 529 beneficiaries can roll up to $35,000 to a Roth IRA from a 529 college savings account as long as it has been open for over 15 years and the beneficiary follows the standard Roth contribution requirements. Additionally, contributions or earnings made within the past 5 years—before distributions start—are not eligible to be converted.

We would highly recommend you start a 529 Plan for any child or grandchild to get that 15 year clock started, even if you hold of fully funding until future years.

Since each practice and each 401(k) plan is different, please schedule a consultation with JNG Advisors today to see what strategies would work best for your practice.