Welcome back! As promised, this week, we will take a look at the provisions in the SECURE Act 2.0 that affect employers. And, while you may own a business and think some of this doesn’t apply to you, think again because if you have more than ten employees, it might.
If you own a business with more than ten employees and you have been in business for at least three years and offer a 401(k) or 403(b) plan, you will have to begin providing automatic enrollment for new employees after December 31, 2024. You’ll also need to provide automatic escalation of the amount of an employee’s deferral. Under these rules, new employees will start with a salary reduction of at least 3% of compensation. The rate of salary reduction increases annually by 1% of their compensation until reaching at least 10%, but no more than 15%. An employee may elect out of auto-enrollment and/or auto escalations.
There is some good news, too, for those with Designated Roth accounts in employer plans. Roth accounts within 401(k) plans, 403(b) plans, and 457 plans are no longer subject to required minimum distribution (RMD) rules. This provision puts Roth accounts on par with Roth IRAs. Prior to SECURE 2.0, employees had to transfer their Roth accounts from the employer plan to a Roth IRA to escape RMDs. Now employees can continue to compound earnings tax-free after retirement within their employer’s plan.
Part-Time Employee Eligibility
In 2019, the tax law changed to require plans to allow long-term, part-time employees to be eligible for an employer’s 401(k) plan. SECURE (2019) permitted dual eligibility for plans: one year of service of 1,000 hours or three consecutive years of service of 500 hours. Under SECURE 2.0, part-time employees are eligible to participate in an employer’s 401(k) plan or 403(b) plan with two consecutive years of service of 500 hours. For transition purposes, the pre-2021 service of part-time employees is disregarded for vesting and eligibility under this new rule.
Overfunded Plan Option
Many employers have overfunded defined benefit plans and find it beneficial to transfer excess assets to an account to pay retiree health benefits. Those provisions, which would have expired after 2025, are now extended until 2032.
The rules applicable to retirement savings are complicated, so it goes without saying that mistakes are quite common. For this reason, the IRS has an Employee Plans Compliance Resolution System (EPCRS) that allows for the self-correction of many errors and rules, such as entering into a closing agreement with the IRS.
Next week, we will look at some of the incentives for small businesses and college savers that are part of SECURE Act 2.0.
Until next time…
One last thought, I believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.
U.S. Congress. "S.1770 - Retirement Security and Savings Act of 2021: Summary."
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