With bipartisan support during the lame duck session of Congress, the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 was passed and then signed into law by President Joe Biden on December 29, 2022. This legislation makes changes to more than 90 sections of retirement law in the Internal Revenue Code (IRC), but it didn’t extend any of the expiring tax provisions. Some changes are retroactive, while others won’t be effective until 2024 or later. Let’s take a look at the changes relevant to small businesses.


Small business pension plan start-up tax credit. A few favorable modifications are made to this tax credit (§102) beginning in 2023. The tax credit for the pension plan start-up costs increased from 50% to 100% for those employers with up to 50 employees and remains at 50% for those employers with between 51 and 100 employees. Also, employers contributing to the plan on behalf of their employees are eligible to take additional tax credits. 


The maximum contribution is limited to $1,000 per employee for employers with 50 or fewer employees, and the amount is phased out for employers with between 51 and 100 employees in the preceding tax year. Furthermore, no contributions can be made for employees with wages that are more than $100,000 (indexed for inflation after 2023). Finally, the additional credit is phased out over a five-year period.


Automatic enrollment starter 401(k) and 403(b) deferral-only plans. For employers with no retirement plans, a starter or safe harbor plan is permitted for plan years beginning after December 31, 2023 (§121). These plans treat each employee as having elected to have the employer make elective contributions by the employee, and no matching contributions by the employer are permitted.


The minimum annual contribution is 3% and can’t exceed 15%. The maximum annual contribution can’t exceed $6,000 adjusted for inflation or exceed $7,000 adjusted for inflation with a catch-up contribution in the case of an employee aged 50 or older. Employees have the option to elect out of the plan.


Retroactive first-year elective deferrals for sole proprietors. A special rule is available for sole proprietors adopting a 401(k) plan (§317). Sole proprietors can make an employee contribution (on behalf of themselves) up to the time for filing their individual tax return (usually April 15), without regard to any extensions.


In addition, the sole proprietor must be the only employee in the company and must own the entire unincorporated trade or business. This contribution, however, is limited to the first year, and therefore contributions by the employee in future years must be made by December 31.


Higher catch-up limits to qualified retirement plans. Beginning in 2025, there’s a new higher catch-up limit (indexed for inflation) for participants who are aged 60 to 63 (§109). The catch-up contribution limits for those employees in non-SIMPLE plans—retirement plans such as pensions, 401(k), and 403(b) plans—and 457 plans—retirement plans for government employees—is tentatively set at $10,000, which is 50% more than the regular catch-up amount set for 2024. 


For SIMPLE plan participants (retirement plans for companies with no more than 100 employees), the catch-up contribution amount is $5,000, or 50% more than the regular catch-up amount set for 2025. (The year 2025 is possibly a typo in the law as it should be 2024 to be consistent with the other retirement plans.)


There’s a further restriction on the higher catch-up limits beginning in 2024 (§603). That is, the catch-up contribution is a mandatory Roth IRA contribution if the participant had wages in the preceding year more than $145,000 (indexed for inflation). The implementation of these restrictions falls on the employer. One question that arises is, what happens with an employee who worked elsewhere in the preceding year? Since this restriction is based on the participant, it seems reasonable to assume that spouses are treated independently. Finally, these restrictions don’t apply to SIMPLE IRA and Simplified Employee Pension (SEP) plans.


Matching and nonelective contributions. Plans may permit a participant in non-SIMPLE and 457 plans to designate some or all matching and nonelective contributions of the employer as designated Roth contributions. This provision (§604) is effective beginning with contributions made after the date of enactment, which is December 29, 2022.


SIMPLE plan contributions. Section 117 introduces new higher contribution limits for participants in a SIMPLE plan. These new contribution amounts are effective for tax year 2024 and are dependent on the number of employees. SECURE 2.0 increases the annual deferral limit and the catch-up contribution at age 50 by 10%. This change is effective for an employer with no more than 25 employees. For an employer with 26 to 100 employees, the change is effective if the employer either provides a 4% matching contribution or a 3% employer contribution.


Section 116 permits an employer to make additional contributions to each employee participating in the SIMPLE plan if the contributions are made in a uniform manner and don’t exceed the lesser of up to 10% of compensation or $5,000 (indexed for inflation). This rule becomes effective for taxable years beginning after December 31, 2023.


Matching and student loan payments. Pursuant to the Senate Finance Committee report, this change is intended to assist employees who aren’t contributing to their retirement plan and thereby losing out on matching contributions from their employer because they’re overwhelmed with student debt. Therefore, §110 of the SECURE Act permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA plan with respect to qualified student loan payments, which are broadly defined by the Senate Finance Committee as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. This provision also applies to governmental employers that are making matching contributions in a 457(b) plan or another plan with respect to such repayments.


The SECURE 2.0 Act makes several modifications to various IRC sections pertaining to employer-sponsored retirement plans. In addition to the changes discussed, the legislation also made numerous modifications to employees’ participation in these plans.


© 2023 A.P. Curatola

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