Changes in retirement savings: What small businesses need to know
Small businesses are undergoing a major shift in the business landscape, which is prompting them to reassess their future. Getting ready for retirement involves thorough planning, assessing available retirement options, and taking ownership of your finances. A recently passed law, known as Secure 2.0, is providing a number of changes that could help strengthen the retirement system for small businesses and their employees in the United States.
Here are the major changes that small business owners and their employees can expect from Secure 2.0.
- Expands tax credits for starting a retirement plan. Businesses can now claim 100% of their plan startup costs, up to $5,000 over three years, which means more small businesses will be able to offer plans at no cost to them. Previously, the tax credit was for only 50% on startup costs.
- Startup costs include: Plan administrator fees, setup fees, and employee education.
- The credit is available to businesses with 100 or fewer employees that have at least one individual in the plan, who is not a highly compensated employee and received at least $5,000 in compensation from you for the preceding year. Learn more here.
- Small businesses that match their employees’ contributions can get a federal tax credit for up to $1,000 per employee matching contribution. Additionally, workers can get a $1,000 credit for their own contributions as part of the bill’s Savers Credit.
- Expands retirement plan eligibility to part-time employees. Currently, employees who work between 500 and 999 hours for three consecutive years must be allowed to participate in their company's retirement plan. Secure 2.0 reduces the time period to two years, which will go into effect starting in 2025. This does not apply to employees who participate in collectively bargained plans, or to nonresident aliens.
- Requires that retirement plans automatically enroll and escalate employee contributions. All employees must be enrolled at a default 3% contribution rate, and their contribution percentage must be increased by 1% every year until they reach 10%. Employees maintain the option to opt out. Any plan set up with an effective date after Dec. 29, 2022 must add auto-enroll no later than Jan. 1, 2025.
- Establishes an emergency savings program as part of a retirement plan that would allow employees to withdraw tax and penalty-free contributions for qualified emergencies. Businesses will have the option to set up this Roth-type savings plan when they set up their main plan.
- Increases catch-up contributions in 2025 for 401(k), 403(b), governmental plans, and IRA account holders. In 2023, participants age 50 and older can contribute an extra $7,500 per year annually into their 401(k) account. This amount will increase to $10,000 per year (indexed for inflation) starting in 2025 for participants of ages 60 to 63. Also, after 2023, all catch-up contributions for participants earning over $145,000 annually must be made on a Roth (after-tax) basis.
- Student loan debt. Starting in 2024, employers will be able to "match" employee student loan payments with matching payments to a retirement account, giving workers an extra incentive to save while paying off educational loans.
- Expanded Roth matching for businesses. Employers will have the option to provide vested matching contributions to employee Roth accounts. This means that employers can match employee contributions to after-tax retirement accounts, after which earnings can grow tax-free.
Retirement planning is not just about 401(k)s and IRAs. For many small business owners, their business is their retirement program, and planning for succession and your business sale can be complicated. We break down your options in this blog post.