- SECURE 2.0: Consulting Opportunities for Retirement Professionals
- How those advising plans, employers, and individuals can add value
- 2023-01-27 09:43
- Key Insights
- SECURE 2.0 provides advisers, consultants, and financial planners with opportunities to engage their clients on a host of significant changes to retirement policy.
- The legislation builds upon the original SECURE Act of 2019 by providing new incentives to small businesses and new financial planning options for individuals.
- SECURE 2.0 is designed to help increase retirement plan adoption and access, as well as to allow participants to save more and longer for retirement.
The Consolidated Appropriations Act of 2023, a spending bill that includes the retirement bill known as the SECURE 2.0 Act of 2022 (SECURE 2.0), was signed into law by President Joe Biden on December 29, 2022. SECURE 2.0 provides advisers, consultants, and financial professionals with opportunities to engage their clients—both small businesses and individuals—on a host of significant changes to retirement policy. The legislation builds upon changes made by the original SECURE Act of 2019 by providing new incentives to small businesses and new financial planning options for individuals.
Considerations for counseling small businesses or employers without retirement plans
SECURE 2.0 includes provisions that simplify administrative responsibilities and offer tax credits, which are designed to encourage plan adoption by making it easier for small businesses and sole proprietors to sponsor and maintain a retirement plan. The new provisions include:
Expanded start-up credits for small businesses
The modification of the tax credit available for small businesses relating to their retirement plan start-up costs is one of the significant changes. Under current law, employers with 100 or fewer employees may be eligible for an annual tax credit for three years (generally, up to a maximum annual cap of $5,000) that is equal to 50% of the administrative costs paid or incurred in connection with starting a retirement plan. Effective in 2023, SECURE 2.0 expands the credit to cover 100% of start-up costs (subject to the maximum annual cap of $5,000) for businesses with 50 or fewer employees.
SECURE 2.0 also provides an additional start-up credit of up to $1,000 per employee earning up to $100,000 in Federal Insurance Contributions Act (FICA) eligible wages (indexed). This credit is available for five years and is based on a percentage of contributions made to the plan by the employer. The applicable percentage is 100% in the first year and reduces in stages to 25% in the fifth and final year. The new credit is phased out for employers with between 51 and 100 employees.
If a small business without a retirement plan joins a multiple employer plan (MEP), including a pooled employer plan (PEP), SECURE 2.0 clarifies that the start-up credit is available for three years following when an employer joins that plan, regardless of how long the MEP or PEP has been in existence.
Tax credit for small businesses with plans covering military spouses
SECURE 2.0 also provides small business plan sponsors with a tax credit for non-highly compensated military spouses who are made immediately eligible for plan participation and any employer contributions (including matching contributions) within two months of hire. Employer contributions must be 100% vested to receive the tax credit, which applies for three years for each military spouse. The annual tax credit equals the sum of $200 per military spouse plus 100% of all employer contributions (up to $300) made on behalf of the military spouse, for a maximum credit of $500. The military spouse tax credit is also effective for tax years beginning in or after 2023.
Flexibility for sole proprietors
The original SECURE Act allows an employer flexibility to adopt a plan after the end of the year but before the due date of the employer’s tax return (including extensions). As a result, an employer can fund a newly adopted plan with employer contributions for the preceding plan year. However, the legislation did not impact rules requiring elective deferrals to be made by the end of each year. SECURE 2.0 allows new 401(k) plans that are sponsored by sole proprietors or single-member LLCs to receive employee contributions up to the date of the employee’s tax return filing date for the initial plan year.
Deferral-only “starter” plans
Beginning in 2024, SECURE 2.0 permits an employer of any size that does not sponsor a retirement plan to offer a “starter” deferral-only 401(k) plan (or safe harbor deferral-only 403(b) plan), where the contribution limits are similar to individual retirement accounts (IRAs) and are indexed for inflation. These starter plans are exempt from nondiscrimination and top-heavy testing and require an auto-enrollment deferral rate of between 3% and 15%.
Considerations for counseling clients that sponsor retirement plans
SECURE 2.0 contains a whopping 92 provisions, nearly all of which have an impact on the retirement savings system. Advisers of, and consultants to, employers that already sponsor a retirement plan should help their clients understand any necessary changes to existing retirement plans and evaluate new features that are available to plan sponsors.
For example, the new auto-enrollment and auto-escalation requirements are a significant change. Beginning in 2025, all new 401(k) and 403(b) plans will have to offer auto-enrollment at 3% or more and auto-escalation to at least 10% (but no more than 15%). It’s important to understand that existing plans established prior to the enactment of the legislation are exempt from these requirements. However, any plan established on or after December 29, 2022, will need to be in compliance with these requirements by 2025. Those assisting clients with establishing new plans should help ensure that their clients understand the need to incorporate auto-enrollment and auto-escalation features within the required time frame.
Considerations for financial planners and wealth managers
SECURE 2.0 offers financial planners and wealth managers a host of new considerations to discuss with their individual clients. While a number of these changes encourage Roth savings within retirement plans and IRAs, financial planners and wealth managers will be interested to know that earlier legislative proposals to eliminate so-called backdoor Roth savings for high-income earners were not included. Also, beginning in 2024, required minimum distributions will no longer be required from Roth sources within a retirement plan—creating parity with Roth IRAs—and eliminating one significant advantage for maintaining Roth balances in an IRA.
While there is no single blockbuster provision included in SECURE 2.0, such as a mandate that most businesses sponsor a retirement plan, the breadth of incremental changes included in SECURE 2.0 make it one of the most significant pieces of legislation impacting the retirement industry in recent memory. As such, the legislation offers abundant opportunities for those advising plans, employers, and individuals to provide value to their respective clients.
Founded in 1937 and headquartered in Baltimore, MD, T. Rowe Price delivers investment excellence and retirement services for institutions, intermediaries, and individual investors. Two‑thirds of our assets under management are in retirement, and one‑quarter of our assets are in target date funds. We have over 40 years’ experience as a recordkeeper, and we support over 7,600 retirement plans and over 2.2 million participants, as of December 31, 2022. We have veteran industry experts across the retirement spectrum, as well as dedicated retirement public policy experts who are closely engaged with legislators, regulators, and policy influencers.
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