There was legislation that passed at the very end of 2022, which will impact many small businesses. The legislation is called Secure 2.0. It passed as part of the Omnibus spending bill at the beginning of 2023. It carries on from the original Secure Act from 2019. That Secure Act provided tax credits for small businesses to start up 401K plans and it continues with tax credits. It expands them for businesses with less than 50 employees that set up 401k plans. That’s what Secure 2.0 does. Now, Secure 2.0 also has some really interesting new incentives that are going to be coming over the next few years that will have an impact on both you and your employees. For some businesses, that match a 401k contribution, the government will give you a tax credit of up to a thousand dollars per employee per year. However, there are specific rules and eligibility that apply for that, but that should be talked about in advance with your benefits advisor or your accountant.
Secure 2.0 is also going to include a provision for student loan matching. So, beginning in 2024, if you’ve got any employees that are paying down their student loans, you can kind of treat that as a contribution to their retirement plan, which means you can match it. For example, during 2024 you have an employee that shows you documentation that they paid $5,000 towards their student loan. You will be allowed to contribute $5,000 as a match to their retirement plan; their 401K plan, you will get a deduction for it and the employee does not get taxed on that contribution. So just bear in mind that student loans are now being interwoven with retirement savings to give employers a chance to put money away for their employees.
Starting in 2024, employees are going to be able to set up emergency funds. They’ll be able to put away about $2,500 a year, segregating it in their 401k. Employers can still match, but they can then pull out a thousand dollars per year for anything that qualifies as an emergency, and they won’t be penalized for doing it. An emergency can be considered to be any type of family leave issue, some emergency medical expense, something like that. But more definitions will be coming up. The good news is employees can take money out of their 401k without getting penalized and that helps you as a business owner.
Another big thing that’s going to start in 2025 is automatic enrollment. If you have a 401K plan, you are going to be required to enroll your new employees in it and start deducting 3% of their compensation, then put it towards their retirement plan. Your employees will have the benefit of opting out if they choose not to participate. They’ll have that choice, but the hope is that some won’t, and they’ll get used to it and they’ll start putting money away for their retirement. In addition, starting in 2025, part-timers, that have worked for just two years, at 500 hours a year, they’ll be allowed to participate in the company 401k plan.
There are two things in this legislation that appeal specifically to older employees. Number one is they can keep their money in their retirement plan for longer. Starting this year, the minimum distribution age increases to 73 years old, which means employees can keep their money in up to the age of 73, they can even keep working if they would like. They’re not forced to start taking money out of their 401k plan, which the current rules or the previous rules forced them to do. Lastly, if any employees are over the age of 60, the company can now contribute up to $10,000 more annually over and above the maximum contribution that the IRS allows. That way they can start putting more away for retirement. By the way, there are some income limitations to this, so be aware of that. Lastly, in the future we will be allowed to make matching contributions not only to a regular 401k but to an after-tax Roth 401k as well.
So, over the next few years there’s going to be a lot of different changes to 401k plans, plenty of incentives to start one, and incentives to help your employees put money away for retirement. The more money the company's employees put away for retirement, the more money the owners can put away for their retirement as well.