Small employers who start new employee retirement plans under Secure Act 2.0 passed by Congress at the end of the year will find themselves faced with more paperwork for their efforts.
Deborah Lander, senior retirement plan advisor with Lancaster-based RKL Wealth Management, said the extra paperwork will come from the provision that will require automatic enrollment in plans starting in 2025.
Secure Act 2.0 states employers with more than 10 workers that start new 401(k) plans after the new law takes effect beginning with the plan years in 2025 will be required to automatically enroll employees and have them set aside 3% to 10% of their earnings every year. Those employees who don’t want to participate would have to opt out.
“Some employers don’t like automatic enrollment. It can be more paperwork and if an employee doesn’t understand and sees money being taken out of the paycheck, it can cause issues,” Lander said.
However, to encourage employers to set up these plans, there will be a 100% tax credit for employers, giving them up to $5,000 for the costs of starting a plan, with a $1,000 per employee cap.
“Payroll systems may have to change,” Lander said, to ensure contributions are handled correctly. “We’ll have to see how this plays out.”
Overall, Lander said the act is a good incentive to encourage retirement savings.
Her colleague William Onorato, RKL’s Family Office Practice Leader, agreed, saying the act, which picks up on Secure Act 1.0 passed in December 2019, will “encourage broader participation in retirement savings by making accounts more user friendly.”
The biggest area of change Onorato sees is the increased age for mandatory distributions. Prior to the changes, people were required to take money out of their retirement accounts at age 70 1/2. Secure Act 1.0 changed that to age 72 and the new provisions increased it to 73 beginning in 2023 and to 75 in 2033. However, anyone who has already started drawing on an account will have to continue to do so.
“In reality, this is not significant,” he said.
He explained that most people who retire by age 70 will draw on their retirement accounts anyway. The biggest benefit, he said, will be for those higher income earners who can let assets grow tax deferred longer.
“But even for higher income earners, from an income tax perspective, it may be better to take money earlier to spread the tax burden out over a longer number of years.”
That is because most retirement accounts are tax deferred. Only Roth IRAs and Roth 401(k) plans are post tax, he said.
“For most people, this will not have a huge impact,” he said noting the House version passed in 2022 by 414-5 votes, showing there was not a lot of controversial stuff in it. “The changes are nice, but the impact will be modest.”
Lander said one provision she sees as a real benefit is the Emergency Savings provisions that can be used for emergencies.
Starting in 2024, Secure Act 2.0 allows emergency withdrawal of up to $1,000 from a company retirement plan or IRA without the standard 10% early penalty of pre-tax money. The second allows creation of an emergency savings account linked to 401(k) plans. Workers could set aside up to $2,500 and their employer may set up to have a 3% automatic enrollment of their salary in these plans with Roth after-tax dollars having a cap of up to $2,500. In an emergency, they could withdraw money tax-free and without paying the standard 10% penalty for money taken out before age 59 1/2.
“The Roth emergency savings is more like a savings account instead of a retirement account. It looks like employees can take this yearly. We’ll have to see as more information comes out,” Landers said, adding it would be a great incentive for people who don’t feel like they have the money to contribute to retirement because they don’t have enough emergency savings.
For younger workers, the provision that allows for employer contributions to be made into Roth accounts can be beneficial, she said.
“Employer contributions were pretax in the past, meaning the taxes had to be paid upon withdrawal. Now, employees can choose all Roth and pay taxes now and let the money grow without worrying what the tax rate will be later,” Lander said.
Another plus for younger employees, Onorato said, is the provision that allows employers to match 401(k) contributions to student loan debt.
“Young workers with student loan debt can’t save for retirement,” he said. Employers who opt to match that debt with contributions can help employees start saving.
“It’s not required so we’ll see how many employers will do this,” Onorato said.
Both agreed the new provisions are extensive and span several years. While both think the new rules are beneficial, they said time will tell how impactful they are.