February 20, 2023

SECURE Act 2.0 for Small Businesses

There has been much discussion in Congress over the last few years on how to update and reform retirement saving rules. The unfortunate reality is that many Americans will not have enough to retire. It is a serious issue when one considers that the average working household has virtually no retirement savings. Several studies have illustrated the depth of the problem and just how many will be forced to work beyond the traditional retirement age. The lack of access to workplace retirement plans and limited savings have intensified the issue.

In late December 2022, President Biden signed the Consolidated Appropriations Act of 2023 into law. While primarily a funding bill for the federal government, it also contained another important parcel of legislation – the SECURE Act. 2.0. Building upon the reforms made in 2019, it calls for several changes designed to expand access, enhance eligibility, and make it easier to save for retirement. While several provisions focused on issues germane to large corporations, there were also several important provisions that impacted small businesses. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

The Small Business Conundrum

Retirement savings is an especially tricky matter for small businesses. While offering a 401(k), or other employer-sponsored retirement plan is beneficial for employee recruiting and retention, it can also be quite expensive. A recent study of 500 small businesses found that 74% do not offer a workplace retirement plan. When asked why respondents indicated that 58% believe the business is too small to qualify 32% can’t afford the match, and 24% believe these plans are too expensive to set up and manage. The concerns about cost are a serious obstacle.  

SECURE Act 2.0 – Small Business Provisions

There were several provisions included in the legislation designed to reduce the cost of starting and maintaining a retirement plan, including:

• Small Business Start-Up Credit – The value of this credit was increased to 100% (previously 50%) to offset the administrative costs associated with plan start-up. The maximum credit amount is $5,000 for the first three years, limited to businesses with up to 50 employees. It is also available to those joining a multiple-employer plan (MEP).
• Employer Matching Contribution Credit – There is also a federal tax credit available for employer-matching contributions. It covers 100% of employer matches for the first two years after plan creation and then slowly reduces in value. For example, the credit reduces to 75% in the third year, 50% in the fourth year, and finally 25% in the fifth year. The maximum credit amount is $1,000 per participant.
• Automatic Enrollment Exemption – SECURE Act 2.0 created a requirement that any newly created plans include an automatic enrollment feature. Such a feature would create an undue burden on small employers by increasing costs. For this reason, employers with 10 or fewer employees are exempt from both the automatic enrollment and escalation requirements.
• Starter 401(k) Plans – In 2024, small businesses that do not offer retirement plans will be allowed to create a starter 401(k) or safe harbor 403(b) plan. Annual deferral limits would be like those used for IRAs. It is important to note the decision to make matching or nonelective contributions is at the discretion of the employer. This feature is designed to make the costs of offering a plan more manageable.
• Military Spouse Plan Eligibility Credit – Small employers will receive a tax credit if they allow military spouses eligible to be enrolled in a retirement plan within 2 months of being hired. They also need to make sure military spouses are eligible for matching or nonelective contributions (anything that would apply after 2 years of service should apply to them within 2 months) and be 100% vested immediately. The credit is equal to $200 per military spouse and 100% of employer contributions up to $300 made on their behalf, for a maximum $500 tax credit. This applies for 3 years and does not include highly compensated employees.

Contact Us

SECURE Act 2.0 made many updates designed to expand retirement-saving opportunities. However, there were several changes benefitting small businesses that need to be considered. If you have questions about the information outlined above or need assistance selecting and starting a new retirement plan, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.