Secure Act 2.0 & small businesses: What owners should know

American workers and their families gained new retirement savings opportunities when the SECURE Act 2.0 was signed into law in late 2022. The law builds on another retirement game-changer, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the original SECURE Act).

However, individuals seeking to boost their nest eggs aren't the only ones who should be paying attention to the new law. The SECURE Act 2.0 affects small businesses as well, providing tools and incentives to benefit both employers and employees. Here are some key provisions that small business owners should know about.

It costs money to set up a retirement plan, manage it and educate employees about their options. The Secure Act 2.0 may allow eligible employers with up to 50 employees to be able to claim a three-year start-up tax credit that equals 100% of administrative costs—up from 50%—that is capped annually at $5,000.

Small businesses also may qualify for an additional credit of up to $1,000 per employee, which will generally be a percentage of the amount contributed by the employer on behalf of employees. The full additional credit is limited to employers with 50 or fewer workers and phases out for those with 51-100 employees.

Many companies require employees to work a certain amount of time before becoming eligible for an employer-sponsored retirement plan or vesting in employer contributions. Yet reaching that milestone of time isn't always possible for individuals who frequently need to relocate because their spouses are serving on active duty in the military.

The SECURE Act 2.0 provides a tax credit for eligible small businesses that do the following for military spouses who are non-highly compensated employees:

• Make them immediately plan eligible and participate within two months of their start date.
• Upon plan eligibility, make them eligible for any matching or nonelective contribution that they would have qualified for otherwise at two years of service.
• Allow them to be 100% vested immediately in all employer contributions.

The tax credit applies for three years for each military spouse and is capped at $500. It equals the sum of $200 per military spouse and 100% of all employer contributions made on their behalf up to $300.

Employers already can offer workers the option of owning Roth versions of 401(k)s and 403(b)s, which have different tax advantages than their traditional counterparts.

The new law added two kinds of workplace individual retirement accounts (IRAs) to the list of plans that can be funded on an optional Roth basis: Savings Incentive Match Plan for Employees (SIMPLE) IRAs and Simplified Employee Pension (SEP) IRAs. Contributions to these Roth accounts will be made after taxes and be included in the employee's annual taxable income.

Before SECURE Act 2.0, matching contributions could only be made to traditional retirement accounts that are pre-tax. Employers are now able to give employees the option of receiving matching and nonelective contributions to their Roth retirement account. The employer Roth match will be taxable to the employee in the year it's made.

Businesses that don't sponsor a retirement plan are now able to offer a starter 401(k) plan that is easier and less costly to operate than a traditional 401(k) plan. The starter 401(k) generally requires that all employees are enrolled in the plan by default at a deferral rate of 3% to 15% of compensation. The limit on annual contributions will equal the IRA contribution limit ($6,000 if under age 50, $7,000 if age 50 or older), and employers can't make matching or nonelective contributions.

Alternatively, businesses can offer a starter safe harbor 403(b) plan that has similar guidelines.

Currently, employers with SIMPLE plans must make contributions to employees of either 2% of their compensation or 3% of employee elective deferral contributions. Employers are now able to make additional nonelective contributions to each employee of the SIMPLE plan up to 10% of compensation or $5,000 (indexed), whichever is less.

In addition, annual employee contribution limits for SIMPLE IRA plans will increase next year:

• For employers with 25 or fewer employees, the annual deferral and catch-up contributions will increase by 10%.
• Employers with 26-100 employees can provide higher deferral limits only if the employer either provides a 4% matching contribution or a 3% employer contribution.

Some individuals don't contribute to an employer-sponsored plan because they're directing extra cash toward paying down their student loans, and that means they miss out on employer matches.

The Secure Act 2.0 now allows employers the option to make matching contributions to an employee's 401(k) plan, 403(b) plan or SIMPLE IRA when participants make payments on their student loans. Employers can contribute to their workers' retirement plans even if the individuals aren't making contributions.

Employers can choose to allow non-highly compensated employees to make Roth contributions to an emergency savings account that links to their individual retirement account. The contributions are treated as elective deferrals for purposes of retirement matching contributions. (Matching contributions will go into the retirement account rather than the savings account.)

Businesses can automatically enroll employees into the accounts at no more than 3% of their salary, though workers can opt out. The participant's contribution is capped at $2,500 unless employers set a lower limit, and employees must be allowed to make withdrawals at least once a month.

A new provision in 2025, employers will need to automatically enroll eligible employees in newly established 401(k) or 403(b) plans, starting with a minimum pretax contribution equal to 3% of their wages. Contributions will increase by 1% each year until the employee contributes at least 10%, but not exceeding 15%, of their earnings. Employees can opt out of contributing as well as the scheduled increases.

The automatic enrollment provision does not apply to companies that are less than three years old and businesses with 10 or fewer employees.

Employers must currently allow eligible long-term, part-time workers to participate in their 401(k) plans, but the legislation helps many employees gain coverage faster.

Part-time employees aged 21 and older who work at least 500 hours in each of two consecutive 12-month periods will generally be eligible to participate in 401(k) plans. This is a change from the existing requirement of three consecutive years of service. (Clocking in at least 1,000 hours per year will remain another way to gain eligibility.) The new part-time coverage rules also extend to 403(b) plans that are subject to ERISA.

While the SECURE Act 2.0 IRA and 401(k) provisions (among others) in the legislation will likely have a big impact on workplace retirement accounts, the details can be tricky. Contact a local Thrivent financial advisor to get a better handle on when and how your business can implement the sweeping new changes.