Spokane Journal of Business

SECURE Act 2.0 focuses on US small business

Legislation encourages such employers to set up worker retirement plans

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Noah Schwab is a certified financial planner with Stewardship Concepts Financial Services LLC, in Spokane. He can be reached at 509.443.0845.

With over 90 changes, the SECURE Act 2.0 of 2022 aims to entice small businesses to build upon the original Setting Every Community Up for Retirement Enhancement Act passed in 2019 to help Americans save more for retirement.

Workers have been saving less for retirement and need to prepare better. According to a recent survey, 55% of working Americans say they’re behind on retirement savings. Combined with high inflation levels and the uncertainty of Social Security, saving for retirement is a dilemma. This trajectory is unsustainable.

Small businesses are where real change happens. They make up 44% of the U.S. gross domestic product. This legislation targets the backbone of our economy, including several significant provisions aimed at helping small businesses with retirement savings. Some changes are effective immediately, while others begin in 2024 or later.

Small businesses that previously dismissed the idea of a retirement plan because of the cost may now reconsider. One specific area targeted was to get small business owners to start a retirement plan through tax credits. The new legislation provides two tax credits for creating a new retirement plan, such as a 401(k), simplified employee retirement plan, or individual retirement plans set up for employees known as SIMPLE IRAs. The first tax credit is for employers claiming 100% of eligible startup costs instead of the earlier 50% for each of the first three years up to a limit. The number of employees at the business determines that limitation.

The second credit offered is substantial for employers. Owners can receive a tax credit of up to $1,000 a year on their matching contributions for each employee earning less than $100,000.

While the credit phases out over five years, this change is a massive benefit for business owners and employees.

Employees who haven’t had access to retirement plans previously may now get the opportunity.

Contribution limits to retirement accounts was a specific area that the legislation targeted. The act increases the contribution limits for particular retirement plans, such as 401(k)s and IRAs, allowing employees and small business owners to save more money for retirement. The increased limits for business owners will enable them to save on taxes and make the cost of a retirement plan make sense. This change is a win-win because small businesses will attract and retain employees while helping them save more for retirement.

Provisions of the bill also focus on helping long-term, part-time employees. The current law doesn’t allow those who work less than 1,000 hours per year to participate in a 401(k) plan. The SECURE Act 2.0 changes the minimum limit number of hours to 500 hours per year for three consecutive years to participate.

Previously available only as pretax contributions, employers now have the Roth option, which lets employees decide whether to take the employer match before or after tax. Before-tax contributions help younger savers because they can pay a lower tax rate and utilize tax-free growth over their lifetime. Furthermore, Roth options are available to all retirement accounts, including SIMPLE and SEP IRAs.

An additional change is requiring new 401(k) and 403(b) plans to enroll participants automatically in the plan with a 3% to 10% salary deferral. Then deferrals must increase by 1 percentage point per year up to 10% to 15%. Automatic enrollment doesn’t apply to businesses under 3 years old or with fewer than 10 employees. Employees also have the option to opt out. I like this requirement because it helps employees who don’t typically save, but it doesn’t restrict everyone’s choice.

Overall, the SECURE Act 2.0 has many different provisions, and many changes lean toward benefiting the business owner. I like the strategy of targeting the business owner. Employees will ultimately gain because the business owners are more likely to pay the cost of a retirement plan and give matching contributions.

Specific provisions will make saving better and more accessible for small businesses and their employees. This legislation will result in many companies establishing retirement plans over the next few years, helping employees save and giving business owners another tool to accumulate retirement investments from their businesses tax efficiently. Time will tell how effective these changes will be in moving the needle toward solving our retirement savings crisis.

For specific guidance on your situation, talk to your certified public accountant or certified financial planner.

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