June 22, 2023

Volume XIII, Number 173

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Diving Into SECURE 2.0: Changes for Small Employer Retirement Plans

The SECURE 2.0 Act of 2022 (SECURE 2.0) significantly changes the legal and administrative compliance landscape for U.S. retirement plans. Foley & Lardner LLP is authoring a series of articles that take a “deep dive” into key SECURE 2.0 provisions that will affect how employers structure and administer their 401(k) plans, pension plans, and other types of employer-sponsored retirement plans.

In our prior SECURE 2.0 articles, we have discussed student loans and 401(k) plan matching contributionschanges designed to simplify plan administrationchanges to the minimum required distribution rules, and new and potentially easier ways to make withdrawals from retirement plans, with a focus on how they relate to 401(k) and other defined contribution plans.

This month, we focus specifically on SECURE 2.0 changes to small employer plans (Small Plans), including SIMPLE IRA Plans and SEPs. A SIMPLE IRA Plan is an abbreviated name for a Savings Incentive Match Plan for Employees, which allows employees and employers to contribute to traditional IRAs set up for employees.  A SEP Plan is an abbreviated name for a Simplified Employee Pension, which provides small business owners with a simplified method to contribute toward their employees’ retirement through an individual retirement account or annuity.  Small Plans generally have no more than 100 participants. The chart below is intended to be used as a reference for describing many of the Small Plan changes relative to current law, the type of plans affected, whether the change is mandatory or optional, and the effective date of the change.

 

Mandatory/
Optional

SECURE 2.0 Changes

Effective
Date

Optional

Higher catch-up limit to apply at age 60, 61, 62 and 63. Under current law, employees who have attained age 50 are permitted to make catch-up contributions under a SIMPLE IRA plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2023 for SIMPLE IRA plans is $3,500. The SIMPLE IRA Plan catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63 is the greater of $5,000, indexed, or 150% of the regular catch-up amount for 2025.

Tax years 2025 and after.

Optional

Treatment of student loan payments as elective deferrals for purposes of matching contributions. Employees who may not be able to save for retirement because they are overwhelmed with student debt, may receive matching contributions by reason of repaying their student loans. An employer is permitted to make matching contributions under a SIMPLE IRA with respect to qualified student loan payments. A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee.

Contributions made for plan years beginning after Dec 31, 2023.

Optional

Starter 401(k) plans for employers with no retirement plan. A starter 401(k) plan (or safe harbor 403(b) plan if the applicable employer is a tax-exempt organization) is a type of plan that may be offered by an employer that does not currently sponsor a retirement plan. A starter 401(k) plan would generally require that all employees be default enrolled in the plan at a three to 15%of compensation deferral rate. The limit on annual deferrals would be the same as the IRA contribution limit, which for 2023 is $6,500 with an additional $1,000 in catch-up contributions beginning at age 50. No employer contributions are allowed.

Plan years beginning after Dec 31, 2023.

N/A

Modification of credit for small employer pension plan startup costs. Currently, the three-year small business startup credit is 50% of administrative costs, up to an annual cap of $5,000. SECURE 2.0 makes changes to the credit by increasing the startup credit from 50% to 100% for employers with up to 50 employees. Except in the case of defined benefit plans, an additional credit is provided. The amount of the additional credit generally will be a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. This full additional credit is limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees. The applicable percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year and no credit for tax years thereafter.

Tax years 2023 and after.

N/A

Military spouse retirement plan eligibility credit for small employers. SECURE 2.0 provides small employers a tax credit with respect to their defined contribution plans if they (1) make military spouses immediately eligible for plan participation within two months of hire, (2) upon plan eligibility, make the military spouse eligible for any matching or nonelective contribution that they would have been eligible for otherwise at two years of service, and (3) make the military spouse 100% immediately vested in all employer contributions. The tax credit equals the sum of (1) $200 per military spouse, and (2) 100% of all employer contributions (up to $300) made on behalf of the military spouse, for a maximum tax credit of $500. This credit applies for three years with respect to each military spouse and does not apply to highly compensated employees. An employer may rely on an employee’s certification that such employee’s spouse is a member of the uniformed services.

Tax years beginning after December 29, 2022.

Optional

Allow additional nonelective contributions to SIMPLE IRA plans. Current law requires employers with SIMPLE IRA plans to make employer contributions to employees of either 2% of compensation or 3% of employee elective deferral contributions. SECURE 2.0 permits an employer to make additional contributions to each employee of the plan in a uniform manner, provided that the contribution may not exceed the lesser of up to 10% of compensation or $5,000 (indexed).

Tax years 2024 and after.

Mandatory

Contribution limit for SIMPLE IRA plans. Under current law, the annual contribution limit for employee elective deferral contributions to a SIMPLE IRA plan is $15,500 (2023) and the catch-up contribution limit beginning at age 50 is $3,500. A SIMPLE IRA plan may only be sponsored by a small employer (100 or fewer employees), and the employer is required to either make matching contributions on the first 3% of compensation deferred or an employer contribution of 2% of compensation (regardless of whether the employee elects to make contributions). SECURE 2.0 increases the annual deferral limit and the catch-up contribution at age 50 by 10%, as compared to the limit that would otherwise apply in the first year this change is effective, in the case of an employer with no more than 25 employees. An employer with 26 to 100 employees would be permitted to provide higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution.

Tax years 2024 and after.

Optional

Tax treatment of certain nontrade or business SEP contributions. SECURE2.0 permits employers of domestic employees (e.g., nannies) to provide retirement benefits for such employees under a Simplified Employee Pension (SEP).

Tax years beginning after December 29, 2022.

Optional

Employers allowed to replace SIMPLE IRA retirement accounts with safe harbor 401(k) plans during a year. SECURE 2.0 allows an employer to replace a SIMPLE IRA plan with a SIMPLE 401(k) plan or other 401(k) plan that requires mandatory employer contributions during a plan year. This is important for acquisitions; otherwise, SIMPLE IRAs can only be terminated at year-end.

Plan years beginning after Dec 31, 2023.

Optional

SIMPLE and SEP Roth IRAs. Generally, all plans that allow pre-tax employee contributions are permitted to accept Roth contributions with one exception – SIMPLE IRAs. SECURE2.0 now allows SIMPLE IRAs to accept Roth contributions too. In addition, aside from grandfathered salaried reduction simplified employee pension plans, under current law, simplified employee pension plans (SEPs) can only accept employer money and not on a Roth basis. SECURE2.0 allows employers to offer employees the ability to treat employee and employer SEP contributions as Roth (in whole or in part).

Tax years 2023 and after.

N/A

Application of credit for small employer pension plan startup costs to employers who join an existing plan. The startup tax credit is available for three years for employers joining a MEP (multiple employer plan), regardless of how long the MEP has been in existence.

Tax years 2020 and after (retroactive).

 

 

© 2023 Foley & Lardner LLPNational Law Review, Volume XIII, Number 172
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About this Author

Michael Abbott employment lawyer Foley Lardner
Partner

Employee benefits and tax lawyer Michael Abbott is a leading advisor to companies, executives and fiduciaries with sophisticated employee benefits and executive compensation needs, particularly in the tech, energy and private equity sectors. In addition, he has a significant employee benefits presence representing clients in the live entertainment, credit/debit card, chemical, school bus, transit and transportation industries. His nationwide practice focuses on ERISA and related tax compliance matters involving various aspects of employee benefits including, cross-border tax issues, tax-...

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