CCPA: Navigating Business Retirement Plans Under SECURE 2.0
We usually like to cover new topics over here at the Commonsense CPA but sometimes there are topics that have to be revisited. And one of those is retirement plans but this time we’re inviting Chris Oland – a principal at Harmony Wealth – to talk about the state of play with retirement programs.
The SECURE 2.0 Act, signed into law in 2022, brings sweeping changes to retirement plan policies, with implications for both employers and employees. This guide will explore both the key provisions of SECURE 2.0 and the various retirement plan options available to businesses, including SIMPLE IRAs, SEP IRAs, and 401(k)s.
Read on for Chris's primer.
SECURE 2.0: Key Provisions and Benefits for Employers
1. Mandatory Auto-Enrollment and Contribution Increases
One of the hallmark changes introduced by SECURE 2.0 is the requirement for new 401(k) and 403(b) plans to include automatic enrollment for employees. This provision aims to increase retirement savings participation rates, as many employees tend to delay or neglect opting into such plans. Employers must enroll eligible employees at a default contribution rate of at least 3%, gradually increasing up to 10% over time. However, employees retain the option to opt-out or adjust their contribution levels.
For businesses, particularly small businesses that may have previously struggled with low employee engagement in retirement plans, this change could foster greater participation and higher overall savings for their workforce. It also reduces the burden on employers to actively encourage plan enrollment, as auto-enrollment ensures a baseline participation rate.
2. Expanded Roth Contributions
SECURE 2.0 also expands options for Roth contributions, allowing employers to offer employees the flexibility of contributing to Roth accounts within 401(k) and other retirement plans. This could be a valuable offering for employees who prefer to pay taxes upfront on their contributions and enjoy tax-free withdrawals in retirement.
For businesses, offering Roth options can enhance the attractiveness of their retirement benefits package, particularly for younger workers or higher-income employees who anticipate being in a higher tax bracket in the future. Moreover, employees over the age of 50 can now make catch-up contributions to Roth accounts, further expanding the scope of retirement planning.
3. Increased Catch-Up Contributions
Employees aged 50 and above can contribute additional funds to their retirement plans through catch-up contributions. Under SECURE 2.0, these limits have been raised for individuals between the ages of 60 and 63, offering an opportunity to accelerate retirement savings during the crucial final working years. For businesses, this provision encourages older employees to save more, while also potentially offering them a sense of security and long-term financial planning as they near retirement.
4. Student Loan Matching Contributions
Recognizing the burden of student debt on younger generations, SECURE 2.0 introduces a provision that allows employers to match employees' student loan payments with retirement contributions. This provision can be a significant incentive for businesses to attract and retain younger talent. It also provides a dual benefit: helping employees reduce student debt while simultaneously contributing to their retirement savings, even if they cannot afford to contribute directly to their 401(k) due to loan payments.
Understanding Business Retirement Plan Options
While SECURE 2.0 introduces many exciting opportunities to enhance retirement savings, businesses must also carefully consider which type of retirement plan best fits their needs. Below are some popular options to consider.
Solo 401(k)
A solo 401(k) is ideal for self-employed individuals or business owners who have no employees. This retirement plan allows significant contributions, with deadlines that differ based on whether the business is incorporated or not. Retroactive employer contributions can be made by the tax filing deadline, including extensions. Elective deferrals for unincorporated businesses must be made by the tax filing deadline, excluding extensions, while incorporated businesses need to make these deferrals by the end of the tax year. For 2024, employee deferrals can reach up to $23,000 if under age 50, or $30,500 if aged 50 or older. Additionally, employer contributions can be up to 25% of compensation (or 20% of self-employment income), with a total limit of $66,000, or $73,500 for those aged 50 or older.
SEP-IRA
The SEP-IRA (Simplified Employee Pension) is designed for self-employed individuals or small business owners who have few employees. The plan must be established and funded by the tax filing deadline, typically April 15, with the possibility of extensions. For 2024, contributions can be the lesser of 25% of compensation or $66,000. A key feature of the SEP-IRA is the flexibility in contributions, but they must be applied equally for all eligible employees.
Safe Harbor 401(k)
A Safe Harbor 401(k) is most beneficial for small to medium-sized businesses with employees who want to avoid IRS nondiscrimination testing. To start a Safe Harbor 401(k), the plan must be in effect by October 1, with participant notices distributed by December 1. For 2024, employees can defer up to $23,000 if under 50, or $30,500 if 50 or older. Employers are required to contribute, offering either a 3% non-elective contribution or a 4% matching contribution. The total contribution limit is $66,000, or $73,500 for those aged 50 or older.
Defined Benefit Plan
A Defined Benefit Plan is designed for high-income business owners who seek to maximize their tax-deferred retirement savings. The plan must be established by December 31 or by the end of the business's fiscal year, with a Funding Proposal Worksheet due by November 15. Contributions for the year must be made by September 15 of the following year. Contribution limits in 2024 are determined through actuarial calculations and can exceed $250,000 annually, offering a significant advantage for those looking to save aggressively for retirement.
Cash Balance Plan
A Cash Balance Plan is another option for high-income business owners who want higher contribution limits than those offered by other retirement plans. The plan must be established by December 31 for the current tax year. Contribution limits for 2024 vary depending on the participant’s age and income, with potential contributions ranging from $100,000 to over $300,000 annually. This plan combines elements of both defined benefit and defined contribution plans, offering flexibility and high savings potential.
The changes introduced by SECURE 2.0, combined with the variety of available retirement plan options, present businesses with new opportunities to optimize their retirement offerings.
With Harmony Wealth as your solution, we simplify retirement planning for small businesses and help leverage the provisions of SECURE 2.0. Our personalized approach ensures you’re never navigating this process alone. We will help you find the plan that aligns with your goals and implement to ensure the long-term success of your business and employees.
- Chris Oland
Founder & President, Harmony Wealth