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How a new federal law will help small-business owners provide retirement plans for their employees

By January 4, 2023No Comments

(This column originally appeared in the Philadelphia Inquirer)

Nearly 60% of adults said they worry they’ll be unable to retire by age 65, and 46% said they have less than $15,000 saved for their golden years, according to a recent study by First National Bank of Omaha. Another recent study of 500 small businesses found that only 26% currently offered a 401(k) retirement plan.

As people live and work longer than ever before, these statistics are alarming. But help could soon be on the way.

Legislation, known as Secure 2.0, was signed last week by President Joe Biden to help small-business owners empower their employees to save for retirement. The new law is an expansion of 2019′s Secure Act, which offered tax credits and other incentives to small-business owners..

Many retirement plan professionals and employee benefits advisers in the area predict a substantial impact from this legislation.

“Secure 2.0 will create real value for both the employee and employer,” said Jeffrey Biernat, founder and CEO of Gwynedd Wealth Partners LLC in Plymouth Meeting. “Many of the obstacles and objections small-business owners encountered in the past when contemplating offering a retirement benefit have now been removed.”

The new legislation expands the tax credit for companies with less than 50 employees to pay for administrative costs when starting a new plan from 50% to 100% with a cap of $5,000 annually. In addition, small businesses with up to 100 employees may be eligible to receive a tax credit on employer contributions made to some employees’ retirement accounts up to $1,000.

Michael Menninger, CEO of Menninger & Associates in Trooper, thinks Secure 2.0 will cause big changes in retirement savings.

“We love this, as it provides an increased incentive for small employers to start a new retirement plan for their employees,” he said. “In the past, it was cost prohibitive for many employers to start a plan, and this makes it nearly cost-free to do so, except if the employer chooses to make matching or nonelective contributions.”

Beginning Jan. 1, 2025, the legislation will also require employers to withhold a minimum contribution of 3% of the earnings of new employees to their 401(k) plan. (There is an exception to the requirement for start-ups, small businesses with 10 or fewer employees, churches, and governmental plans.)

“I believe this is the most important feature of Secure 2.0,” said Dan Hernandez, senior financial representative of Lincoln Investment in Voorhees. “Employees can still opt out, but it makes it easier to save and it will be a huge step in getting workers to save what they need for retirement.”

Also included in the legislation is the ability, beginning in 2024, for employers to consider an employee’s student loan repayments as a “contribution” and therefore match that amount for their retirement savings. For example, if an employee pays $5,000 toward their student loan during the year, the employer is allowed to “match” that amount with a pretax contribution to that employee’s retirement account.

There are other incentives coming over the next few years as part of the bill:

  • Older employees will be allowed to wait until they’re 73 to take mandatory distributions from their retirement accounts. That means those employees have the option to keep working for longer to continue to build their nest eggs.

I realize that some business owners may find these additional rules to be burdensome. But, for me, the Secure 2.0 (and its Secure Act predecessor) offers two big benefits for my clients.

The first is that small-business owners can save more for retirement. The Employee Retirement Income Security Act (ERISA) requires annual “discrimination” testing of a 401(k) plan to ensure that higher compensated individuals and the owners of businesses aren’t using these retirement plans as a vehicle only for themselves and making disproportionate contributions as compared to non-highly compensated employees. The more your employees contribute, the more you can contribute, which is one of the aims of the Secure 2.0 legislation.

The second is that by offering your employees more incentives to save, there may be less burden to help your employees in the future. I’ve seen instances where long-term workers haven’t prepared for retirement and turn to their employers for help in the form of consulting contracts or loans. Rarely have I seen this help denied, but it’s not an easy situation for a business owner. The Secure 2.0 law also now allows employees to put money aside and then withdraw as much as $1,000 every year for “emergencies” without incurring a penalty.

Ed MacConnell, who runs employee benefits firm Total Solutions, Inc. in Feasterville, believes that the emergency payment feature could potentially be used for unforeseen medical expenses (or maybe insurance premiums) and help alleviate both a potential financial burden on the worker and the employer.

“It could help offset large out-of-pocket expenses and encourage employees to set aside the savings for that event,” he said. “It’s still unclear how the details would work, but that’s the most exciting part for me.”

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