SECURE 2.0 Act: Potential Employer Impact

Capitol Hill plays a critical role in shaping the corporate landscape, but even to the trained observer it can be difficult to discern how new changes in retirement legislation may affect your business. How can you deliver more value to your employees through your benefits offerings when the rules of the road continue to shift?

In the case of the SECURE 2.0 Act of 2022, also known as SECURE 2.0, there are a few provisions that directly affect workplace benefits—and the companies that rely on these critical tools for motivating employee recruitment, productivity, and retention. Here’s what you need to know.

What is SECURE 2.0?

These changes in legislation were developed to combat the ever-growing American retirement saving gap. The initial bill passed through the House in a near-unanimous bipartisan vote, demonstrating that Capitol Hill recognizes the need to prevent a retirement crisis, and the full bill passed through the Senate on Dec. 19, 2022, and was signed into law on Dec. 29, 2022.

The legislation includes changes that increase uniformity across employee segments and can help you leverage your workplace benefits to accelerate your employees’ journey on the road to financial well-being.

The bill includes requirements for newly established, employer-sponsored 401(k) and 403(b) plans to enroll their workers automatically and makes it easier for student-loan borrowers to save and for older workers to make catch-up contributions. It will also lower costs for certain employers starting a retirement plan by modifying the existing tax credit available to smaller businesses that start a new plan, among other changes.

There are many provisions in the bill, but here are a few key standouts with significant impact to employers and employee retirement planning:  

• Establishment of a new “Starter K,” which will allow employers that do not currently sponsor a retirement plan to offer a “starter 401(k) deferral-only arrangement” plan (or a safe harbor 403(b) plan). Effective 2024.

• Increase in tax credit for small employers implementing a new 401(k) plan for the first three years from 50% to 100%, capped at $5,000. Effective 2023.

• Creating an additional new tax credit to encourage eligible small employers to make direct contributions to their new plan for their employees, offsetting up to $1,000 of these employer contributions for each participating employee. Such credit is available for the first five years of the plan but is not available to new defined benefit plans. Effective 2023.

• Expanding automatic enrollment in retirement plans by requiring new 401(k) and 403(b) plans to automatically enroll participants in the plans upon becoming eligible, with the ability for employees to opt out of coverage. Such new plans are also required to automatically increase (or escalate) such contribution amounts by 1% of compensation each year with a cap at 15% of the employee’s compensation (although plans are permitted to cease the annual automatic escalation at 10%). Exemptions from these requirements include small businesses with 10 or fewer employees, new businesses that have been in business for less than 3 years, church plans and governmental plans. Effective for plan years beginning after December 31, 2024.

• Small immediate financial incentives for contributing to a plan permits the provision of de minimis financial incentives, such as gift cards, to encourage participation and may be provided to participants for contributing to a 401(k) or 403(b) plan, provided plan assets are not utilized to pay for such incentives. Provides an exemption to the contingent benefit rule and relief from the prohibited transaction rules under both the Code and ERISA, so long as the de minimis incentive does not exceed $250 in value Effective for plan years beginning after the date of enactment. Effective 2023.

• Allows eligible employee student loan repayments to be treated as employee deferral contributions for purposes of the employer making matching contributions for SIMPLE IRAs, 401(k), 403(b) and governmental 457(b) plans. Effective 2024.

• Increasing the age for required beginning date of required minimum distributions (RMDs) from retirement plans from age 72 to age 73 in 2023, and then to age 75 in 2033 (“RMD Age”). Specifically, the RMD Age is (a) age 70 ½ for individuals born before July 1, 1949; (b) age 72 for individuals born after June 30, 1949, but before January 1, 1951; (c) age 73 for individuals born after December 31, 1950 but before January 1, 1960; or (d) age 75 for all other individuals born after December 31, 1959. Effective for distributions made after December 31, 2022, for individuals who attain age 72 after that date.

• A new one-time and penalty-free emergency withdrawal of up to $1,000 from a retirement account for unforeseeable or immediate financial needs relating to personal or family emergency expenses within a three-year period. Effective 2024.

• Higher catch-up contribution limits for individuals ages 60-63 for most retirement plans to the greater of $10,000 per year, or 150% of the regular catch-up contribution amount in 2024. Effective 2025.

• Automatic portability allowing retirement participants to transfer their retirement savings more easily to a new employer by allowing retirement plan providers to provide plans with the ability to automatically transfer a participant’s default IRA into the participant’s new employer’s retirement plan. Effective Dec. 29, 2023.

• Repeal and replacement of existing Saver's Matching Contribution allows lower-income retirement savings to receive a refundable, direct government-funded matching contribution to their individual retirement account (IRA) or retirement plan in an amount up to 50% of their contributions, up to $2,000 for tax years beginning after Dec. 31, 2026.

• Establishment of a Retirement Savings Lost and Found will provide an online searchable database, within two years of enactment, that will allow a participant or beneficiary to search for contact information for plan administrators of plans in which the participant or beneficiary may have a benefit. Effective 2025.

• Broadening pooled employer plan or open multiple employer plans to allow 403(b) plans to participate in, and be operated as, multiple employer plans and pooled employer plans. Effective 2023.

Meeting the moment—and the law

Saving for a comfortable retirement can be a significant challenge—45% of workers are say saving for retirement is a top-stress causing financial issue.¹  However, business leaders are beginning to understand they can play a more active role in removing some of these retirement obstacles from their employees’ lives.

SECURE 2.0 expands on this logic to help companies help their employees reach their financial goals.

The takeaway

At the end of the day, more comprehensive solutions are needed to address employee retirement planning needs, and SECURE 2.0 offers opportunities for forward momentum.

Use any legislative updates as an opportunity to educate your workforce on the benefits you provide them and raise awareness about the good work you’re doing to take care of your people.

Morgan Stanley empowers companies and employees wherever they are on their unique financial journey, and we’re here to help companies navigate today’s financial services landscape and latest legislative changes with confidence.