The United States has a significant retirement savings problem.
According to a study by the Urban Institute, almost 40% of millennials born in the 1980s will not have sufficient income at age 70 to maintain their pre-retirement standard of living. A recent Gallup study concluded that about half of current non-retirees do not expect to be able to live comfortably in retirement, and the expected retirement age has moved up from 60 in 1995 to 66 in 2022. Finally, a recent analysis conducted by The Penny Hoarder found that 32% of working-age Americans—about 57 million people—have no retirement savings at all.
These retirement savings shortfalls appear to be driven at least in part by a lack of access to employer-sponsored retirement plans. AARP Public Policy Institute researchers have found, for example, that 46 million workers with annual earnings of $50,000 or less, or 81% of those 57 million workers, do not have access to an employer retirement plan.
Almost all of these individuals who are employed full-time likely work for small businesses (generally defined as 50 employees or fewer), as small businesses employ approximately 61.7 million Americans, or 46.4% of the total U.S. workforce. In fact, a 2019 survey estimated that 90% or more of small businesses were not offering employer-sponsored retirement savings plans.
In the current, highly divided Congress, attempting to close this retirement savings gap is a rare area of bipartisan agreement. In 2019, Congress enacted the “Setting Every Community Up for Retirement Enhancement Act” (SECURE 1.0). SECURE 1.0 began to address some of the small-business access issues, partly by allowing unrelated employers to pool together to participate in a single 401(k)-type plan sponsored by a registered pooled plan provider. SECURE 1.0 also allowed—but did not require—employers to automatically enroll new hires into their plans (with an employee opt-out right) and included various measures designed to incentivize small employers to offer plans and to ease the administrative burdens of operating them.
Seemingly indicating that the SECURE 1.0 reforms did have an impact, a 2022 Sharebuilder 401k survey concluded that three quarters of all U.S. small businesses offer no employer-sponsored retirement plan at all—notably down from the pre-SECURE 1.0 2019 survey that logged more than 90%.
To address persistent retirement gap issues, this past December Congress enacted the SECURE 2.0 Act of 2022 as part of the $1.7 trillion year-end Consolidated Appropriations Act. SECURE 2.0 includes a number of provisions designed to increase individual plan participation and to make it easier and less expensive for small businesses to provide retirement savings plans.
Under the SECURE 1.0 Act, 401(k) plans are permitted, but not required, to have automatic enrollment policies, where employees have a percentage of compensation withheld and contributed to the employer’s 401(k) plan.
SECURE 2.0 ups the ante by requiring—starting in 2025—all new plans to automatically enroll all employees (with an opt-out right) with a contribution of at least 3% and up to 10% of the employees’ incomes into the plan (subject to the statutory contribution caps). These provisions also require that the contributions be increased by 1% per year up to at least 10% of the employees’ salaries. New businesses (less than three years old), employers with 10 or fewer employees, and government, church and SIMPLE plans all are exempted from the automatic enrollment requirements.
Employee Contribution Incentives
SECURE 2.0 makes it easier for long-term part-time employees to qualify for plan participation (essentially reducing the look-back evaluation period from three years to two) and expands that regime to include 403(b) plans.
The act also includes a number of provisions designed to allow plans to better incentivize employee plan contributions, including an increase in the “catch-up” contribution amounts for older plan participants and the inflation indexing of those amounts going forward.
New incentives include the following:
Savers Match For lower-income workers, beginning in 2027 the federal government will make an annual matching plan contribution to a qualifying plan participant’s retirement account of 50% of that individual’s non-Roth elective plan contributions. The benefit is capped at a $1,000 per year payment per individual and phases out once the plan participant exceeds certain income thresholds, which vary by filing status. This will replace the “Savers Credit” program.
Student Loan Matching Contributions Starting next year, employers will be permitted, but not required, to treat an employee’s qualified higher education student loan repayments as, effectively, contributions to 401(k), 403(b) or SIMPLE IRAs for purposes of calculating their employer plan contribution matching amount.
Emergency Expenses Plan participants can now receive an early plan distribution of up to $1,000 to cover unforeseeable or immediate financial needs relating to personal or family emergency expenses without being subject to the 10% early withdrawal tax. The plan participant may not take another distribution from same plan within three years unless the plan has been replenished.
New Emergency Savings Account Linked to Retirement Plan Starting in 2024, employers can offer a new retirement plan-linked emergency savings account to their non-highly compensated employees. Employer contributions to these accounts are prohibited, and account contributions are capped at $2,500 net of permissible distributions and accrued interest.
De Minimis Gift Employers are now permitted to offer de minimus incentives, such as low-dollar gift cards, to boost employee participation in 401(k) and 403(b) plans (but those incentives cannot be paid with plan assets).
Employer Contributions May Be Roth Employers may allow employees to elect vested matching and non-elective contributions be treated as Roth contributions under 401(k), 403(b) or 457(b) plans.
Small-Business Plan Provisions
SECURE 2.0 includes a number of provisions designed to ease the burden of administering a plan. These provisions apply to all plans but will be especially beneficial for smaller ones. For example, all inadvertent plan violations may now be self-corrected without a regulatory submission if completed within a reasonable period after failure is identified.
The act also creates a new “Starter 401(k) Plan” option that is designed to simplify the plan startup and administrative burdens for employers that have not previously maintained employee retirement plans. Only employee contributions are permitted (up to $6,000 per year).
The legislation also insulates multi-employer plan participating employers from most fiduciary liability exposure if they are not plan fiduciaries and includes provisions further easing the administrative burdens of operating such plans.
In addition, the act includes two small-business targeted tax credits:
Plan Startup Costs For small businesses with fewer than 50 employees, SECURE 2.0 increases the plan startup cost credit from 50% to 100% up to $5,000.
Employer Plan Contributions Credit The act also includes a tax credit for employer plan contributions of up to $1,000 per eligible employee; there is a credit phase-out formula for employers with more than 50 employees.
There is a lot to be done in the retirement space, and now we have some new tools with which to attack our retirement savings gap problems.