The SECURE 2.0 Act took effect at the start of 2023, and its retirement plan provisions are among the most impactful changes for small business owners in years. If you sponsor a plan or are considering one, here are five changes that create real opportunities.
1. Starter 401(k) Plans
SECURE 2.0 created a new “starter” 401(k) option for businesses that do not currently offer a retirement plan. These plans have simplified administration: no employer matching required, no nondiscrimination testing, and lower setup costs. Employee contributions are capped at the IRA limit ($6,500 for 2023). If the cost and complexity of a traditional 401(k) has kept you from offering a plan, the starter option removes the biggest barriers.
2. Enhanced Tax Credits for Small Employers
Small businesses with up to 50 employees can receive a tax credit covering 100% of plan startup costs, up to $5,000 per year for the first three years. There is also a new credit of up to $1,000 per employee for employer contributions to the plan, available for the first five years. Combined, these credits can make offering a retirement plan essentially free for small employers.
3. Auto-Enrollment Requirement (Starting 2025)
New 401(k) and 403(b) plans established after December 29, 2022 must include automatic enrollment starting in 2025. Employees are automatically enrolled at a contribution rate between 3% and 10%, with annual automatic escalation of 1% up to at least 10% (and no more than 15%). Existing plans are grandfathered. If you are setting up a new plan, build auto-enrollment into the design from the start.
4. Roth Employer Contributions
For the first time, employers can make matching and nonelective contributions to designated Roth accounts within 401(k) and 403(b) plans. Previously, employer contributions could only go to pre-tax accounts. This gives both employers and employees more flexibility in managing the tax treatment of retirement savings.
5. Catch-Up Contribution Changes
Starting in 2025, participants aged 60 to 63 will be eligible for an enhanced catch-up contribution: the greater of $10,000 or 150% of the standard catch-up amount. For high-earning participants (wages over $145,000), catch-up contributions must go into a Roth account. Plan sponsors should prepare payroll systems for these changes.
Take Action
If you do not offer a retirement plan, the combination of starter plans and enhanced tax credits makes 2023 an ideal year to start. If you already have a plan, review it against the SECURE 2.0 provisions with your plan administrator to ensure you are capturing all available benefits and preparing for the mandatory changes ahead.