Attracting Skilled Labor With Retirement Opportunities
The Setting Every Community Up for Retirement Enhancement 2.0 Act (SECURE 2.0) makes it easier for employees to save for retirement by increasing contribution limits and expanding hardship withdrawals.
It also offers tax credits and other incentives for employers that adopt new retirement plans and authorizes plan enhancements that can help employers boost participation in existing plans. Here are key provisions for employers to consider.
Small Employer Tax Credit
SECURE 2.0 expands the existing tax credit for small employers that start new retirement plans. Starting in 2023, employers with up to 50 (down from 100) employees may claim a credit equal to 100% (up from 50%) of their qualified start-up costs. The credit is generally capped at $5,000 per year.
These employers are also entitled to an additional credit of up to $1,000 per employee for employer contributions to the accounts of employees earning $100,000 or less. For employers with more than 50 employees, the credit is reduced by 2% for each employee in excess of 50, and fully phased out at 100 employees. The full credit is available in the year the plan is established and the following year. After that, it decreases by 25% each year and is eliminated after year five.
Plan Participation Financial Incentives
Boosting retirement plan participation by rank-and-file employees can provide many benefits. Examples include easier compliance with nondiscrimination requirements, improved employee satisfaction and retention, enhanced tax benefits, and cost savings. Previously, plans were prohibited from offering financial incentives (other than matching contributions) to encourage participation.
Now, however, SECURE 2.0 allows employers to offer participants “de minimis” financial incentives, such as low-dollar-value gift cards. Keep in mind that these incentives usually are treated as taxable income to the employee.
Penalty-Free Emergency Distributions
Employers may now amend their plans to permit penalty-free distributions, up to $22,000, for participants who suffer economic losses related to a federally declared disaster. Participants may spread the resulting income tax over three years. Or, if they repay the distribution within three years, participants may avoid tax altogether.
SECURE 2.0 also permits employers to establish emergency savings accounts for rank-and-file employees, linked to a 401(k) or similar plan. These accounts may accept only after-tax contributions (although they’re considered contributions to the linked plan for matching purposes). Account balances must not exceed $2,500. And withdrawals, which must be permitted at least monthly, are tax- and penalty-free.
More Ways To Attract Employees
Other SECURE 2.0 provisions that can help employers attract skilled labor include:
Expanded coverage for part-time workers. Currently, part-time employees are eligible to participate in a 401(k) plan if they complete at least 500 hours of service for at least three consecutive years and meet certain other requirements. SECURE 2.0 reduces the service requirement from three to two years for plan years beginning after December 31, 2024.
Election of Roth treatment for employer contributions. Plans (other than SIMPLE IRA plans) may now permit participants to elect to treat fully vested employer contributions as Roth contributions. Offering this option would require a plan amendment, and such contributions will be taxable to the employee at the time they’re made.
Matching contributions for student loan payments. Starting in 2024, employers may amend their plans to treat qualified student loan payments as elective deferrals for matching contribution purposes. This can be a valuable benefit for employees who would otherwise have to choose between paying down student debt and deferring salary to receive matching contributions.
Mandatory automatic enrollment for new plans. Starting in 2025, new 401(k) plans (those established on or after December 29, 2022) will be required to automatically enroll participants at an initial contribution rate of 3% to 10% of compensation, unless the participant opts out. The contribution rate will be automatically increased by 1% per year until it reaches at least 10% (but no more than 15%), unless the participant elects a different contribution level.
Increased catch-up contributions. Starting in 2025, employees between the ages of 60 and 63 will be permitted to make catch-up contributions to a 401(k) plan up to $10,000 (adjusted for inflation) or 150% of the regular catch-up amount, whichever is greater. As an example, using the current catch-up amount for employees over 50 ($7,500), employees from 60 to 63 would be able to make catch-up contributions up to $11,250 ($7,500 x 150%). For plans that use the IRS’s model catch-up contribution language, this change will happen automatically. Some employers may need to amend their plans to allow these contributions.
Review Your Plans
Enhancing retirement benefits can be an effective tool for attracting and retaining skilled workers — a major benefit for manufacturers that are having a hard time filling open job positions. However, taking advantage of some SECURE 2.0 provisions may require plan amendments. Contact us or check with your CPA to review your plans and update if necessary.