According to a 2022 study from the Transamerica Center for Retirement Studies, less than half (48 percent) of employed workers in the United States indicated having savings in 401(k), 403(b), and similar retirement accounts. A similar study published by AARP, found that nearly half of all employers don’t provide their employees with any kind of retirement savings or pension plan. When it boils down to it, a major proportion of the country’s workforce doesn’t have access to various workplace savings benefits – and this makes it hard for them to source emergency funds when they need it.
The SECURE Act 2.0 was passed as part of a $1.7 trillion omnibus budget bill to expand access to workplace savings plans at companies large and small to create offerings for their workers.
HR and people ops teams within organizations need to prepare for what’s to come: whether that’s acting on new laws and regulations for which to abide, or simply knowing what to relay to key stakeholders when it comes to preparing budgets for possible changes in their employee benefits offerings.
Note: for a summary of the legal impact, check out this helpful comparison table put together by Groom Law.
What is the SECURE Act 2.0?
Formally called the “Setting Every Community Up for Retirement Enhancement Act” – and initially presented by the House, the most recent version of SECURE Act 2.0 incorporates provisions previously found in similar bills presented by the Senate, such as the RISE & SHINE Act and EARN Act, as well as the earlier House-passed Securing a Strong Retirement Act (SSRA).
According to House Majority Leader, Steny Hoyer (D-MD), back in March of this year, the proposed legislation aims to “[expand] automatic enrollment in employer-provided retirement plans, [simplify] rules for small businesses, and [help] those near retirement save more for longer” and “help increase Americans’ access to retirement funds and help families save for the future.”
When does the SECURE Act 2.0 take effect?
The SECURE Act 2.0 was voted on and passed as part of the 2023 omnibus spending bill.
“Retirement legislation benefits from wide bipartisan support,” said Catherine Reilly, the head of retirement solutions at the retirement savings platform Smart.
With the SECURE Act 2.0 passing as part of the spending bill, many of the provisions take effect on January 1, 2024 – with some provisions taking effect at once and implemented over the next few years.
Who benefits from the SECURE Act?
According to Paul Richman, chief government- and political-affairs officer at the Insured Retirement Institute (IRI), we should expect the 2022 version of the SECURE Act to “add billions to the retirement savings for small-business workers, part-time workers, employees with student loan debt, military spouses, low-income workers, and others.”
The legislation will greatly increase access to these workplace retirement and savings benefits for millions of underrepresented populations throughout the United States. In the same survey from AARP, it’s estimated that 46 million workers with annual earnings of $50,000 or less do not have access to any kind of employer-provided retirement plan. From a wider lens, SECURE Act 2.0 is set to impact these primarily low- and middle-income working Americans. The emergency savings provisions, in particular, provide step stones to accessible savings before committing to longer-term to or dipping into retirement savings.
Homing in, we see its effect on specific workers and companies:
Startups and small businesses
Core provisions in SECURE Act 2.0 are designed to incentivize small businesses and startups to create and/or expand workplace savings benefits to their employees. Coming largely in the form of tax credits, these added incentives are expected to increase the options for available retirement savings for millions of working Americans.
As highlighted by the AARP study, it’s approximated that currently 80 percent of people who work at companies with fewer than 10 employees and 65 percent of those who work at companies with 10 to 24 employees lack access to an employer-sponsored retirement savings or workplace benefits plan.
Under the original SECURE Act, it was made mandatory for employers to give long-term, part-time employees the choice to contribute to their 401(k). The 2019 version required that those part-time workers put in at least 500 hours per year for at least three years to qualify.
SECURE Act 2.0 cuts that down to two years or potentially shorter, with the hope that this increases the number of part-time employees to enroll in employer-sponsored retirement and workplace savings plans.
According to the US Bureau of Labor Statistics, less than half (43 percent) of part-time workers have access to a retirement savings or workplace benefits plan. But part-time workers want employers to give them access to retirement plans.
Wendy Baker is a senior legal counsel at Human Interest, which offers full-service 401(k) plans for small- and medium-sized businesses, offered insight into this demand from part-time workers. “When Human Interest started seeing an uptick in hourly employees gaining access to our platform, hourly worker enrollment outpaced that of salaried workers,” said Baker.
Employees carrying student loan debt
SECURE Act 2.0 allows employers / plan sponsors to match student loan payments with retirement contributions, the same way many employers already match employee contributions to retirement funds like 401(k)s. And, similarly, these matched funds will vest on the same schedule as if employees were contributing to a retirement plan.
For example, if an employee pays off $500 of their student loan every month, an employer can match contribution with $500 into that employee’s 401(k) – exempt from payroll taxes and with the employee’s income taxes deferred.
We see potential for this to go beyond traditional student debt. With the passage of SECURE Act 2.0, there’s an opportunity for this contribution match benefit to extend to employees who rely heavily on public and private certification programs – including frontline workers and certified nursing assistants.
Employers with an older workforce
We get more in-depth about this later, but there are several provisions laid out in SECURE Act 2.0 that aim to attract and keep older employees. From changes to the schedule for required mandatory distributions (RMDs) to increases in catch-up contributions, companies with employees nearing, at, or past the retirement age should expect to maintain a high level of employee engagement with that older population after the SECURE Act 2.0’s implementation.
Critics believe that the higher age for RMDs paired with higher catch-up contributions will disproportionately benefit wealthier workers. Per the latest data from Vanguard and Fidelity, only 10 to 15 percent of plan participants are currently maximizing their retirement savings contributions.
Employers in states with pre-existing mandates
For companies running in states with state-mandated retirement plans, passage of the SECURE Act 2.0 gives them more options beyond those created by the state, said Smart’s Reilly.
Currently, there are seven states where employers must provide workers with access to retirement savings: California, Connecticut, Illinois, Maryland, Massachusetts, Oregon, and Washington. Additionally, there are seven states where legislation has passed and where they’re awaiting implementation: Colorado, Maine, New Jersey, New Mexico, New York, Virginia, and Vermont.
Rather than having to opt-in to their respective state’s publicly available retirement plan, companies from these states can comply by creating their own employer-sponsored plans.
How the SECURE Act may affect your business and what to do
For employers large and small, the updated SECURE Act supplies added support to expand retirement savings and workplace benefits for their employees.
“[Employers] aren’t forced to do anything they weren’t already doing before. [The SECURE Act 2.0 of 2022] just gives them more options…and provide them with more incentives,” said Reilly.
Follow automatic enrollment requirements
One of the biggest changes in the SECURE Act 2.0 is mandatory automatic enrollment for employees into new employer-sponsored retirement savings and benefits plans. HR and people ops need to ensure their companies are ready to follow the new requirement.
Opt-in versus opt-out
Currently, companies have two enrollment options they can offer to employees:
- Opt-out: They can use automatic enrollment to deduct elective deferrals from an employee’s salary and contribute to an employer-sponsored plan, or
- Opt-in: They can offer plans with voluntary enrollment, where employees need to sign up to take part.
Starting in 2025, eligible employees are automatically enrolled at 3 percent of their pay, and contributions are set to automatically increase annually up to at least 10 percent of their pay, but no more than 15 percent. Employees can choose to opt-out or choose a contribution level higher than the default 3 percent level.
Existing 401(k)s would be exempt from this requirement, so your company isn’t required to make any changes to existing plans. Other exemptions include companies with 10 or fewer employees, 403(b)s, and new businesses that have been in operation for less than three years.
Impact on Accessibility
“Of all of the changes included in SECURE Act 2.0 and their potential impact on the retirement gap, auto-enrollment has the potential to be a game-changer,” said Human Interest’s Baker. “Auto-enroll could help us attack glaring inequities in our current savings system, where millions historically have not had access to the same savings tools as those in higher income brackets.”
This claim can be supported by research from the Employee Benefit Research Institute (EBRI), which found that automatic enrollment and automatic contribution escalation lead to a “big improvement in retirement savings, especially for low-income workers.”
Expand/offer retirement plan options or savings benefits
SECURE Act 2.0 offers organizations the opportunity to vary the kinds of workplace benefits they provide to their employees.
Create employee matching contributions program for student loan borrowers
From a people ops standpoint, offering employer matching contributions for student loan payments can help attract employees with large student loan debt, especially for companies in less lucrative fields that might otherwise struggle to compete (e.g., teaching, nursing).
“While the provision is optional and [an] employer does not have to include it in their plan, we anticipate that employees will ask for this benefit,” said Baker.
From an admin perspective, offering student loan matching will help companies pass ADP and ACP nondiscrimination testing, which evaluates whether plans offer contribution opportunities for non-highly compensated employees that are proportional to what highly-compensated employees like managers and owners can contribute.
“SECURE Act 2.0 requires that the CEO pay ratio be calculated in order to be compliant with the act and [that companies] file a public form with the SEC to disclose this information,” said Paw Vej, COO of Financer.com. He added that these guardrails support one of the bill’s purposes of “prevent[ing] executive greed and excesses that can lead to corporate mismanagement and eventually financial ruin” for organizations.
Revise employee benefits offered to part-time employees
The provisions designated specifically for part-time workers under the new SECURE Act should start a revision of your company’s current benefits programs.
Make plans to add long-term, part-time employees to company retirement plans and workplace savings programs. As part of this, you may have to adjust your overall benefits budget to factor part-time employees into their 401(k) plans sooner.
Part-time employees stand for a significant expansion in labor strategy, particularly in the healthcare, retail, hospitality, and education sectors. Barring a slight downturn throughout the peak of the pandemic (when many of these industries had to let go of their part-time workforce), the US Bureau of Labor Statistics tracks a steady increase in our economy’s reliance on part-time employees between 1990 and 2021.
For organizations in these industries, creating and extending employee benefits packages to part-time workers can help attract and retain the necessary labor force for operations.
Maximize your tax credits
As part of SECURE Act 2.0, companies can receive a $500 tax credit for the first three years of using auto-enrollment. But that’s just the starting point to making it more affordable for smaller companies and startups to offer better retirement benefits for their employees.
Startup costs tax credit expansion
“The passage of the bill means larger tax credits for small businesses,” said Vej. SECURE Act 2.0 expands the startup costs tax credit, raising the credit to 100 percent from 50 percent for companies with up to 100 employees (up from 50), capped at $1,000 per employee. “This credit is available to firms with fewer than 50 employees, and it gradually disappears for those with 51 to 100 employees.”
Baker said to expect an “expansion of the tax credit to smaller employers participating in MEPs, or multiple employer plans, even if the MEP has been around for a few years.” Currently, smaller employers that join MEPs aren’t eligible for the full amount of tax credits unless they joined right at the beginning of the MEP’s existence.
Additionally, under the new SECURE Act, 403(b) plan sponsors – typically nonprofit and government entities – are now allowed to join altogether and form their own MEP.
Military spouse employment
For organizations that employ military spouses, there’s a new tax credit capped at $500.
Plan long-term to attract and keep an aging workforce
Between 2002 and the end of 2012, the US Bureau of Labor Statistics found that the percentage of the labor force aged between 65 years and 74 years increased from 20 percent to around 27 percent. By the end of 2022, the BLS estimated that percentage to increase to around 32 percent.
SECURE Act 2.0 aims to better align with this aging population’s sentiments around their retirement savings plans.
Delays to required mandatory distributions (RMDs) may push back the retirement age
An RMD is the amount individuals must withdraw annually from their retirement accounts after reaching a certain age. Currently, you’re required to make these withdrawals starting at the age of 72 years. SECURE Act 2.0 would push that age requirement up to 73 years beginning January 1, 2023. Within the next ten years, that RMD age goes up to 74 years starting in 2030, and then 75 years in 2033.
As an unintended consequence of this change to mandatory distributions, we may see people who are able to work longer voluntarily choose to retire later.
Increases to catchup contributions incentivize older workers
Catch-up contributions allow individuals over 50 to make additional contributions to their retirement fund, allowing them to “catch up” on building savings.
SECURE Act 2.0 allows people aged between 62 years and 64 years to contribute an additional $10,000 to an employer-sponsored 401(k) or 403(b) plan, or $5,000 to a SIMPLE IRA plan. Under our current system, catch-up contributions are set at $6,500 and $3,000 respectively for savers 50 years and older.
Once the new SECURE Act is enacted, IRA catch-up contributions are set to be indexed to inflation, the same way that employer-sponsored plans already are. As of right now, catch-up IRA contributions are limited to $1,000 per year for people aged 50 years and over.
Because of these proposed increases in the SECURE Act 2.0, HR and people ops should expect older employees to ask their employers to match catch-up contributions. While not required to do so, employers who do end up matching employee catch-up contributions can get an edge when trying to attract older, more experienced workers.
Improve and promote incentives for employee participation
Access to employer-sponsored retirement savings and benefits is one thing, but it’s ultimately down to your HR and people ops teams to make sure that people actively sign up to take part.
Create a small incentives program
For the first time, the new bill allows companies to offer small incentives to encourage employees to sign up for employer-sponsored retirement plans. As part of your priorities for HR and people ops, set up an incentive program to help encourage employee participation in workplace benefits and retirement savings. Things that count as small incentives include low-dollar-amount gift cards or cash bonuses.
Educate employees on the saver’s match / saver’s credit
In the current system, low- and middle-income taxpayers are entitled to a retirement savings contribution credit (called, simply, the “saver’s credit”) matched by federal funds up to $1,000 for individuals and $2,000 for married folks.
Under the new legislation, “saver’s match” aims to increase that credit. The match is equal to 50 percent of applicable retirement plan contributions with an increased cap of $2,000 per person.
Once this provision passes as part of the new bill, educating employees about these other credits can help increase participation in workplace savings benefits.
What the SECURE Act 2.0’s emergency savings provisions can do for low- and middle-income workers
One talking point that we, at Sunny Day Fund, are keeping our eyes on is the new SECURE Act’s provisions around emergency savings – particularly on what those could mean for low- and middle-income workers in the United States.
According to a Bankrate survey published in January of 2022, just 44 percent of Americans have enough savings to cover an unplanned expense of $1,000.
With most working Americans without access to employer-sponsored savings and/or retirement plans, most are often left to pull this amount from other savings. When savings aren’t enough, people will often take that money from the only place they can: their retirement account. These loans and early withdrawals often incur penalties, and they affect people’s ability to save for retirement in the long term.
In a survey we completed this year at Sunny Day Fund, we found that approximately 18 percent of workers earning between $40,000 and $110,000 dip into their 401(k)s and similar retirement savings.
There are several provisions currently included in the latest version of SECURE Act 2.0 that touches on emergency savings for American workers.
Establishes a new employee expectation for emergency savings accounts
SECURE Act 2.0 will give people more access to employer-sponsored / workplace emergency savings accounts (ESAs). Unlike traditional retirement savings and workplace benefits plans, ESAs are designed so that employees don’t incur penalties for withdrawals. The bill allows companies to include emergency savings as part of their 401(k) or pension plan.
Under the bill, participants contribute to an emergency savings account (to which employees can add up to $2,500) that they can make withdrawals as needed (regardless of frequency). Other amounts over the $2,5000 cap are redirected to an employee’s retirement account.
Shifts mindsets and behaviors to mimic investments in retirement
Offering this connected experience between workplace emergency savings and retirement savings can give employees a sense of competence and security, and encourage behaviors and mindsets that allow for increased patience in long-term investments.
Although not mandated under the new SECURE Act, employers can choose to auto-enroll their employees into ESAs at up to 3 percent of their gross income. We expect that auto-enrollment into emergency savings accounts will drive greater savings behavior, just as we’ve seen auto-enrollment’s impact on dramatically increasing participation in retirement savings.
ESAs might enable people to rely less on hardship withdrawals, which often end up in costly early-withdrawal penalties and the added stress of having to prove the need for emergency funds. This takes a big step toward leveling the playing field in inclusion, giving access to retirement options while, at the same time, keeping easy and immediate access to funds.
Makes it easier to access retirement accounts for emergency situations
Another possibility enables retirement plans to have a $1,000 emergency distribution once a year from retirement accounts for emergencies, penalty-free – starting in 2024. This emergency withdrawal from an employee’s retirement account can be used to cover immediate or unforeseeable expenses but must be repaid into the account within a certain period.
Codifies the demand for workplace emergency savings
Whether it’s wrapped into an employer’s benefits package or is a separate out-of-plan emergency savings program, workplace emergency savings are primed to become staple benefits that employees will come to expect. This latest formulation of the SECURE Act helps to further codify both the demand and the need for emergency savings plans to support American workers.
An emergency savings benefit can help to alleviate the mental and emotional stresses that affect many low- and middle-income American workers. It can serve as a powerful tool for progressing diversity and inclusion in the workplace.
These emergency savings provisions open a new product category for benefits brokers and consultants, who can help the push to normalize emergency savings as a key employee benefit. According our 2022 report on financial wellbeing, emergency savings as part of a company’s employer-sponsored benefits falls just behind both retirement savings and health savings as one of the top financial considerations in people’s decision matrix when potentially joining a new employer.
What to expect from the market reaction’s to SECURE Act 2.0
“The underpinning of the retirement savings crisis is the retirement savings gap: the difference between what we’ve saved and what we’ll need to spend when we retire,” said Baker. According to 2015 data from the World Economic Forum, that gap was estimated at $28 trillion and is only projected to grow to an overwhelming $137 trillion by 2050.
This seems to fall in opposition to the optimism of people who hold these retirement savings plans – at least in the United States. According to the 2022 Retirement Confidence Survey (RCS) published by EBRI, worker confidence in being financially secure throughout retirement remains very high – with 73 percent of respondents feeling either very or somewhat confident about having enough money to live comfortably once they retire.
In spite of some recent market fluctuations, we should expect continued and growing optimism from American retirement savers once the provisions under the new SECURE Act are slowly implemented. More importantly, we should (hopefully) see better retirement savings, emergency savings, and student loan outcomes – especially with the requirement for auto-enrollment into employer-sponsored plans.
Want to attract and retain a more financially-resilient workforce? Reach out to us for a demo, we’d love to help.