SECURE Act 2.0 Impact on Business Owners

Nestled within the more than 4,000 pages of the massive federal omnibus bill passed in late December are 350 pages of the widely anticipated Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022. The broad-ranging SECURE Act of 2019 sequel introduces nearly 150 new provisions taking effect in 2023 that will strengthen retirement savings for employees and business owners alike.

Business owners can expect to benefit from SECURE Act 2.0 provisions in two ways: Boosting business growth through expanded retirement savings opportunities for employees and achieving a more financially secure retirement for themselves.

SECURE Act 2.0 Provisions that can Boost Business Growth

Historically, small businesses have been disadvantaged because they have to compete with larger companies for talent. In particular, many small businesses could not offer their employees an attractive retirement plan benefit due to the high costs and administrative burden of starting and maintaining one. The SECURE Act 2.0 goes a long way toward leveling the playing field with the following provisions:

Starter 401(k) plans

Beginning in 2023, the Starter 401(k) provision reduces or eliminates many administrative and cost obstacles making it easier and less expensive for small businesses to offer a workplace retirement plan for the first time.

Increases Retirement Plan Start Up Credit

In 2023, the business credit available to small businesses with up to 50 employees for starting a new qualified retirement plan is increased to 100% of administrative costs (up from 50%) up to $5,000 for the first three years. Businesses participating in a multiple employer plan (MEP) are also eligible for the credit. Small businesses can now most of the costs and avoid the administrative burdens associated with starting and maintaining a retirement plan for their employees.

Increases Part-Time Employee Eligibility

Beginning in 2025, businesses will be required to offer part-time employees the opportunity to participate in their retirement plans. Employees working more than 1000 hours annually must be included after one year of service, while those working more than 500 hours for two consecutive years are eligible after two years of service.

While allowing part-time employees to participate can potentially increase a small business’s costs, it can also help the business compete for a growing pool of talent in the U.S.

Provisions Helping Business Owners Achieve a More Financially Secure Retirement

It’s well established that business owners tend to neglect or postpone their retirement planning, choosing instead to focus on growing their business. In addition to making it easier and more appealing for business owners to establish retirement plans, the SECURE Act 2.0 contains several provisions that can help them achieve retirement security.

Increase in the Required Minimum Distribution Age

The age at which retirees must begin required minimum distributions (RMDs) was already increased to 72 from age 70½ with the SECURE Act of 2019. SECURE Act 2.0 increases the age requirement further to age 73 beginning January 1, 2023, increasing it to age 75 by January 1, 2033. That means business owners can enjoy a few more years of tax-deferred growth of their retirement accounts before having to take withdrawals to satisfy RMDs.

IRA catch-up contribution limit indexed to inflation

The $1,000 annual limit on IRA catch-up contributions for individuals aged 50 and older has been static since its introduction. SECURE Act 2.0 now indexes the yearly limit to inflation starting in 2024.

Increases catch-up limit for ages 60 to 63

The annual catch-up contribution limit for 2022 is $6,500. Section 109 increases the limit to the greater of $10,000 or 50% more than the standard catch-up limit for individuals aged 60 to 63 starting in 2025. The increased limits will be indexed for inflation after 2025. The increase in catch-up contributions can significantly boost the retirement savings of business owners who may have delayed starting a plan.

These provisions target retirement savers, expanding opportunities to save while enhancing the benefits of retirement accounts. Business owners benefit in two ways—allowing them to compete for talent by offering less costly and burdensome retirement plans and making it easier to set aside money for their own retirement security.