It Figures Podcast: S4:E5 – SECURE 2.0 & The Impact of Changes for Business Owners

Speaker 1:

From Carr, Riggs & Ingram, this is It Figures: The CRI Podcast, an accounting, advisory and industry focused podcast for business and organization leaders, entrepreneurs, and anyone who is looking to go beyond the status quo.

Daniel Rodriguez:

Hello and welcome to another edition of the IT Figures Podcast. Today we’re here with Joy Hodgson, the COO of CRI TPA Services, and we’re going to be discussing the SECURE 2.0 Act of 2022. This was passed on December 29th by Congress and the President and contains over 90 provisions related to retirement accounts that impact both individuals and businesses. Today we’re going to be talking about some of the biggest changes that impact businesses and those that sponsor retirement plans.

So the headline for this bill, I think, has been automatic enrollment is going to be mandated. Would you agree?

Joy Hodgson:

Yes. That’s to me from a business owner’s perspective what we call automatic enrollment features are now mandatory. So any new 401(k) plan that is set up after the enactment of this bill, which was in December, so any plans starting now, 2023 or after, will have to have an automatic enrollment feature.

For those of you who may not know, automatic enrollment is the method by which eligible employees will be automatically put into the 401(k) plan unless they opt out. Historically, 401(k) plans have operated that it’s a voluntary action by the employee to be in the plan, and if they don’t sign up, they’re not in the plan. Well now, automatic enrollment means the default position is everyone who is eligible will be automatically enrolled at a minimum of 3% unless they opt out. So the employee still has the ability to opt out and not participate, but the default is now going to be that you are enrolled.

Starts at 3%, and it will have what’s called an auto-escalation feature where each year after the first year, your auto-enrollment will increase by 1%, and it goes thereafter up until 10%. And so this will be a significant shift in how qualified plans, specifically plans 403(b), 401(k) plans that allow elective deferrals, will be handled from an eligibility and enrollment perspective.

Daniel Rodriguez:

When does the mandatory automatic enrollment begin? Is that now or is it…

Joy Hodgson:

Any new plan that was established after December 29, 2022, must implement those provisions by January 1 of 2025. So anyone setting up a plan now in 2023, you can run without automatic enrollment, but at this point, any new plan has got to turn that feature on no later than January 1 of 2025. And so part of what our discussions are in setting up new plans now is, do you want to turn that feature on now immediately or wait until you absolutely have to turn it on?

There is still a lot of guidance and treasury regs that need to come out as to how this is going to affect other aspects of a plan. For example, non-discrimination testing, the headcount for the 5500, and whether you need an audit. So there are many things that this particular change is going to drastically change how 401(k) plans operate. This is a big change.

Daniel Rodriguez:

So with this big of a change, there seems to be a chance that employers can mess up and miss enrolling participants and individuals. Is there any relief given for that if I fail to enroll somebody?

Joy Hodgson:

Yes. Under the what’s called the EPCRS program, an employee compliance resolution program, they have a default correction method that says as long as you get the employee’s election implemented within nine and a half months after the close of the plan year they were first eligible there’s no corrective contribution that has to be made. So from that perspective, I think there’s going to be a sort of a grace period for new businesses who are getting these provisions rolled out, getting their processes and their procedures figured out without penalty.

But that being said, there are things you can do to design your plan maybe to avoid this. For example, do you just say everybody’s eligible their first day of hire, and we’re going to sign you up and you’re going to have 3% unless you sign out of it? Then you don’t have to worry about keeping track of when someone’s eligible. You can exclude them from the match for the first year. So that may be one way to help employers avoid the missing people is just let them in from the day one and have them be eligible.

Daniel Rodriguez:

Another big piece, especially the first SECURE Act that passed in 2019, was the inclusion of what are called long-term part-time employees. So those individuals that may have been working with you for several years but don’t work a thousand hours that are maybe needed to enter the retirement plan. So this has made another change to those rules. Can you explain what those are?

Joy Hodgson:

Sure. I think this is another example of Congress, the legislature, wanting to expand the group of people that are covered by employer workplace retirement plans. They’re wanting to make it more broad and less restrictive on who can participate and save for retirement. And this is a prime example.

They have this new classification in the retirement plan space called a long-time part-time employee. Initially, when it was passed through SECURE 1.0, which was in 2019, it basically said anyone who works for an employer for three consecutive years with 500 hours must be allowed to make elective deferral contributions. In other words, they have to be eligible for the plan. You let them decide if they want to sign up. You do not have to provide a match to those individuals, but you have to let them make elective deferrals. What happened with 2.0 is they shortened the window, and now they say no, now long-term part-time employees are those who work two consecutive years with 500 hours or more. You have to let them participate.

So there are going to be certain industries that are going to be heavily impacted by this provision. I’m thinking of hospitality industries, restaurants, hotels. Any industry that is heavily served by part-time employees consistently, they’re going to have to watch out for this role because they’re now going to have to add these individuals to their enrollment procedures and let them sign up for the plan if they want. What isn’t clear right now in the regulations is if these individuals now are going to be subject to the auto-enrollment feature that we previously were discussed. So if you’ve got a bunch of part-time people, are they now have to be automatically enrolled? We don’t know at this point. We’re waiting on the guidance for some of these things.

So again, I think this is a major provision that won’t affect every industry, but it’s going to heavily affect some industries. We’re again waiting for guidance because the provision kicks in January 1 of 2024, so we need guidance from the IRS in the next six to nine months as to how they want this to look like.

Daniel Rodriguez:

Exactly. And I think it’s important to point out that we’re still waiting on guidance on certain things from SECURE 1.0 that passed in 2019, and we’re expecting guidance real fast on SECURE 2.0. So hopefully the IRS does turn things around pretty quick.

Joy Hodgson:

Yeah, I think there’s going to be a lot of wait and see, and we’re not sure. We’re just not sure how some of these features are going to look.

Daniel Rodriguez:

So with over 90 provisions, there is more to cover than what we can cover in a 20-minute podcast. What are some of the other major provisions that will impact businesses?

Joy Hodgson:

Sure. I think a couple that come to mind that everyone should be aware of is that they have made it much more flexible now for the employer to change things like their allocation after the year end. For example, if we’ve got a profit-sharing plan that starts out the year with a pro rata allocation method, and after the year’s end and they want to change it and do something different, they are allowed to retroactively change the benefit formulas as long as it is an increase in benefits. They do not allow you to reduce benefits, but if you want to increase benefits, they’re going to allow you to do that retroactively.

One of the things they did with SECURE 1.0 back in 2019 that I still find a lot of folks don’t realize is you can now retroactively adopt a profit sharing, for example, a cash balance defined benefit plan after the year has closed. Before SECURE 1.0 in 2019, qualified plans had to be executed, meaning they had to be set up and signed by the last day of the tax year. So there’s flexibility there to actually adopt a plan after year end.

I think one of the great provisions they changed is that if you start the year out with a simple IRA plan, you can convert to a safe harbor 401(k) plan mid-year. Before this act, if you had a simple IRA plan, it was the only plan you could have for the year, and you had to let it run for the entire year. Now with this change, you can actually suspend your simple IRA mid-year and replace it with a safe harbor 401(k) plan, which I think is great because a lot of times we do find business owners want to make a change, and so now they’re not stuck with that. In addition, plans that have 401(k), 403(b) elective deferrals, they are no longer going to be able to allow pre-tax catch-up contributions to individuals who are earning more than $145,000 a year.

I personally thought maybe they would strike this provision, but it made it through all the way to the final bill. And so if you are a plan sponsor that has a 401(k) or a 403(b) plan that does not allow Roth contributions, your individuals who are earning more than 145,000 are not going to be able to make catch-up contributions unless you add the Roth feature. So again, this is back to how are we paying for some of these things that are in the bill? Well, we’re paying for them with the Rothification of as much as we can essentially give into a Roth account. That’s how they’re paying for some of these things.

Daniel Rodriguez:

So as part of the expansion of flexibility and trying to encourage companies to sponsor retirement plans, they’ve offered several new tax credits. Can you go into detail on some of those?

Joy Hodgson:

Yes. In terms of businesses that are considering sponsoring a plan, setting up a new plan for their company, they really have incentivized small employers to set these plans up by giving them some tax credits, which are pretty generous compared to what has been available in the past.

One type of tax credit is they are going to get 100% of their administrative costs associated with setting the plan up and running it for the first three years that they set it up. So up to $5,000 per year is just a straight offset tax credit. And as a reminder, these items are deductible as ordinary business expenses. However, tax credits are a direct dollar for dollar offset of the actual tax. And so you’d want to take the tax credit. But very few small retirement plans cost you more than $5,000 a year in administrative fees. So it essentially covers the cost of the plan for the first three years.

The second tax credit they’ve added, which I find interesting, but again, from a business owner’s perspective, this is a very good thing, they’re going to let you take a tax credit for any employer contributions that you make up to $1000 per employee for five years. There’s a phase out over time. It’s not 100% for five years, but it is a significant tax credit to help, again, cover the cost of the contributions you’re making to the plan. And again, there’s a lot of nuance to the detail. It’s available without reduction for employers who have up to 50 employees. If you have between 51 and 100 employees, there’s going to be a phase out of that tax credit based on the number of employees you have over 50. But again, small businesses, they are trying to encourage you to set these plans up, get them running, and they’re helping you by giving you these tax credits to offset some of the initial costs.

There’ll be a lot more guidance, a lot more articles and technical training and things that come out over the next few months because there is a lot to unpack in this act, and the details will come out over time. But we hope you have found this helpful and hopefully geared you up to talk to your clients about how this is going to affect them.

Speaker 1:

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