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​​​​​​​The SECURE Act 2.0: A Look Ahead for 2021

employee reviewing retirement plan information

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed by Congress to address the retirement savings crisis in our country.

The first phase of the SECURE Act went into effect in 2019, with its second phase now awaiting passage by Congress. Since the first part of the SECURE Act passed nearly unanimously in both the House and Senate, it is likely to be approved.  If passed, the new legislation could potentially have even more impact, especially for small businesses. 

The SECURE Act—Expanding and preserving retirement savings

Many Americans don’t have a way to save for retirement. The SECURE Act’s goal is to address this problem by providing incentives for businesses and easing the restrictions that hinder small and medium-sized businesses from offering 401(k) plans. Two important changes for small business owners are the Pooled Employer Plan (PEP) and the deadline extension for profit-sharing plans.

The Power of PEP

The Pooled Employer Plan (PEP) 401(k) allows unrelated businesses to pool their assets into a single plan administered by a professional plan manager. This gives businesses a simple, cost-effective solution that eases the burden of 401(k) management.

This plan is designed to be a retirement-savings gamechanger, especially for small businesses. Since a 401(k) enables employees to save more quickly, allows for employer matching, and provides tax credits, it’s one of the most popular retirement plans. By making the 401(k) more manageable, businesses can use this in-demand plan to help attract new employees and retain top talent.

 Extra Time to Start 401(k) Profit-Sharing

The SECURE Act gives extra time for employers to start 401(k) profit-sharing plans in 2021.  It extends the deadline for starting a plan and allows an employer to backdate it to the prior year (starting with 2020), thereby increasing their tax-deductible contribution. This is similar to what many businesses do with a SEP IRA. Note that this extension will not apply to certain plan provisions, such as elective deferrals and company match.

As an example, employees would be able to contribute up to $19,500 per year to their 401(k) plan. If the employer makes a match to the 401(k) and contributes a profit-sharing distribution, the employee’s total pre-tax contribution can be increased to the IRS limit of $58,000 per year per IRS limits for 2021. With this example, the employer can claim a tax deduction for both the employee match dollars and the contributions from the profit-sharing plan.

The SECURE Act 2.0—good for business, good for employees

The SECURE Act’s “second act” will build on the initiatives already started to help a wide range of Americans achieve retirement security and financial wellbeing. It has provisions for military spouses, employees saddled with student debt, and retirees. It also includes a bold set of provisions to help small businesses. First, let’s take a quick look at how it may affect your employees.

Changes to benefit a multigenerational workplace

Today’s workplace is more generationally diverse than ever. Older employees are working longer, and millennials make up roughly a third of the American workforce. The SECURE Act 2.0 addresses both of these age groups.

For older employees, the bill would raise the required minimum distribution (RMD) age from 72 to 75 so they can save for longer. There is also a new catch-up contribution proposed:  for those 60 and over, the amount would be increased to $10,000 for employer-sponsored 401(k)s and 403(b)s, or an additional $5,000 for SIMPLE plans.

For younger employees, the SECURE Act 2.0 aims to address two crises: retirement saving and student loan debt. Instead of contributing to a 401(k) or other type of retirement plan, employees can opt to make contributions that go toward paying off their student loans. These contributions would still be eligible for employer matching.  

Since today’s workforce includes more part-time workers, they would be eligible for an employer-sponsored retirement plan for the first time ever. The SECURE Act would require employers to allow long-term, part-time workers to defer into their 401(k) plans. Part-time employees would be required to work three consecutive years and complete at least 500 hours of service in each year. The bill also proposes to simplify and increase the “Savers Credit” which provides millions of low and middle-income individuals with an incentive to save for retirement each year.

Automatic enrollment to encourage participation

Automatic enrollment in a retirement plan is designed to make it easier for employees to participate. The bill would require smaller businesses with 401(k) and 403(b) plans to be automatically enrolled. Employees who prefer not to participate can opt out. Typically, the initial enrollment amount is at least 3 percent and then increased each year. There is an exception for small businesses with 10 or fewer employees, new businesses less than three years old, churches, and government agencies. To add even more convenience, businesses could integrate automatic enrollment with payroll.

Increased tax credits for small business start-ups

For start-up businesses with up to 50 employees, the current tax credit is equal to 50% of administrative costs, capped annually at $5,000. Under the new proposal, the 50% would be increased to 100% and businesses of up to 100 employees could qualify. The applicable percentage would be 100% in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year – and no credit for tax years thereafter.

In addition, the bill would give employees a $1,000 tax credit in the first year of a defined contribution plan, phased down gradually over five years. There would also be an additional tax credit of $500 per year for the first three years.

Reduced penalties to make compliance easier

Being in compliance with tax regulations can be a challenge for businesses. The SECURE Act 2.0 would allow both businesses and taxpayers to avoid harsh penalties for inadvertent errors.  It would also protect retirees who unknowingly receive retirement plan overpayments.

List of SECURE ACT 2.0 proposed changes.

  • Mandate auto-enrollment across all employer-sponsored 401(k) plans (with employee opt out option and small business exemptions)
  • Increase tax credit for small-employer retirement plan startup costs
  • Increase Saver’s Credit for contributions to a retirement plan or IRA;
  • Allow groups of non-profits to join together to offer retirement plans to their employees
  • Increase savings options for individuals 60 and older
  • Increase the required minimum distribution age to 75
  • Allow individuals to pay down a student loan instead of contributing to a 401(k) plan and still receive an employer match in their retirement plan
  • Simplify options for military spouses who change jobs frequently to save for retirement;
  • Increase IRA flexibility for charity gifts
  • Reduce avoid harsh penalties for inadvertent IRA errors
  • Protect retirees who unknowingly receive retirement plan overpayments
  • Create a national, online, database of lost retirement accounts for missing participants.

Congress has yet to pass the SECURE Act 2.0. Paychex Retirement Services will continue to monitor its progress and provide updates. For more information on how your business can take advantage of the SECURE Act, contact a Paychex retirement specialist.


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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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