SECURE 2.0 Act: Potential Employer Impact

Capitol Hill plays a critical role in shaping the corporate landscape, but even to the trained observer it can be difficult to discern how new changes in retirement legislation may affect your business. How can you deliver more value to your employees through your benefits offerings when the rules of the road continue to shift?

In the case of the SECURE 2.0 Act of 2022, also known as SECURE 2.0, there are a few provisions that directly affect workplace benefits—and the companies that rely on these critical tools for motivating employee recruitment, productivity and retention.  Here’s what you need to know.

These changes in legislation were developed to combat the ever-growing American retirement saving gap.  The initial bill passed through the House in a near-unanimous bipartisan vote, demonstrating that Capitol Hill recognizes the need to prevent a retirement crisis, and the full bill passed through the Senate on Dec. 19 and was signed into law on Dec. 29, 2022.

The legislation includes changes that increase uniformity across employee segments and help you leverage your workplace benefits to accelerate your employees’ journey on the road to financial well-being.

The bill requires newly established, employer-sponsored 401(k) and 403(b) plans to enroll their workers automatically, making it easier for student-loan borrowers to save and for older workers to make catch-up contributions. It will also lower costs by modifying the existing tax credit available to smaller businesses that start a new plan.

There are many provisions in the bill, but here are the standouts with the most significant impact to employers and employee retirement planning:  

• Establishment of a new “Starter K,” which will allow employers that do not currently sponsor a retirement plan to offer a “starter 401(k) deferral-only arrangement” plan (or a safe harbor 403(b) plan). Effective 2024.
• Increase in tax credit for small employers implementing a new 401(k) plan for the first three years from 50% to 100%, capped at $5,000. Effective 2023.
• Creating an additional new tax credit to encourage eligible small employers to make direct contributions to their new plan for their employees, offsetting up to $1,000 of these employer contributions for each participating employee. Such credit is available for the first five years of the plan and is not available to new defined benefit plans. Effective 2023.
• Expanding automatic enrollment in 401(k) plans by requiring new 401(k) and 403(b) plans established after Dec. 1, 2024, to automatically enroll participants in the plans upon becoming eligible, with the ability for employees to opt out of coverage. Effective 2025.
• Allows employer contributions made on behalf of an employee for eligible student loan payments to be treated as matching contributions for SIMPLE IRAs, 401(k), 403(b) and governmental 457(b) plans. Effective 2024.
• Increasing the age for required beginning date of required minimum distributions (RMDs) from retirement plans must commence from age 72 to age 73 in 2023 and to age 75 in 2033 (“RMD Age”). Specifically, the RMD Age is (a) age 70 ½ for individuals born before July 1, 1949; (b) age 72 for individuals born after June 30, 1949, but before 1951; (c) age 73 for individuals born after 1950 but before 1960; or (d) age 75 for all others. Note an apparent drafting error in the statutory language of SECURE 2.0 makes it unclear when age 75 starts to apply in lieu of age 73, but it appears age 75 is intended to apply if born after 1959.
• A new one-time and penalty-free emergency withdrawal of up to $1,000 from a retirement account for unforeseeable or immediate financial needs relating to personal or family emergency expenses within a three-year period. Effective 2024. 
• Increases higher catch-up contribution limits for individuals ages 60-63 for most retirement plans to the greater of $10,000 per year, or 150% of the regular catch-up contribution amount in 2024. Effective 2025.
• Automatic portability allowing retirement participants to transfer their retirement savings more easily to a new employer by allowing retirement plan providers to provide plans with the ability to automatically transfer a participant’s default IRA into the participant’s new employer’s retirement plan. Effective Dec. 29, 2023.
• Repeal and replacement of existing Saver's Matching Contribution allows lower-income retirement savings to receive a refundable, direct government-funded matching contribution to their individual retirement account (IRA) or retirement plan in an amount up to 50% of their contributions, up to $2,000 for tax years beginning after Dec. 31, 2026.
• Establishment of a Retirement Savings Lost and Found will provide an online searchable database, within two years of enactment, that will allow a participant or beneficiary to search for contact information for plan administrators of plans in which the participant or beneficiary may have a benefit.
• Broadening pooled employer plan or open multiple employer plans to allow 403(b) plans to participate in, and be operated as, multiple employer plans and pooled employer plans. Effective 2023.

Because linking matching employer retirement contributions to employee student loan repayments may seem counterintuitive, it’s helpful to take a step back to better explain why this connection can have such a profound impact on your employees’ individual finances.

By treating employer contributions for qualified student loan repayments as matching contributions, employees who weren’t previously able to budget retirement contributions will be able to take advantage of their employer match. Businesses will also be able to better utilize their retirement plans by subtracting any student loan payments employees make from their salaries and treating them as an elective deferral or an elective contribution.¹

Student loans are the second-largest source of debt in the U.S., with 43.2 million Americans owing over $1.71 trillion.² When student debt is measured as a percentage of first-year income, it can range from 70%-110% of income, depending on demographic status (for example, women of color owe far more than average). It’s an unequal challenge, and not just for recent college graduates:

• Americans over 50 carry 22% of the country’s student loan debt,³ whether because they are still repaying their own debt or because they took out education loans to help support a child or grandchild.
  
• Similarly, Americans over 60 collectively still owe over $86 billion in student loan debt.⁴
  
• Women carry two-thirds of the national student debt burden,⁵ even though they represent 56% of college students.⁶
• Also, women and people of color tend to borrow more, earn less and struggle more to repay their loans compared to their white, male peers.^5,7,8

Taken together, it’s easy to see how these factors can compound financial pain points for many of your employees.

TJ Donovan, Executive Director at Morgan Stanley at Work, has worked with many employers to tackle the challenge of student debt. “It’s difficult to overestimate the impact of the student loan debt crisis on future financial planning and outcomes for employees, particularly women and people of color,” he says. “When you know you should be saving for retirement but are mired in debt, it can feel like an either/or choice.”  

Saving for a comfortable retirement can be a significant challenge—just 62% of workers are confident they will have enough put away⁹—and many of your employees may feel forced to choose between repaying their student debt or saving for the future. However, business leaders are beginning to understand they can play a more active role in removing some of these obstacles from their employees’ lives.

Legislation like SECURE 2.0 can empower the private sector to make real change. We’ve seen many clients take advantage of a favorable legislative landscape to expand their benefits and offer meaningful support to their employees.

SECURE 2.0 expands on this logic to help companies help their employees in two critical financial arenas at once. Legislative updates like the SECURE 2.0 provide an opportunity not only to reinvigorate your offerings but also to raise awareness and help employees learn more about how many ways you can support them on their financial journeys.

At the end of the day, more comprehensive solutions are needed to address both the student debt crisis and employee retirement planning needs, and SECURE 2.0 offers opportunities for forward momentum on both fronts.

SECURE 2.0 may give companies a way for employees to continue to repay student debt and start saving for retirement—at the same time and at the same out-of-pocket cost for the employee.

Use any legislative updates as an opportunity to educate your workforce on the benefits you provide them and raise awareness about the good work you’re doing to take care of your people.

Morgan Stanley at Work empowers companies and employees wherever they are on their unique financial journey, and we’re here to help companies navigate today’s financial services landscape and latest legislative changes with confidence. Learn how Morgan Stanley at Work can help.