Safe Harbor 401k, Starter 401k and More: SECURE Act 2.0 Provides New Retirement Plan Options for Small Business Owners

December 20, 2023 by Emily Garman

Safe Harbor 401k, Starter 401k and more: SECURE Act 2.0 provides new retirement plan options for small business owners

The Landscape of Retirement Savings is Shifting

The passage of the SECURE 2.0 Act on December 29, 2022, marked a significant milestone in the evolution of retirement security in the United States. This legislation specifically targets small businesses and their employees, aiming to drastically expand access to employer-sponsored retirement plans, in part with the creation of two simple, affordable new plans: the Safe Harbor 401k and the Starter 401k. For many small businesses, this presents a unique opportunity to enhance their employee benefits packages and contribute meaningfully to their overall financial well-being.

Why Invest in Retirement Savings for Employees?

Offering retirement benefits offers numerous advantages for small businesses, both directly and indirectly. Here are some key benefits.

Attract and Retain Top Talent: In today’s competitive job market, offering retirement benefits can be a significant differentiator when attracting and retaining skilled employees. Studies show that access to retirement plans ranks highly among employee priorities, making it a powerful tool for recruiting and keeping top talent.

Boost Employee Morale and Productivity: When employees feel financially secure and have a sense of security for their future, it leads to increased morale and motivation. This translates to improved productivity, higher engagement, and a more positive work environment.

Reduce Financial Stress: The burden of managing personal finances, especially saving for retirement, can be a significant stress factor for many employees. Offering retirement plans helps alleviate this stress by providing a structured and automated approach to saving, allowing employees to focus on their work and personal lives with greater peace of mind.

Strengthen Your Company’s Reputation: Demonstrating a commitment to employee well-being through retirement benefits can significantly enhance your company’s reputation. This can attract positive attention from potential employees, customers, and the broader community, leading to a stronger brand image and improved public perception.

The Growing Trend of State-Mandated Plans

With over 30 states actively considering state-mandated retirement plans and 17 already having enabling legislation in place, the landscape of retirement savings is rapidly evolving. Small businesses owners may not have a choice about whether to provide a retirement plan for much longer. This trend, as well as the provisions of the SECURE Act, reflects the growing awareness of the need for broader access to retirement savings options and the potential benefits it offers for employees and the economy as a whole.

“The bi-partisan SECURE legislation is really exciting for the millions of Americans who don’t right now have access to an employer-sponsored retirement plan,” says Jean Smart, founder and CEO of Penelope, a 401(k) startup that offers retirement plans for micro businesses. “This legislation offers tax incentives that make it more affordable for small business owners to provide retirement plans. In turn, it will help more Americans save for retirement, ensuring their financial security in old age.”

Understanding the SECURE 2.0 Act Provisions

The SECURE 2.0 Act tackles several crucial areas to improve retirement savings accessibility (for employers and employees) and incentivize participation:

Matching Contributions for Student Loan Payments: This innovative provision enables employers to match employee retirement contributions based on their student loan payments. This directly addresses the significant financial burden of student loan debt and encourages employees to prioritize retirement savings alongside debt repayment.

Emergency Savings Accounts within Retirement Plans: This provision allows employees to establish emergency savings accounts within their retirement plans. This empowers them to build a financial safety net for unexpected expenses, reducing their reliance on high-interest debt and promoting financial stability.

Automatic Enrollment and Contribution Increases: The act encourages employers to automatically enroll employees in retirement plans and gradually increase their contribution rates over time. This removes the inertia that often prevents individuals from taking action and helps them accumulate significant savings over time.

Increased Catch-up Contribution Limits: Older workers (aged 50+) now have the opportunity to make higher catch-up contributions to their retirement plans. This allows them to close any existing savings gaps and reach their retirement goals more effectively.

Simplified Disclosures: The act requires clearer and more concise explanations of retirement plan options for employees. This empowers them to make informed decisions about their retirement savings and participate with greater confidence.

New and Enhanced Tax Credits for Small Businesses: The SECURE 2.0 Act offers valuable tax credits to small businesses offering retirement plans. This financial incentive helps offset the costs associated with establishing and maintaining a plan, making it a more financially feasible option for smaller businesses.

New Retirement Plan Options Tailored for Small Businesses

The SECURE 2.0 Act introduces two new types of retirement plans for small businesses, the Starter 401k and the Safe Harbor 401k.

Starter 401k:

● Ideal for businesses with no existing retirement plan
● Employees contribute only (no employer match required)
● Lower contribution limits ($6,000 annually, with a $1,000 catch-up for those 50+)
● Automatic enrollment (starts at 3%; employees can contribute up to 15%)
● Simplified administration for employers
● Available starting January 1, 2024

Safe Harbor 401k:

● Requires employers to make mandatory matching or profit-sharing contributions
● Higher contribution limits ($22,500 annually, with an additional $6,500 catch-up for those 50+)
Automatic enrollment (starts at 3%; employees can contribute up to 6%)
● Automatic compliance with testing requirements
● Provides a more robust retirement benefit for employees
● Already available for employers

Choosing the Right Plan for Your Business

The optimal retirement plan for your small business will depend on several factors, including:

Size and budget of your business: Smaller businesses may benefit from the simplicity and affordability of the Starter 401k, while larger businesses with more resources may opt for the more robust benefits offered by the Safe Harbor 401k.

Employee demographics and participation preferences: Understanding your employees’ age, income levels, and financial goals is crucial for choosing a plan that resonates with them and encourages participation.

Desired level of administrative complexity: The Starter 401k offers a simplified administrative process, making it ideal for businesses with limited resources. Businesses seeking more flexibility and customization may prefer the Safe Harbor 401k.

Financial goals of your employees: Consider the long-term financial aspirations of your employees and choose a plan that offers sufficient contribution limits and investment options to help them achieve their goals.

What Is Auto-enrollment?

The government doesn’t directly enroll employees in any retirement plan. It is up to the employer/small business owner to decide whether to auto-enroll eligible new employees in any plan. Employees always have the option to opt-out.

If the employer chooses to use auto-enrollment, new eligible employees will be automatically enrolled at a default contribution rate set by the employer. This rate must be between 3% and 10% of the employee’s salary. Employees will be automatically notified of their enrollment and given the option to opt out or adjust their contribution rate. If the employer does not choose to use auto-enrollment, then new employees will have to actively enroll themselves in the plan if they want to participate.

Be A Proactive Small Business Owner: Take Action Now

With the abundance of resources and incentives offered by the SECURE 2.0 Act, there is no time like the present for small businesses to take proactive measures in helping to secure their employees’ financial future. By exploring the available retirement plan options, selecting the right one for your needs, and taking advantage of the provided tax credits, your company can make a significant and positive impact on your employees’ lives, and contribute to your company’s long-term success. Investing in your employees is an investment in your company’s future.

Additional Resources

IRS Website: https://www.finance.senate.gov/
American Retirement Association: https://araadvocacy.org/the-whats-and-whens-of-secure-2-0/
National Institute on Retirement Security: https://www.nirsonline.org/

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