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Jared Porter

Retirement Planning > Saving for Retirement > 401(k) Plans

2 Ways Secure Act 2.0 Could Help Small Businesses

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What You Need to Know

  • Only 1 in 4 small and midsize businesses offer employer-sponsored 401(k)s.
  • The Secure Act 2.0 package includes a proposed Starter 401(k) so that even the smallest business can offer something to employees.
  • The legislation also offers new and expanded tax credits to small businesses offering retirement plans.

With the Senate Finance Committee last month unanimously approving the Enhancing American Retirement Now (EARN) Act, just weeks after the Senate Health, Education, Labor and Pensions Committee released draft legislation for the RISE & SHINE Act, retirement security is back on the congressional agenda.

These proposals were, of course, all part of the Senate’s response to the Secure Act 2.0 package, which passed the House in March and is an iteration of the original Secure Act, which became law in 2019. Behind its many names lies a solid and straightforward purpose: to better prepare Americans for retirement.

Many studies have found workers behind on savings. For example, only 36% of non-retired adults think their retirement savings are on track, according to the Federal Reserve. Meanwhile, a separate survey from the Insured Retirement Institute found that most workers don’t have sufficient retirement savings and aren’t putting aside enough to catch up.

Leveling a Steep Hill for SMBs

One sector disproportionately affected is small-business employees, many of whom don’t even have access to employer-sponsored retirement plans. In fact, despite employing the largest share of American workers, only 1 in 4 small and midsize businesses offer employer-sponsored 401(k)s today. Due to this, employees of these businesses have a steep hill to climb to try to achieve some level of financial security.

In truth, it’s also hard to place a ton of blame on employers for this. Even three years from the original Secure Act, a vast majority of small and midsize businesses haven’t been able to execute any 401(k) offerings. They couldn’t afford to offer their workers a worthwhile retirement plan. Thankfully, armed with bipartisan support, Secure 2.0 appears to take an essential step in the right direction in giving SMBs and their employees access to meaningful retirement plans.

Starter 401(k)s

Although anyone can get an IRA, very few do. Included in the Secure Act 2.0 package is a proposed Starter 401(k) similar to an IRA. The contribution limit is the same as that of an IRA — smaller than the current 401(k) contribution limit — and the plan does not allow employer matching contributions. Although no match is allowed, the benefit is the removal of nondiscrimination testing, so even the smallest business can offer something to employees.

Overall, this is a great entry point for micro-sized businesses, even though I think they should have higher contribution limits.

Tax Benefits

Another upside of the Secure Act 2.0 for small businesses is expanded tax benefits. Today, companies with less than 50 employees get a tax credit equal to 50% of administrative costs, capped at $5,000 annually, when they start a retirement plan. Under the Secure Act 2.0, however, the 50% would be increased to 100%, and businesses with up to 100 employees would qualify.

In addition, the package would give small employers a tax credit of up to $1,000 per employee in the first year of a defined contribution plan, phased out over five years.

Meeting the Demands of a Knowledge-Hungry Generation

The Secure Act 2.0 package, if passed, would certainly be vital progress and a boon for Americans saving for retirement. Retirement reform can’t come at a better time, with just over a decade until the trust funds behind Social Security are expected to run out of money, leaving beneficiaries with a 20% cut to what they’re owed if nothing is done to fix it.

Moreover, technology is moving in a way where people are learning more about what it means to save and what it means to put money away for retirement. Their first interaction, or their first step toward seeking more knowledge, is often when they start working for a business with a retirement plan. Because of this, we need more legislation that gives workers in businesses of all sizes the freedom to save for retirement.