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Secure 2.0 Act: How new changes can impact businesses

Feb 20, 2023

Congress had the SECURE Act 2.0 signed into law on December 29, 2022. For businesses, this means new retirement plan provisions.

The act includes updates on multi-employer plans, SIMPLE plans and regulations for covering part-time workers. Businesses that want to continue providing competitive employee benefits need to understand these key changes. 

Here are important SECURE Act 2.0 items that can impact your business:

Charitable conservation easement restriction

Effective: Contributions made after December 29, 2022.

The act will now disallow a charitable deduction for a qualified conservation contribution if the deduction claimed exceeds two and one-half times the sum of each partner’s relevant basis in the contributing passthrough entity.

This provision will not apply in the following situations:

  1. The contribution meets a three-year holding period test.
  2. Substantially all of the contributing passthrough is owned by members of a family.
  3. The contribution relates to the preservation of a certified historic structure.

Military spouse retirement plan eligibility credit

Effective: Taxable years beginning after December 29, 2022.

SECURE 2.0 creates a new credit for small employers who hire military spouses. It allows them an expediated timetable to participate in the retirement plan and vesting employee contributions.

Under this new provision, the employer would need to ensure that:

  1. Military spouses are immediately eligible for plan participation within two months of hire.
  2. Upon plan eligibility, the spouse is also eligible for matching and nonelective contributions.
  3. The spouse is immediately vested in 100% of all employer contributions.

If an employer follows the above, they can claim a credit of up to $500 per year, for up to three years, per military spouse. Note that if a spouse is highly compensated, they cannot be used to calculate this credit.

The credit is made up in two parts:

  1. $200 for hiring the spouse
  2. 100% of all employer contributions to the spouse (up to $300)

Small immediate incentives for contributing to a plan

Effective: Plan years beginning after December 29, 2022.

Employers may now offer de minimis financial incentives to encourage employees to participate in the employer’s retirement plan. The Senate Finance Committee identifies “gifts cards in small amounts” as an option. Previously, offering a financial incentive was not allowed.

Be aware that the provision did not provide for an exception for the de minimis fringe benefit rules in Section 132.

In short, this section states that if something you provide is difficult to value per employee, then you don’t need to report it as income so long as it is de minimis. However, if you provide cash or cash equivalents, no matter the amount, then that must be included in the employee’s wages and subject to taxes as any other wages would be.

Without a congressional correction or IRS guidance to the contrary, it appears that any business that offers such a de minimis financial incentive will need to report that as income to each employee.

Modification of credit for small employer pension plan startup costs

Effective: Taxable years beginning after December 31, 2022.

The SECURE Act 2.0 significantly modifies the Code 45E credit. First, the three-year startup credit will:

  • Increase from 50% of administrative costs to 100%.
  • Remain at an annual cap of $5,000.
  • Reduce total employees from 100 to 50.

Second, a technical drafting error is fixed for employers that join a multi-employer plan that had existed for more than three years.

This retroactive change will treat these employers as having established the plan the year they join. Therefore, they will qualify for the credit. And if an individual joined a multi-employer plan in 2020 or 2021, their returns can also be amended for the credit.

Lastly, SECURE 2.0 establishes an additional credit: the employer contribution credit.

Under this credit, for a period of five years, the employer will be eligible for a credit based on what they contribute to their employee’s plan. However, the credit is not eligible for defined benefit plans.

Under this new credit, the employer can claim a $1,000 credit for each employee based on how much the employer contributed to that employee’s account. How much of the contribution applies towards the credit depends on the taxable year the plan is established:

  • 100% Year one (taxable year established)
  • 100%Year two
  • 75%Year three
  • 50%Year four
  • 25%Year five
  • 0%Year six and onward

As a result, to maintain the full credit, employers may need to increase how much they contribute to each employee’s plan.

Some restrictions apply, including:

  • If an employer has more than 50 employees, the credit is phased out by 2% for each employee over 50. If they reach over 100 employees, the credit would be fully phased out.
  • Employees who receive wages greater than $100,000 are excluded from the additional credit amount. The $100,000 wage amount will be indexed for inflation annually.

Starter 401(k) and safe harbor 403(b) plans

Effective: Plan years beginning on or after December 31, 2023.

The act permits an employer that does not sponsor a retirement plan to offer either a starter 401(k) plan or safe harbor 403(b) plan as applicable. These new plans have similar rules and qualifications.

The plan would require every employee to be enrolled automatically at a contribution rate between 3% and 15%. Employees can then elect to have a different amount contributed, or nothing contributed at all. The contribution limit will line up with IRA limitations — $6,500 in 2023 — along with catch-up contributions as applicable.

Retroactive elective deferrals for sole proprietors

Effective: Plan years beginning after December 31, 2023.

A sole proprietor or single-member LLC filing as a sole proprietor, with a single employee (owner), can establish a new 401(k) plan.

The plan will be treated as having been established on the last day of the prior year. Additionally, employees can make contributions into the plan and treat them as made in the prior year. These contributions can be made through the tax return due date, excluding extensions.

A sole proprietor looking to set this up could wait until 2024 to establish the plan. They can then make contributions using 2024 funds, while taking the deduction on their 2023 tax return. 

Employers can replace a SIMPLE plan with a 401(k) plan

Effective: Plan years beginning after December 31, 2023.

During the year, an employer can make an election to terminate the savings incentive match plan for employees (SIMPLE) and replace it with a 401(k) plan that has required mandatory employer contributions. This could allow an employer to take advantage of the more preferential contribution maximums a 401(k) plan has over a SIMPLE.

Improving coverage for part-time workers

Effective: Plan years beginning after December 31, 2024.

Under current law, part-time employees must complete 500 hours each year and have worked for the employer for at least three years to qualify to participate in a 401(k) or 403(b). SECURE 2.0 will reduce this from three years to two years.

How Wipfli can help

Whether you’re an individual navigating the new retirement plan regulations, or a business looking to improve benefits for your employees, Wipfli is here to offer support.

Our knowledgeable tax team can help you identify how to maximize these new provisions for your retirement. And our human capital management consultants can help your business ensure it’s complying with new regulations.

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Michael J. Santo, CPA
Senior Tax Manager
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