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There's monumental change happening in the retirement industry today. From evolving state mandates to the rise of fintechs and expanded legislation, the industry is gaining more attention than ever before.
Join our LinkedIn group, ALM's Small Business Adviser, a space where small business owners can gather to network, have discussions and keep up with the trends and issues affecting their industries. The savings gap in the United States is something we cannot afford to ignore any longer. Today, there are 32 million small businesses and 100 million undersaved individuals across the country. With less than three percent of small businesses in the country offering a workplace savings solution, there is a great opportunity to support employers and help them offer a retirement plan that enables their employees to save for their futures.
As the Securing a Strong Retirement Act of 2022 (SECURE Act 2.0) was passed earlier this year in the House and is currently being reviewed in the Senate, more opportunities for small businesses are on the horizon. SECURE Act 2.0 will make it even more affordable for employers to start a new workplace retirement plan, expand coverage of previously excluded employees, and help employees understand the new benefits offered. This bill will also increase access to retirement savings for millions of Americans across the country including military spouses, part-time workers, non-profit employees, and late savers. While there are many benefits covered in this proposed bill, I've outlined a few highlights to discuss with your small business clients.
Tax benefits for small businesses
Employers who start a new workplace savings program will benefit from an increase in available tax credits. SECURE Act 2.0 would introduce a tax credit for defined contribution plans equal to the amount contributed by the employer on behalf of employees, up to $1,000 per employee. The full credit would be available for small businesses, those with 50 or fewer employees, and would be phased out for employers with between 51 and 100 employees. These tax credits, in combination with utilizing modern fintechs like Vestwell, make starting a retirement plan more affordable now than ever.
Student loans
Student loans are a top concern for 46 million Americans. If a large majority of the workforce is focused on paying down debt, it can be difficult for the same individuals to also save for their long-term needs, such as retirement. This is one of the reasons why we see some employees not making retirement contributions, even when they are eligible for employer matching, leaving thousands of dollars on the table each year. Under the SECURE Act 2.0, employers would be allowed to match student loan payments as contributions to retirement for employees with student loans, allowing strained employees to pay off their loans while saving at the same time.
Roths
The proposed bill will allow for more flexible employer matching options. Currently, employer matching contributions can only be paid into employees' pre-tax 401(k) accounts. If passed, businesses could offer their employees the option to elect that some or all of their matching contributions be treated as Roth contributions for 401(k) plans. These Roth contributions would not be excludable from employees' gross income.
Catch-up contributions
SECURE 2.0 will also support businesses with employees looking to make catch-up contributions. Currently, anyone age 50 or over is eligible to make a catch-up contribution of $6,500 on top of the $20,500 limit on 401(k) plan contributions. However, starting in 2023, employees aged 62 to 64 would be able to make larger catch-up contributions of up to $10,000 per year. Additionally, the bill states that all catch-up contributions to qualified retirement plans would be subject to Roth tax treatment, meaning those dollars would be taxed sooner.
The SECURE Act 2.0 is just one of the many opportunities that make employer-sponsored retirement plans more accessible to all. Walking your clients through the benefits above may help them to start a plan, however, this is just the first step. A key way employers can attract and retain top talent is not only through benefits offered, but the training that goes along with it. Encouraging financial education and leading training sessions for employees of your small business clients helps them understand the impact of a given program that will enable them to make the best decisions for themselves and their families. Through new legislation, affordable plan solutions, and the support of financial advisors, we can work together to help savers across the country.
Aaron Schumm is the Founder and CEO of Vestwell.
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