What’s in SECURE 2.0 for small businesses? A lot

Section 102—For taxable years beginning after December 31, 2022

Section 111—For taxable years beginning after December 31, 2019 (effective retroactively)

Summary

Before SECURE 2.0, the three-year start-up tax credit for employers with up to 100 employees was 50% of qualified start-up costs, with an annual limit of $5,000 (or if less, $250 times the number of non-highly compensated employees, with a minimum of $500). 

Section 102 of SECURE 2.0 increases the 50% limit to 100% for employers with up to 50 employees, subject to the same annual dollar limit. The 50% limit remains the same for employers with 51 to 100 employees. For this purpose, qualified start-up costs are generally defined as ordinary and necessary costs needed to set up and administer the plan or to educate employees about the plan.

An additional tax credit for eligible employer contributions (except in the case of defined benefit plans) is available to eligible employers for five years. The additional credit amount will be based on an applicable percentage of the amount contributed by the employer on behalf of employees (excluding elective deferrals), up to $1,000 per employee (excluding employees with wages that exceed $100,000—indexed for inflation). The applicable percentage is as follows:

• First year: 100%
• Second year: 100%
• Third year: 75%
• Fourth year: 50%
• Fifth year: 25%
• Sixth year and thereafter: 0%

Employers with 50 or fewer employees are eligible for the full credit, but the credit is phased out for employers with between 51 and 100 employees. 

Section 111 of SECURE 2.0, paired with Section 102, clarifies that a small employer that joins a multiple employer plan (MEP) or pooled employer plan is eligible for the full start-up credit, provided that the small employer is otherwise eligible. This applies regardless of how many years the MEP was previously in existence.

John Hancock viewpoint

We believe the expanded tax credit provides a strong incentive for small employers that may be otherwise hindered by the administrative burdens and costs involved in establishing a retirement plan for employees.

For plan years beginning after December 31, 2023

Summary

An employer that doesn’t maintain a retirement plan may establish a starter 401(k) or safe harbor 403(b) plan. Both types of plans, generally, must: 

• Limit contributions to elective deferrals only
• Cover all employees except those who can be excluded by statute
• Have automatic deferrals at a rate of at least 3% but not more than 15%
• Have an elective contribution limit of $6,000 (indexed for inflation after December 31, 2024)
• Have a catch-up contribution limit equal to the IRA catch-up contribution limit (which is $1,000 for 2023 and now indexed under SECURE 2.0)

Starter 401(k) and safe harbor 403(b) plans aren’t subject to average deferral percentage and top-heavy testing.

John Hancock viewpoint

We believe for small employers that don’t sponsor a retirement plan and aren’t ready to make employer matching or nonelective contributions, this may be an attractive alternative to setting up a 401(k) plan with employer contributions or a state-mandated IRA. In addition, the cost of establishing a starter 401(k) plan may be offset by the increased tax credit if the employer is eligible. For plan years after December 31, 2024, starter 401(k) and safe harbor 403(b) plans maintained by employers with more than 10 employees will have to comply with the automatic increase provision in Section 101 of SECURE 2.0.

For plan years beginning after December 31, 2023

Summary

Under current law, plans that allow for entry earlier than the statutory eligibility requirements of age 21 and one year of service may separately account for otherwise excludable employees (i.e., those who are under age 21 or have less than one year of service) for the purposes of coverage and nondiscrimination testing, but not for the purposes of top-heavy requirements. SECURE 2.0 allows defined contribution plans to disregard otherwise excludable employees when determining whether a plan meets the top-heavy minimum contribution requirement.

John Hancock viewpoint

We believe this provision allows plan sponsors of top-heavy plans to permit early entry without the obligation of additional top-heavy contribution expenses. This will generally benefit small employer plans since retirement plans of large employers are generally not top heavy.

For plan years beginning after December 31, 2023

Summary

When applying most retirement plan requirements, certain related employers are treated as a single employer. The determination of whether employers are related is quite complicated and often involves looking at common ownership between companies. For this purpose, ownership is attributed to certain family members to determine whether common ownership exists. For example, under current law, ownership is attributed to a minor child from a parent, so that if both parents of a minor child each own a company, those companies would be considered related, even in the case of a divorce. Section 315 of SECURE 2.0 modifies the attribution rules so that attribution from parents to their minor child won’t by itself result in related employers. Further, community property laws will be disregarded when determining ownership.

John Hancock viewpoint

We believe the modification to the family attribution rules is long overdue. This change should reduce the existence of inadvertent related employers and the negative impact they cause on their respective retirement plans, especially involving sole proprietors of small businesses.

For plan years beginning after December 31, 2023

Summary

An employer may terminate a SIMPLE IRA midyear and replace it with a safe harbor plan (i.e., SIMPLE 401(k) plan, traditional safe harbor 401(k) plan, QACA plan, or a starter 401(k) plan, although the starter 401(k) plan may have been included due to a drafting oversight) provided certain aggregated contribution limits under the terminated SIMPLE IRA and new safe harbor plan are satisfied. In addition, if employers terminate their SIMPLE IRA and establish a 401(k) or 403(b) plan, any rollovers to the new plan won’t be subject to the penalty tax that would otherwise apply under the two-year rule provided such amounts under the new plan are subject to the 401(k) (or 403(b), as the case may be) distribution restrictions.

John Hancock viewpoint

We believe the ability to replace a SIMPLE IRA with a safe harbor plan (as defined above) midyear will generally allow participants to have greater retirement benefits as well as to provide tax advantages to an employer.

Effective on December 29, 2022

Summary

The SECURE Act of 2019 permits a single Form 5500 to be filed for a group of plans (i.e., defined contribution plans that have the same trustee, named fiduciary, plan administrator, and investment options). SECURE 2.0 clarifies that, in such a case, an independent auditor’s report is required only for those individual plans that have 100 or more participants.

John Hancock viewpoint

We believe this is welcome clarification that participation in a group of plans won’t change the independent auditor’s report requirement, which will continue to apply on a plan-level basis. This will allow employers that have fewer than 100 participants to be part of a group of plans without having to obtain an independent auditor’s report. In addition, this will be of interest to third-party administrators (TPAs), who may be able to complete a single Form 5500 covering their clients participating in a group of plans without that causing their smaller clients to become subject to the independent auditor’s report requirement. 

This material does not constitute tax, legal, or accounting advice, and neither John Hancock nor any of our agents, employees, or registered representatives are in the business of offering such advice. Please consult your personal tax advisor for information about your individual situation. These views and opinions are subject to change and do not constitute investment advice or a recommendation regarding any specific product or security. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed. This information may contain certain statements that may be deemed forward looking. No forecasts are guaranteed. Past performance does not guarantee future results.

John Hancock Retirement Plan Services LLC offers administrative and/or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in NY), and John Hancock Life Insurance Company of New York, Valhalla, NY. Product features and availability may differ by state. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC. 

John Hancock Investment Management Distributors LLC is the principal underwriter and wholesale distribution broker-dealer for the John Hancock mutual funds, member FINRA, SIPC. 

FOR PLAN SPONSOR AND PARTICIPANT USE ONLY. NOT FOR USE WITH NON-PLAN PARTICIPANTS. 

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