SECURE 2.0 Act and the Retirement Situation

By James Tehrani

Nowadays, there are a lot of people who aren’t feeling very secure about their retirement.  

So let’s talk about that retirement situation. 

Today’s employees are tending to remain in the workforce longer. The U.S. Bureau of Labor Statistics projects that almost a quarter (24%) of the workforce will be over the age 55 by 2032 with 8.5% of those people being 65 and older.  

That’s great; older workers offer experience, leadership, mentorship opportunities and provide age diversity in the workforce. And, at least until the pandemic, people in the country were living longer so working longer should not be too much of a surprise. What is surprising is the number of older people who are struggling financially. 

It’s not so great if people are continuing to work longer simply because they are concerned they won’t be able to afford to retire comfortably. 

Many Older People Are Struggling 

One recent analysis from the National Council on Aging found that 47 million U.S. households with older adults (80%) were financially struggling or at risk of falling into economic uncertainty as they age

Part of the reason is that people just aren’t saving enough for retirement. According to NerdWallet, the average retirement savings for people aged 64 to 74 is $426,070. That said, we all know averages include outliers who can skew data, so looking at the median savings for that age group—which is only $164,000—is more telling. The general rule of thumb, according to Fidelity Investments, is you need 10 times your income saved to retire comfortably at age 67. So a person making $50,000 per year would need to have saved $500,000 under those guidelines.  

See the problem? 

The current retirement age is 67 for workers born in 1960 or later, and some policymakers have proposed increasing it to 70 or older. 

Back to Work? 

A CNBC poll from last year found that 68% of people who retired during the pandemic would consider returning to the workforce. Some, of course, are itching to get back into the workforce because they miss it; others have no choice in order to make ends meet. 

Before COVID-19, the average life expectancy was creeping closer and closer to 80 years old, but sadly it is now back to about 76 years. Scientists are writing about just how “shocking” that is, but economists are also worried about a growing retirement crisis in this country.  

In a news release, the Economic Policy Institute discussed how many older adults work in difficult conditions, which puts them at risk. “Working longer is not a viable answer to the retirement crisis,” the release said. “Instead, policymakers must ensure workers can afford to retire when they need to. 

Sure There’s SECURE 2.0, But … 

As a Professional Employer Organization (PEO) or Administrative Services Organization (ASO), you play a critical role in helping your small and medium-sized business (SMB) clients help their worksite employees save and plan for retirement through integrated financial services benefits, like 401(k)s, as part of a multiple employer plan. 

The more the merrier, right? Well, policymakers have had their eyes on retirement, too.  

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (aka SECURE 2.0) was signed into law at the end of last year, and offers Americans aged 60-63 the ability to make larger catch-up contributions ($10,000 or 150% of the catch-up limit, whichever is greater) to their 401(k)s and individual retirement accounts (IRAs) beginning in 2025.  

And there are many other helpful provisions in this piece of legislation, including: 

  • Startup Tax Credits: Employers sponsoring a new plan will receive significant credits for both setup costs and also employer matching contributions.
  • Employee Student Loan Match: Employers can make matching contributions to employees’ 401(k)s based on employee student loan payments.
  • Saver’s Match: Starting in 2027, low-wage earners will receive a 50% credit on any contribution they make up to $1,000 a year, which can be deposited directly into their retirement account.
  • Pension Linked Emergency Savings Account (PLESA): An optional plan structure, which offers employees an easy mechanism to regularly withdraw from their account. 

That all sounds great, of course, but SECURE 2.0 has its flaws, too.

Chris Babigian 
PrismHR Compliance Strategy Manager

“While many provisions add new benefits and options to employers and employees,” explains Chris Babigian, PrismHR’s compliance strategy manager, “others establish new requirements that are antithetical to the interest of either party.” 

One of those provisions that is “antithetical” Babigian says, is “Section 603, which requires highly paid employees to make catch-up contributions to a 401(k), 403(b) or 457(b) government plans on a Roth basis only.” 

The Internal Revenue Service is aware of the problem. 

A recent IRS notice stated, “The Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) have been made aware of taxpayer concerns with being able to timely implement Section 603 of the SECURE 2.0 Act.” 

Initially scheduled to take effect in January 2024 (yep, right around the corner), the notice instead will create a two-year transition period about that provision and become mandatory in 2026 instead. 

More SECURE 2.0 Act Questions 

That doesn’t mean there aren’t questions that still need answers, Babigian adds, including those revolving around: 

  • Catch-ups for people making over $145,000 per year in Federal Insurance Contributions Act (FICA) wages, which is a key threshold when it comes to contributions in SECURE 2.0. Sole proprietors and partners without FICA wages are still able to make catch-up contributions as the act currently stands, so that needs to be resolved.
  • Rectifying a drafting error that technically eliminates all catch-up contributions and limits starting on Jan. 1, 2024.
    • The IRS informally answered these questions via Notice 2023-62, but additional guidance is expected.
  • Determining whether FICA wages should be Medicare or Social Security when the employee may be exempt from one but not the other.
  • How to handle employees who make Roth catch-up contributions concurrently with pretax contributions but never reach the contribution limit.
  • The age-old question for PEOs: Just who is the employer? 

On that last point, Babigian explains, “The only employee wages that matter for Roth analysis are those from the ‘employer sponsoring the plan.’ However, in the PEO context, multiple questions emerge when attempting to define who the employer is. For instance, when an SMB joins a PEO, are employees’ prior year wages analyzed and the prior client FEIN ignored? Is this decision altered by whether the client or PEO sponsors the plan?” 

More to Come 

There’s a lot to unpack there, but the request for comment period ends Oct. 24, 2023, so stay tuned. 

“SECURE 2.0 is a great way to help people save for retirement,” says Chris Babigian, “but it’s still a work in progress. Expect more updates in the coming months.” 

And you can feel “secure” knowing that PrismHR will keep you abreast of all the changes as they materialize.

James Tehrani is PrismHR’s digital content marketing manager. He is an award-winning writer and editor based in the Chicago area.