The SECURE 2.0 Act of 2022 includes 90+ provisions that should result in expanded savings opportunities for workers if more employers sponsor retirement plans and/or offer the new plan features. Many of SECURE 2.0’s changes are designed to assist small employers with offering a workplace retirement plan. This includes creating a new type of “Starter” plan and enhancing existing arrangements that allow multiple employers to join one plan. Now, employers have more options than ever before to choose a type of workplace savings plan that meets their budget and their appetite for plan administration and complexity.
The Starter Plan (Sec. 121)
More states are requiring employers to participate in a state-mandated Automatic Payroll Deduction IRA Program if they don’t sponsor a retirement plan for their employees. SECURE 2.0 creates a new type of Starter 401(k) plan (or Starter 403(b) plan) that is comparable to an Auto IRA Program but allows employers to choose a private industry plan provider over the state-mandated option. An employer initially choosing a Starter 401(k) plan could also easily convert the plan to a regular 401(k) plan when the employer is ready to provide additional features or benefits to plan participants.
Beginning in 2024, an employer of any size may adopt a Starter 401(k) deferral-only plan so long as they do not sponsor another qualified plan for the same year. The employer must automatically enroll all employees at a default deferral rate between 3%–15% of compensation. No employer contributions are allowed, and the plan is not subject to the nondiscrimination testing required of regular 401(k) plans. Within these parameters, the administrative burden and cost for a Starter 401(k) plan should be much lower than for a regular 401(k) plan, and employees receive the benefit of a payroll deduction saving plan at work with institutionally priced investment options.
For a plan adopted in 2024, employees may defer up to $6,000, plus a $1,000 catch-up contribution for employees aged 50 or older. The limits will be indexed in future years. The contribution limits may be increased more quickly if Congress corrects the legislative text to align the contribution limit with the current IRA contribution limit, as was intended.
The Starter 401(k), along with the employer plan tax credit enhancements made by SECURE 2.0, are projected to enable 19 million more American workers to participate in a workplace retirement plan, and to especially benefit Black and Hispanic workers (American Retirement Association, SECURE 2.0, Closing the Retirement Savings Gap).
Enhancements to MEP, PEPs & GOPs
SECURE 2.0 also makes several enhancements to Multiple Employer Plans (MEPs), Pooled Employer Plans (PEPs,) and Groups of Plans (GOPs).
- MEPs and PEPs are types of plans that allow multiple employers to join one plan that is sponsored and administered by one entity. A (closed) MEP is a single plan that covers associated employers that are not part of the same controlled group of employers. An (open) PEP is a single plan that covers unrelated employers. The sponsoring entity takes on many of the duties that employers would otherwise have to perform, including fiduciary oversight, investment selection, and plan administration. A single Form 5500 is filed at the MEP or PEP level. By pooling the assets and participants of multiple employers into one plan, a MEP or PEP may benefit employers through economies of scale with lower investment or recordkeeping expenses.
- GOPs are two or more plans with the same trustee, named fiduciary, plan administrator and investment options that file one combined Form 5500.
Sec. 105 – Effective in 2023, PEP providers may name any designated fiduciary other than a participating employer to be responsible for collecting plan contributions and implementing contribution collection procedures. Previously, the PEP trustee was required to take on this role.
Sec. 106 – Effective in 2023, tax-exempt employers may join a 403(b) MEP or PEP maintained under the same rules that apply to 401(k) MEPs and PEPs. The Treasury Department is to draft model plan language, as well as guidance regarding relief from the one-bad apple rule for 403(b) MEPs and PEPs and notifying tax-exempt employers that 403(b) MEPs and PEPs and participating employers are subject to ERISA.
Sec. 111 – Effective retroactively to 2020, employers joining a MEP or PEP may claim the plan start-up tax credits available to small employers, starting with the year the employer joins the MEP or PEP.
Sec. 344 – Beginning in 2027, the Department of Labor must provide a report to Congress on the industry’s use of PEPs, including number of plans and participants, fees, investment options, and other items. The DOL is to continue monitoring the PEP industry and provide reports every five years, including recommendations on how to improve PEPs to benefit participants.
Sec. 345 – SECURE 2.0 clarifies that the plan audit requirement for plans with 100 or more participants does not apply to GOPs at the group level but to the individual plans, so that only plans with 100 or more participants are subject to the audit requirement.