A SECURE Act 2.0 Summary for Businesses Providing SEP and SIMPLE IRA Plans

Are you a business owner in charge of selecting and providing a retirement plan for your employees (even if you’re the only employee)? If yes, you’ll want to read this Secure Act 2.0 summary. In January 2024, the IRS issued a notice with important clarifying provisions pertaining to the SECURE Act 2.0, which was passed in 2022.

The notice alone, IRS Notice 2024-2, comes in at a whopping 81 pages — and that’s not even taking into account the original document it’s clarifying. You probably don’t have several hours to spare to weed through either document, so we’ve summarized a few of the most important need-to-know provisions from Secure Act 2.0 related specifically to SEP and SIMPLE IRA retirement plans. Here are the highlights.

A SECURE Act 2.0 Summary

The SECURE Act 2.0 updated the original act that Congress passed in 2019, called Setting Every Community Up for Retirement Enhancement (SECURE). It’s this 2.0 version that tweaked a few of the retirement plans that were significantly improved three years prior in an effort to make it easier for people to 1) contribute to those plans and 2) access those earmarked funds.

So, why the clarifying notice? This condensed document (comparatively, anyway) is presented in a Q&A format as a roadmap to assist people, including employers like you, in beginning to implement the provisions, which went into effect in 2023.

How do these recent clarifications impact SEP and SIMPLE IRA retirement plans?

The simplified employee pension (SEP) retirement plan differs from the savings incentive match plans of small employers (SIMPLE) plan in that it only includes employer contributions. Comparatively, for SIMPLE plans, an employee can opt to defer part of their salary toward the plan as a pre-tax contribution, and the employer can even participate in contribution matching at a certain percentage (among other options).

SECURE Act 2.0  also changes how you will complete Forms W-2 as an employer. See this page for more details about your tax filing.

No matter which retirement plan option you offer your employees, there are a few important things that have changed that could affect how you manage as a business owner — namely, these.

1. As an employer, you may provide Roth options to your employees for both SEP and SIMPLE IRA plans. This is not required.
2. For certain SIMPLE IRA plans, the limits for salary deferral and employer contributions have increased.
3. There’s now a provision for employers who want to cease offering a SIMPLE IRA plan midway through the year.
4. The IRS is offering both an expanded and a new tax credit to those sponsoring SEP and SIMPLE IRA plans.

Let’s dive into each and what that means for you as you sponsor one of these types of retirement plans.

1. The Roth Feature: Option, Timing, and Election

If you provide a SEP or SIMPLE retirement plan to employees of your business, you are not required to offer a Roth feature. If you do opt to, though, you must allow your employees what the IRS refers to as an “effective opportunity” to choose whether or not they’d like their contributions to be treated as Roth (post-tax). This decision must be made before making any contributions to the account, and the Roth election can only be made by the employee.

While SEPs usually only allow contributions from employers, there is the exception of the SAR-SEP, salary reduction SEPs. SAR-SEPs are an older iteration of the SIMPLE IRA retirement plan from the 90s that have essentially been grandfathered in. No new SAR-SEPs have been established beyond 1997, but the ones still existent since before then operate similarly to the SIMPLE IRA plans.

2. Increased Limits

While it’s not a case of “the sky’s the limit,” there’s now a little more wiggle room when it comes to how much of an employee’s salary they can choose to defer, as well as the employer’s own contributions. This could take the form of an automatic increase — where those who are enrolled in the retirement plan would have to opt out (rather than in) of the automatic increase in deferral rate over time — or an allowable increase.

This will depend on the size of the company and its staff. For employers with 25 or fewer eligible employees, the salary deferral limit and the “catch-up contribution limit” (an additional contribution allowed to people aged 50 years or older) are automatically increased by 10%. No action is required on the part of the employer for this to take effect.

On the other hand, for those with 25+ eligible employees, the increased limits only go into effect if the employer chooses to apply the increased limits and up their own employer contribution — either through a) matching the employee’s salary deferrals of 4% (where the standard is 3%) or 2) making a non-elective contribution of 3% (where the standard is 2%). In this case, the switch is not automatic. Employers would need to formally amend their SIMPLE IRA plan documents to reflect the increase, keep record of the change, and properly notify employees of the change at least 61 days before day one of the new plan year.

3. Ending a SIMPLE Plan Mid-year

Let’s say you’ve been offering a SIMPLE IRA retirement plan to your employees, but you’d like to terminate the plan in the middle of the year. Well, now you can! — on the condition that you replace the previous one with a safe harbor 401(k) plan for the rest of the year. To do so, employers must:

• Make all salary-deferred contributions as well as any required employer matching or non-elective contributions that are owed up to the date you cease the SIMPLE plan; and
• Notify the employees at least 30 days in advance of the plan’s termination date. This includes notifying any other involved parties, such as the company payroll provider, and keeping record of all changes.

Where the IRS website previously stated clearly that no, you cannot terminate a SIMPLE IRA plan mid-year, the 2024 notice recently issued provides this clarification, as well as a few other provisions.

4. Tax Credits

We all love a tax credit! In addition to expanding an already existing tax credit, the IRS also created another one — and now you can get both at the same time.

The tax credit already provided to small employers to alleviate 100% of the cost of implementing a retirement plan during the first three years was expanded to include employers with 50 or fewer employees. For 51 – 100 employees, the tax credit is 50%. This tax credit is available only for plans beginning in the 2022 tax year, but for plans effective before 2023, you can still benefit from the remainder of the three- to five-year initial period of the plan.

In addition, the SECURE Act 2.0 created a new tax credit which can be claimed during the first five years of a new plan, and it’s based solely on the employer’s contributions (matching or non-elective) of up to $1,000 per eligible employee. The five-year time period begins in the year the plan went into effect, and it’s phased out over that entire period on a percentage basis of either the $1,000 or the actual amount contributed. Read more about these tax credits on the IRS website.