Getting Ready for Retirement Changes This Year, and Next

By at 13 March, 2023, 2:27 pm

By Barbara Weltman – 

SECURE Act 2.0, which was part of the Consolidated Appropriations Act, 2023, that became law on December 29, 2022, makes a number of dramatic changes for retirement plans designed to enhance retirement savings for employees. Some of the changes must be made by employers with qualified retirement plans, while others are optional. All are quite technical and need careful attention. Now is the time to determine which changes must be made for 2023 and 2024 and assess whether to make one or more of the optional changes.

Changes for 2023

Effective as of the start of 2023, there are some new rules for employer-sponsored retirement plans. The following is a brief explanation of the new rules.

● Enhanced credit for small employers starting retirement plans. The credit for small employer pension plan startup costs, which in 2022 was limited to 50% of administrative costs, up to a maximum credit amount of $5,000, is better now. For employers with up to 50 employees, 100% of administrative costs can be taken into account in figuring the credit. The credit can be claimed for the first 3 years of the plan (the same as pre-2023 rules). But for defined contribution plans, such as 401(k)s and SEPs, there’s an additional credit based on a percentage of employer contributions. The full additional credit is limited to employers with 50 or fewer employees and is phased out for those with 51 to 100 employees. The credit runs for 5 years although the percentage used to figure the credit is reduced (100% in years 1 and 2; 75% in year 3, 50% in year 4; and 25% in year 5).

● Startup credit for joining a MEP. Small employers that join a multiple employer plan (MEP) rather than starting their own plan can claim the credit. What’s more, this clarification in the law is retroactive for tax years beginning after December 31, 2019, so employers that joined MEPs in 2020 and later may be able to file for tax refunds based on the credit (something to discuss with a CPA or other tax adviser).

● Tax credit for immediately enrolling military spouses in retirement plans. Small employers that waive usual participation requirements and enable military spouses to join the company’s retirement plan and become immediately vested in employer contributions are eligible for a special tax credit: $200 per military spouse and 100% of all employer contributions (up to $300) on behalf of military spouses, for a top credit of $500.

● Distributions for terminally ill participants. As long as a doctor certifies that an employee has an illness or physical condition expected to result in death within 84 months, the plan can allow for penalty-free distributions.

● Qualified disaster recovery distributions (QDRDs). A plan can permit distributions up to $22,000 per disaster (not indexed for inflation) for a participant who has a main home in a federally-declared disaster area.

Paperwork for employers is reduced this year. The only notice required to be sent to employees who have elected not to participate in an employer plan after receiving a summary plan description is the annual reminder of eligibility to participate, including applicable deadlines. An unenrolled participant can request other documents at any time.

Mandatory Change for 2024

Starting January 1, 2024, if your company has a 401(k) plan, you must cover long-term part-time employees. These are employees who worked at least 500 hours in the prior 3 years. Hopefully, you’ve carefully tracked hours worked in 2021, 2022, and 2023 so you can determine which workers are eligible to participate starting in 2024. Note: Beginning in 2025, the lookback period drops to 2 years.

Optional Changes for 2024

Starting January 1, 2024, you can make several changes to your plan. Which you decide to incorporate is up to you.

● Treat student loans payments as elective deferrals. If participants use money to pay off student loans, companies can base employer contributions on these payments (up to the annual limits for employees’ elective deferrals the amount of which for 2024 won’t be known until later this Fall).

● Withdrawals for emergency expenses. The plan can enable employees to take a distribution up to $1,000 per year to pay for unforeseeable or immediate financial needs related to personal or family expenses. Plans that adopt this option and then distribute funds for a participant’s emergency expenses won’t lose their qualification. Employers may rely on a written self-certification of a participant’s needs and do not have to inquire any further. If the plan allows for these withdrawals, it must permit employees to recontribute them within 3 years, but such withdrawals are allowed during the repayment period.

● Withdrawals for domestic abuse. A plan may allow for a distribution up to the lesser of $10,000 (indexed for inflation after 2024) or 50% of the vested account balance by a participant who has experienced domestic abuse. Again, self-certification is sufficient to protect the employer plan.

● Emergency savings accounts. Because many workers lack personal funds to pay for emergencies, employer plans can allow for a special savings account tied to the retirement plan. Employers may automatically opt employees into these accounts at no more than 3% of their salary; the portion of an account attributable to the employee’s contribution is capped at $2,500 (or lower as set by the employer). The first 4 withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals.

● Additional employer contributions to SIMPLE plans. Employers must make matching contributions to employees’ elective deferrals up to 2% of compensation or 3% of elective deferrals. Employer may choose to make additional contributions up to the lesser of 10% of compensation or $5,000 (indexed for inflation), as long as this is done in a uniform manner (i.e., does not discriminate against rank-and-file employees).

● Increased deferral limit and catchup contributions to SIMPLE plans. The annual deferral limit and the catch-up contribution at age 50 is increased by 10% (compared to the 2022 limit) for an employer with no more than 25 employees. An employer with 26 to 100 employees is permitted to provide higher deferral limits, but only if the employer either provides a 4% matching contribution or a 3% employer contribution.

Automatic Enrollment Mandates:  Some states—California, Colorado (effective March 15, 2023, for those with 50+ employees) Connecticut, Illinois, Maine (April 2023) Maryland, Massachusetts, New Jersey (the effective date has not yet been announced), New Mexico (July 1, 2024), Oregon, Virginia (July 1, 2023), and Washington—require private employers lacking a qualified retirement plan to automatically enroll their employees in a state-run plan (employees can opt out).

Some other states are considering similar legislation. The state plans resemble Roth IRAs so that employee contributions are not deductible but savings build up for tax-free distributions. Employers do not make any contributions (although Massachusetts permits this); their only obligation is to withhold employees’ contributions and deposit them with the state plan. Employees in these states that have a qualified retirement plan are exempt from using the state plan. Now there’s a federal alternative. Small employers that do not yet have a qualified retirement plan may adopt a “starter 401(k).”

The American Society of Pension Professionals & Actuaries estimates that 19 million employees will gain participation through starter 401(k)s. These plans are funded entirely by employees’ after-tax contributions the limit on which is the same as for contributions to Roth IRAs. Employers do not make any contributions to the plan on their employees’ behalf.


The changes discussed throughout this article are not the full story. There are other changes, other details, IRS guidance yet to come, and possible Congressional action.

The point to note is that there are many changes employers need to consider so action can be taken in a timely manner. Get good advice from a CPA or benefits expert and build the desired changes into your budget for 2023, 2024, and beyond. Watch for technical corrections or other changes from Congress. For example, SECURE Act 2.0 had wanted to restrict catch-up contributions by high-income taxpayers (barred such contributions in 2024 for those earning $145,000 in 2023) to designated Roth accounts. But the law as written says no catch-up contributions—pre-tax or after-tax—are allowed for any participant, which is clearly an error that needs to be fixed.

And monitor developments related to the Administration’s budget for fiscal year 2024, which would include some retirement plan changes.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a leading consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business® and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, Complete Idiot’s Guide to Starting a Home-Based Business, and The Rational Guide to Building Small Business Credit. Follow Barbara on Twitter @BigIdeas4SB.

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