Topic: LEGAL & LEGISLATIVE

The SECURE 2.0 Act was passed as part of the larger Consolidated Appropriations Act of 2023. The SECURE Act itself was over 350 pages containing a myriad of retirement-focused provisions. The 2.0 Act impacts all of the most commonly used retirement vehicles (think 401K, 403b, 457 and IRAs) and does so with provisions correcting the previously passed SECURE Act, some taking effect immediately in 2023, others in 2024 and 2025 and still others as late as 2033.  Not every provision will apply toward PEOs or even your clients, but many of them can have far-reaching changes that will require PEOs and the plan sponsors to be informed. 

2023 PROVISIONS 

The most publicized change for 2023 was to the required beginning date for required minimum distributions (RMDs) from qualified retirement plans and IRAs. Prior to the passage of both SECURE Acts, the date had been April 1st of the year after someone attained the age of 70½. This half-year “rule” caused much confusion and headaches for individuals and plan administrators. The first SECURE Act changed this to age 72 and now the SECURE 2.0 Act has moved it further to age 73. This will go even further in 2033, to age 75. 

The SECURE 2.0 Act has come to be known as the “Rothification” Act. Many retirement funding options have now been opened to being done on a post-tax basis (similar to Roth IRA contributions).  Beginning in 2023, Roth contributions can now be made to SEP and SIMPLE IRA accounts as well as being available for employers to make Roth matching contributions for 401(k), 403(b) and 457(b) plans. The overall goal was to provide a short-term influx of tax dollars to the government due to post-tax treatment and to provide tax-free growth and distributions in the future for individuals. While a welcome change to many, the IRS will need to issue further guidance so employers, employees and individuals will know how to report these contributions.   

Tax credits available to small employers to cover start-up expenses for a new plan were enhanced under the SECURE 2.0 Act. The credit percentage increases to 100% for employers with less than 50 employees for the first three years of a new plan. SECURE 2.0 also implemented a new credit available for employer contributions to a new small employer pension (SEP) plan. The credit is the employer contribution amount, up to $1,000 per employee, for a five-year period. The full credit applies to employers with 50 or fewer employees and prorated up to 100 employees.  The credit also reduces each year going from 100% in the first two years to 75% in year three, 50% in year four and finally 25% in  year five. This small employer pension credit was also made applicable to an employer joining a multiemployer plan (MEP).  SECURE 2.0 corrects wording from the first SECURE Act allowing an employer to retroactively apply this credit back to 2020 (an amended tax filing will be required). 

2024 PROVISIONS  

Beginning in 2024, catch-up contributions made to eligible employees who had compensation exceeding $145,000 in the prior year will need to be made on a Roth (post-tax) basis. The IRS pumped the brakes on this provision on August 25, 2023, to provide a two-year transition period for employers to make this switch. The IRS also clarified that high-paid self-employed persons (i.e., partners in a partnership) won’t be required to make catch-up contributions on a Roth basis even if they exceed the income threshold. The IRS also indicated that further guidance will be forthcoming once public comment has been received and reviewed. 

Employers will have the option to adopt a plan provision to allow for employer matching contributions to be made for employees who are making student loan payments. The employer effectively treats those payments as the employee’s “deferral” and makes corresponding match contributions. Similar to some of the other provisions, further guidance will be needed from the IRS to determine what levels are to be used and how the amounts are referenced/supported. 

Starter 401(k) plans can be offered by employers who wish to provide the ability for employees to defer a part of their wages without having all the added administrative testing requirements applicable to traditional 401(k) plans.  These plans would only allow for employee deferrals at a level between 3-15% of compensation. 

Roth 401(k) accounts will no longer be subject to RMD rules. Prior to SECURE 2.0 Act, Roth 401(k) balances were included in RMD computations for those employees who were taking or were required to take RMDs from their qualified retirement plans. Whereas Roth IRA accounts were not subject to RMD rules, their 401(k) brethren are now treated the same way. 

FUTURE PROVISIONS TO KEEP ON YOUR RADAR 

In 2025, all 401(k) and 403(b) plans will be required to adopt automatic enrollment features that start initial deferral elections at 3% for employees becoming eligible to participate in the plan. The employee can elect out and/or request a refund of any deferrals within 90 days of eligibility. Exclusions will be allowed for employers with 10 or fewer employees. 

Catch-up contributions will increase to $10,000 (or 50% more than the level computed for 2024) for employees who are at least 60 years old. They will also be indexed for inflation going forward (for those age 50 or older as well). 

Part-time workers (those with at least 500 hours per year) will be allowed to participate in a 401(k) plan one year earlier than what was passed under the original SECURE Act. If an employee meets the 500-hour rule for two consecutive years, they can be eligible to participate in the plan (assuming they meet the other eligibility rules – age). Any employer contributions made can be placed on a vesting schedule. 

There are numerous other provisions of the SECURE 2.0 Act that may impact PEOs and their clients. This article outlines several of the likely provisions that will impact most PEO plans. But as with most bills passed by Congress, there are still many rules that will require further guidance from the IRS and substantial updates to be made by plan administrators. Additionally, new language will need to be worked on to allow employers to adopt the necessary plan amendments imposed by the SECURE 2.0 Act. 

This article is designed to give general and timely information about the subjects covered. It is not intended as legal advice or assistance with individual problems. Readers should consult competent counsel of their own choosing about how the matters relate to their own affairs. 

There’s an energy around the PEO industry this year that’s palpable. Nowhere is that more true than in Washington DC, where we are starting to make our mark as a strong contributor to the vitality and success of the backbone of the economy: small and mid-size businesses. We’ve got a great story to tell. Help us tell it.

There’s an energy around the PEO industry this year that’s palpable. Nowhere is that more true than in Washington DC, where we are starting to make our mark as a strong contributor to the vitality and success of the backbone of the economy: small and mid-size businesses. We’ve got a great story to tell. Help us tell it.

There are only three authentic objections – every other objection is BS. No good deed goes unpunished. In the case of PEO clients this punishment is an extended one – with no end in sight. During the height of the pandemic, thousands of small and mid-sized businesses made an ethical and noble decision: keep their employees on payroll while weathering a once-in-a-generation economic catastrophe.

Restrictive covenants, also known as non-compete agreements or post-employment restrictions, are contractual clauses that limit an employee’s ability to work for a competitor or start a competing business after leaving their current employer. These covenants have sparked considerable debate and controversy.

As more and more states adopt paid family leave laws, the PEO industry is confronted with both challenges and opportunities as we adapt and manage these laws on behalf of our worksite employer clients. Like the Americans with Disabilities Act (ADA) or the Family Medical Leave Act of 1993 (FMLA) or the Occupational Safety and Health Act (OSH Act), and other laws that have been bestowed on us, we are in a great position to use what we have learned and accomplished over the years to handle the challenges brought on by state paid family leave laws.

Employee mobility and turnover continue to plague many employers. Naturally, this breeds concerns about what else might go out the door along with a departing employee. Implementing a strategy for protecting a PEO’s or client’s goodwill, business relationships, other employees, confidential information, and trade secrets is crucial. What an appropriate protective strategy should look like depends on numerous factors, and one PEO’s or client’s successful strategy might be disastrous or unworkable if simply duplicated elsewhere. Combined with the challenges of the ever-changing legal landscape of non-compete agreements and other restrictive covenants, many companies struggle knowing where to start.

When writing his theories on evolution, Professor Leon C. Megginson said, “It is not the strongest or the most intelligent who will survive, but those who can best manage change.” The global business world continues to shrink for the modern employer, and change is inevitable. New business opportunities are just an email away. Employees want remote work options, and employers wish to find talent wherever they can. As businesses expand their borders regarding services and products, and evolve their internal company makeup, international barriers still exist- laws, language, and resources. However, enterprises view these obstacles as manageable. There are avenues to expand globally, and our clients are looking for those solutions. 

As we begin to close out the year and look ahead to 2023, one trend we believe should garner significant attention from PEOs is data protection and privacy, and the impact of new laws.  Protecting data in this increasingly data-driven economy isn’t a new concept. However, when the new year rolls around, new legislation in California will take effect that will add a level of complexity to data protection efforts.  

Earned wage access (EWA) is the increasingly accepted term referring to an employee’s ability to access a portion of earned wages in between pay periods. EWA is not a loan, but an advance payment on funds available in the employees’ next paycheck. Financial technology advancements have allowed for significant growth in EWA solutions. However, growing input from state and federal regulatory agencies suggests that PEOs need to carefully consider which solutions most closely adhere to regulatory guidance.

As of the writing of this article, it appears that the Democrats will retain control of the Senate. The only question is whether their majority is 50-50 (with Vice President Harris breaking ties) or 51-49. That will be determined by the Georgia run-off between incumbent Sen. Raphael Warnock and challenger Herschel Walker. The House of Representatives will be controlled by the Republicans, though by a very slim margin. From a legislative perspective, with Republican’s controlling the House, President Biden’s remaining legislative agenda has little to no possibility of being enacted. Split control of Congress means that the only bills that will be enacted into law will have to be bipartisan in nature. This is another way of saying “expect gridlock” this session of Congress. 

As PEO industry professionals serving our companies and our customers, it is prudent to have an introductory knowledge about ESG, consider reasons why our industry should pay attention to ESG, identify ways you can help further ESG initiatives within your own organizations, and aid your customers in doing the same. While the aspects of ESG covered here easily merit separate articles or hour-long webinars, this article will serve as a primer and cover ESG ideas at a high level.