Tax & Retirement Implications of the SECURE 2.0 Act for Small Business Owners

by | Mar 15, 2023 | Business, Taxes

The legislative package known as 2022 Omnibus Appropriations passed last year included the Securing A Strong Retirement Act of 2022, also called the SECURE 2.0 Act. This act was intended to build on the SECURE Act of 2019, revising the parameters of retirement savings, such as raising the age of the required minimum distributions, as well as other changes.


The SECURE 2.0 Act law will allow small businesses to support their employees with retirement plans and extend tax incentives to businesses who are more financially secure. With the number of changes stemming from this new law, it is important to note the implications of the SECURE 2.0 Act for small businesses.


Let’s take a closer look at the effects of this act on small businesses and their employees.


Compulsory Retirement Plan Participation


For retirement savings plans that will begin after December 31st, 2024, all employers with more than 10 employees will be required to automatically enroll their employees in a 401K or 403B retirement plan. The business must have been operating for more than three years to meet this requirement. Employees are allowed to opt out of the enrollment if they choose to do so.


Under the SECURE 2.0 Act, employers will automatically start their employees with a 3% contribution, and increase it by 1% every year until they reach 10%. They cannot exceed 15%.  Employees may also opt out of these automatic escalations.  


This extension of automatic enrollment and plan escalations will allow more employees to have the opportunity to begin saving for retirement, particularly lower-paid individuals. 


Furthermore, small businesses who would like to expand their workforce should consider adopting a retirement savings plan before the mandatory guidelines go into effect. This is due to the fact that there will be added administrative costs associated with operating a retirement plan under the bill’s compulsory participation stipulations. 


The specific retirement-related implications of the SECURE 2.0 Act for small businesses may make a big impact on your business. Feel free to reach out to us if this is something you need help navigating.


Tax Credits for Starter Plans


For small businesses and employers who do not provide a retirement savings plan for their employees, the SECURE 2.0 Act offers a starter 401K plan for employees who meet age and service requirements. The starter 401K plans grant employees the chance to begin a retirement savings plan while working for even the smallest of businesses.


Moreover, this allows small business owners the ability to offer their employees a retirement savings plan, regardless of the size of their operations. One of the implications of the SECURE 2.0 Act for small businesses is that it offers a tax credit to small businesses and employers who begin a retirement savings plan. This is applicable only to employers with less than 50 qualifying employees.  Employers with 51 to 100 employees are entitled to a similar but lower tax credit.


If a small business starts a plan in the year 2023, the credit is extended to 100% of administrative costs up to $5,000. There is an additional credit of 100% of up to $1,000 per employee as well. This is for employer contributions made for all employees during the first year of the plan, who earn less than $100,000.  


Changing Top-Heavy Testing


A notable implication of the SECURE 2.0 Act for small businesses is that it has modified top-heavy contributions. Every year, this ratio is tested based on the retirement plan’s account balances on the last day of the previous plan year. A retirement plan is considered top-heavy when the owners and key employees own more than 60% of the value of the plan’s assets. 


One of the main reasons that small business owners and employers do not implement specific retirement savings plans is that they will most likely fail the top-heavy testing. When a plan fails the test, the plan can lose its qualified status and the employer must pay out minimum benefits and vesting for the year it failed. This can become expensive!


One of the implications of the SECURE 2.0 Act for small businesses is that it addresses this snag in retirement planning. For plans beginning after 2023, these rules will be altered. 


Excludable and non-excludable employees will be tested separately, similar to the 401(k) discrimination tests. The 401(k) discrimination tests ensure that employee matching contributions and deferred wages do not discriminate to the advantage of highly paid employees. This modification of top-heavy testing will boost small employers and business owners’ ability to offer retirement plans to younger workers without breaking the bank.  


Part-Time Workers Eligibility


Another of the implications of the SECURE 2.0 Act for small businesses is that it will give part-time, long-term workers the ability to gain access to employer-sponsored retirement plans. Prior to the first iteration of this act, part-time employees were mostly kept out of these kinds of employment benefits, instead relying on individual retirement accounts for saving for their financial future.


Employers are now required to offer their 401(k) plan to employees who have completed either one year of employment or three consecutive years of employment. In the 2019 Act, part-time employees must have completed no more than 1,000 hours in one year or a minimum of 500 hours in three consecutive years to qualify for a retirement plan. In the SECURE 2.0 Act, the three years has been reduced to two years. 




The SECURE 2.0 Act that was passed in December 2022 added new provisions to the previous law from 2019.  Tax and retirement implications of the SECURE 2.0 Act for small businesses mean new tax credits and modifications to former rules. This will give employers the capacity to offer starter plans with automatic enrollment and escalations to their employees. Further, it can help them to save on taxes while providing greater benefits for their employees. 


Because these complicated tax laws change frequently and can have such large impacts on small businesses, it’s important to stay informed. As tax and accounting professionals, it’s our duty – and pleasure! – to stay on top of changing legislation for our clients at North Shore Accounting Services. Click the button below if you’d like to speak to our knowledgeable team on how this particular law could affect your business.