As organizations compete for talent, it is important to evaluate your total rewards strategy to ensure it meets the needs of current and future employees. Young professionals face unique financial challenges as they enter the workforce, such as repaying student loan debt, building an emergency fund, and living at home with parents. Promoting financial wellness should be a key pillar of any total rewards (compensation and benefits) strategy. Employee financial wellness is defined as the ability to manage your expenses, pay off debt, and weather unexpected emergencies.
An employer-sponsored retirement plan is a critical component of a total rewards package. In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which made sweeping changes to retirement saving rules. On December 29, 2022, the SECURE Act 2.0 was signed into law, which contains over 90 provisions that support our ability as Americans to save for retirement. Below are highlights of the SECURE Act 2.0 that will appeal to young professionals:
- Employer Matching Contributions for Roth Accounts – In 2023, plans can be amended to allow employees to elect vested employer match contributions (and employer nonelective contributions) be made as Roth, after-tax contributions. Previously, all employer match contributions were made on a pre-tax basis. Paying taxes on employer match contributions now, while young professionals are in a lower tax bracket, will benefit employees; funds grow and can be withdrawn tax-free at retirement.
- Emergency Savings Account – In 2024, employers will be able to amend retirement plans to offer an emergency savings account to encourage short-term emergency savings. Non-highly compensated employees will be able to contribute 3% of after-tax pay up to $2,500 per year. Several studies show Americans do not have enough savings to cover unexpected emergencies, and often employees turn to their retirement plan for emergencies or large expenses like a down payment for home purchases. An emergency savings account linked to an employer-sponsored retirement plan will provide young professionals the cushion they need to handle emergency expenses without hindering the growth potential in their retirement savings.
- Student Loan Payments and Employer Match Contributions – In 2024, employers will be able to amend their plans to treat student loan payments made by the employee as employee retirement contributions, allowing employers to contribute employer-match contributions to their retirement plan. Roughly 45 million Americans have student loans, and often young professionals starting out at the lower end of the pay scale contemplate whether to make student loan payments or contribute to their retirement. Retirement is viewed as a future concept; however, we know the best retirement savers are those who start early and are consistent. This provision allows young professionals saddled with student debt to make loan payments and receive employer match-contributions. This is a win-win solution that encourages student loan payments and promotes retirement savings.
- Automatic Enrollment and Automatic Escalation – In 2025, employers adopting new 401(k) and 403(b) plans after December 29, 2022, are required to adopt an automatic enrollment provision for eligible employees, with a deferral contribution of at least 3% and not more than 10%. The deferral election will automatically escalate by 1% each year until the contribution is at least 10%, not to exceed 15% unless the employee specifically elects to waive participation or elects a different percentage. The act excludes new businesses in existence for less than 3 years, small businesses with 10 employees or fewer, and church and governmental plans. Existing plans are not subject to this SECURE 2.0 provision.
An automatic enrollment program is a valuable way to promote retirement savings, and results in higher plan participation. An automatic increase program is a great way to encourage employees to gradually increase deferral contributions. Financial experts encourage employees to save at least 10-15% for retirement.
- Retirement Savings Lost and Found Database – In 2025, employers and employees will be able to access a national database to locate lost retirement plan accounts. Employment patterns have changed dramatically where the average employment tenure has dropped. More young professionals are changing jobs or working multiple jobs. This SECURE 2.0 provision will allow workers to locate their hard-earned retirement accounts.
- 529 College Savings Account Rollover into Roth IRA – In 2024,beneficiaries of 529 college savings accounts can rollover up to $35,000 over the course of their lifetime into a Roth IRA. The rollover is subject to the Roth IRA annual contribution limit which is $7,000 (or $8,000 if aged 50+ for 2024 tax year. The 529 account must be open for more than 15 years to initiate this rollover. For those young professionals who did not use their college savings, they have the ability to divert these funds to their retirement plan for greater savings.
- Other provision enhancements
- Guidance and potential standardization for the retirement plan rollover process.
- Penalty-free withdrawal from retirement plans for domestic abuse hardship.
- Employees are permitted to self-certify for qualifying hardship withdrawals.
- Plan administrators may provide de minimis financial rewards to employees for participating in their retirement plan.
Contact info@wearecompass.com to take your total rewards strategy to the next level. Happy retirement saving!
