SECURE Act 2.0: What it means for 401(k) Plans

SECURE Act 2.0: What it means for 401(k) Plans

On May 5th, the House Ways and Means Committee unanimously passed the Securing a Strong Retirement Act of 2021. The bill is expected to be voted on later this summer by the full House, where it’s already seeing strong support.

The new bill, nicknamed SECURE Act 2.0, builds on the SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019, which expanded retirement coverage to more Americans. In addition, the new bill includes several provisions designed to ease retirement plan administration which should encourage more employers to adopt 401(k) plans.

Key provisions of SECURE Act 2.0 related to 401(k) plans include:

Expansion of automatic enrollment. Requires new 401(k) plans to automatically enroll employees at a default rate between 3% and 10% and automatically escalate contributions at 1% per year to at least 10% (but no more than 15%). Of course, employees can always change their contribution rate or opt out of the plan at any time. Existing plans are grandfathered, and new businesses as well as those with 10 or fewer employees are exempt.Enhanced tax credits for small employer plans. The SECURE Act provides businesses with fewer than 100 employees a three-year tax credit for up to 50% of plan start-up costs. The new bill increases the credit to up to 100% of the costs for employers with up to 50 employees. In addition, SECURE Act 2.0 offers a new tax credit to employers with 50 or fewer employees, encouraging direct contributions to employees. This new tax credit would be as much as $1,000 per participating employee.Increased age for required minimum distributions (RMDs) to 75. The SECURE Act increased the RMD age to 72 (from 70.5).  The new bill increases the RMD age even further: to 73 in 2022; 74 in 2029 and ultimately 75 in 2032.Higher catch-up limits. Catch-up contributions mean older Americans can make increased contributions to their retirement accounts. Under current law, participants who are 50 or older can contribute an additional $6,500 to their 401(k) plans in 2021. The new bill increases these limits to $10,000 for 401(k) participants at ages 62, 63, and 64.Ability to match on student loans. Heavy student debt burdens prevent many employees from saving for retirement, often preventing them from earning valuable matching contributions. Under this provision of the bill, student loan repayments could count as elective deferrals, and qualify for 401(k) matching contributions from their employer. The bill would also permit a plan to test these employees separately for compliance purposes.One-year reduction in period of service requirements for long-term part time workers. The 2019 SECURE Act requires employers to allow long-term part-time workers to participate in the 401(k) plan if they work 500-999 hours consecutively for 3 years. The new bill reduces the requirement to two years. Keep in mind that plans with the normal 1000 hours in 12 months eligibility requirement for part-time employees must allow participants who meet that requirement to enter the plan.Retroactive first year elective deferrals for sole proprietors. Thanks to the SECURE Act,  employers can retroactively establish a profit sharing plan for the previous year up until their business tax deadline. This allows the owner to receive profit sharing for the previous year without having to make any employee deferrals. SECURE Act 2.0 extends the retroactive rule to sole proprietors or single member LLCs, where only one owner is employed. For example, a sole proprietor owner would have until April 15, 2022 to allocate profit sharing and elective deferrals for the 2021 plan year.Penalty-free withdrawals in case of domestic abuse. The new bill allows domestic abuse survivors to withdraw the lesser of $10,000 or 50% of their 401(k) account, without being subject to the 10% early withdrawal penalty. In addition, they would have the ability to pay the money back over 3 years.Expansion of Employee Plans Compliance Resolution System (EPCRs). To ease the burdens associated with retirement plan administration, this new legislation would expand the current corrections system to allow for more self-corrected errors and exemptions from plan disqualification.Separate application of top heavy rules covering excludable employees. SECURE 2.0 should make annual nondiscrimination testing a bit easier by allowing plans to separate out certain groups of employees from top heavy testing. Separating out groups of employees is already allowed on ADP, ACP, and coverage testing.Eliminating unnecessary plan requirements related to unenrolled participants. Currently, plans are required to send numerous notices to all eligible plan participants. The new legislation eliminates certain notice requirements.Retirement savings lost and found – SECURE Act 2.0 would create a national, online lost and found database. So-called “missing participants” are often either unresponsive or unaware of 401(k) plan funds that are rightfully theirs.Want a better 401(k)?
Learn More>

A Guide to Safe Harbor 401(k) Plans

A Guide to Safe Harbor 401(k) Plans


“Your 401(k) plan failed.” Those words can strike fear in the hearts of even the most seasoned business owners. However, there’s a way to avoid the stress of your plan’s annual nondiscrimination testing. By setting up a safe harbor 401(k), you can bypass some of the tests, such as the ADP and ACP tests, and focus on helping your employees save for their financial futures. But is a safe harbor 401(k) right for your company? Read on for answers to frequently asked questions about safe harbor 401(k) plans.

What is nondiscrimination testing?

Before we explore safe harbor plans, let’s talk about nondiscrimination tests. Mandated by ERISA, these annual tests help ensure that 401(k) plans benefit all employees—not just business owners or highly compensated employees (HCEs). Because the government provides significant tax benefits through 401(k) plans, it wants to ensure that these perks don’t disproportionately favor high earners.

The three main nondiscrimination tests are:

Actual deferral percentage (ADP) test—Compares the average salary deferrals of HCEs to those of non-highly compensated employees (NHCEs).Actual contribution percentage (ADC) test—Compares the average employer contributions received by HCEs and NHCEs.Top-heavy test—Evaluates whether a plan is top-heavy, that is, if the total value of the plan accounts of “key employees” is more than 60% of the value of all plan assets. (IRS defines a key employee as an officer making more than $185,000, an owner of more than 5% of the business, or an owner of more than 1% of the business who made more than $150,000 during the plan year.]

Why is it hard for 401(k) plans to pass nondiscrimination testing?

It’s actually easier for large companies to pass the tests because they have many employees at varying income levels contributing to the plan. However, small and mid-size businesses may struggle to pass if they have a relatively high number of HCEs. If HCEs contribute a lot to the plan, but NHCEs don’t, there’s a chance that the 401(k) plan will not pass nondiscrimination testing.

So, you may be wondering: “What happens if my plan fails?” Well, you’ll need to fix the imbalance by returning 401(k) plan contributions to your HCEs or by increasing contributions to your NHCEs. If you have to refund contributions, affected employees may fall behind on their retirement savings—and that money may be subject to state and federal taxes! If you don’t correct the issue in a timely manner, there could also be a 10% penalty fee and other serious ramifications.

If you offer employees a safe harbor 401(k) plan, you can avoid these time-consuming, headache-inducing compliance tests.

What is a safe harbor 401(k) plan?

So, let’s back up for a minute. What exactly is a safe harbor 401(k) plan? Put simply, it’s a defined contribution retirement plan that’s exempt from nondiscrimination testing. It’s like a typical 401(k) plan except it requires you to contribute to the plan on your employees’ behalf, sometimes as an incentive for them to save in the plan. This mandatory employer contribution must vest immediately—rather than on a graded or cliff vesting schedule. This means your employees can take these contributions with them when they leave, no matter how long they’ve worked for the company.

To fulfill safe harbor requirements, you can elect one of the following general contribution formulas:

Basic safe harbor match—Employer matches 100% of employee contributions, up to 3% of their compensation, plus 50% of the next 2% of their compensation.Enhanced safe harbor match—Employer matches 100% of employee contributions, up to 4% of their compensation.Non-elective contribution—Employer contributes 3% of each employee’s compensation, regardless of whether they make their own contributions.

These are only the minimum contributions. You can always increase non-elective or matching contributions to help your employees on the road to retirement.

What are the benefits of a safe harbor 401(k) plan?

At the end of the day, you want your employees to achieve the retirement they envision—and a safe harbor 401(k) plan can help them pursue it (while saving you time and effort). Consider these top five reasons to elect a safe harbor 401(k) plan:

1. Attract and retain top talent—Offering your employees a matching or non-elective contribution is a powerful recruitment tool. In fact, a Betterment for Business study found that nearly half of respondents said a company match was a factor in whether or not they accepted a new job. Plus, an employer contribution is a great way to reward your current employees (and incentivize them to save for their future).

2. Improve financial wellness—Studies show that financial stress impacts employees’ ability to focus on work. By helping your employees save for retirement, you help ease that burden and potentially improve your company’s productivity and profitability.

3. Save time and stress—Administering your 401(k) plan takes time—and it can become even more time-consuming and stressful if you’re worried that your plan may not pass nondiscrimination testing. Skip the tests altogether by electing a safe harbor 401(k).

4. Reward your top earners—With a safe harbor 401(k) plan, you can ensure that you and your HCEs will be able to max out your retirement contributions (without the fear that contributions will be returned if the plan fails nondiscrimination testing).

5. Reduce your taxable income—Like any employer contribution, safe harbor contributions are tax deductible! Plus, you can receive valuable tax credits to help offset the costs of your 401(k) plan.

n ideal solution for small businesses

If you’ve failed nondiscrimination testing in the past—or are concerned that your lower earning employees won’t participate in a 401(k) plan—a safe harbor plan may be the best solution for your small business.

Get a safe harbor 401(k) plan that works for you and your employees. Start now.

What are the key cost considerations of offering a safe harbor 401(k) plan?

The main consideration is that safe harbor contributions could increase your overall payroll by 3% or more depending upon your participation rates and contribution formula. Therefore, it’s important to think about whether your company has the financial capacity to make employer contributions on an annual basis.

The good news is that 401(k) plans—including those with safe harbor provisions—are more affordable than they have been in the past. In fact, providers like Betterment now offer comprehensive plan solutions at low costs. Learn more now.

How do I set up a safe harbor 401(k) plan?

If you’re thinking about setting up a safe harbor plan or adding a safe harbor match to your existing plan, here are a few safe harbor 401(k) rules you need to know:

Starting a new plan—For calendar year plans, October 1 is the final deadline for starting a new safe harbor 401(k) plan. But don’t cut it too close—you’re required to notify your employees 30 days before the plan starts. So, if you’re mulling over a safe harbor plan, be sure to talk to your plan provider well in advance.Adding a safe harbor match to an existing plan—If you want to add a safe harbor match provision to your current plan, you can include a plan amendment that goes into effect January 1. However, employees are required to receive a notice at least 30 days prior.Adding a safe harbor nonelective contribution to an existing plan—Thanks to the SECURE Act, plans that want to become a nonelective safe harbor plan have newfound flexibility. An existing plan can implement a 3% nonelective safe harbor provision for the current plan year if amended 30 days before the close of the plan year. Plans that decide to implement a nonelective safe harbor contribution of 4% or more have until the end of the following year in which the plan will become a safe harbor. Importantly, the SECURE Act eliminated the usual employee notice requirement for nonelective safe harbor plans.Communicating with employees—Every year, eligible employees need to be notified about their rights and obligations under your safe harbor plan (except for those with nonelective contributions, as noted in the previous bullet). Notice must be given at least 30 days, but no more than 90 days, before the beginning of the plan year. Want to learn more about notices? Visit the IRS website.A plan provider like Betterment will be able to assist you with everything you need to create the safe harbor 401(k) plan that’s right for your company.

How do I select a safe harbor 401(k) plan provider?

When it comes to choosing the right provider, it’s all about asking the right questions. Here’s how Betterment would answer them:

Do you have experience setting up safe harbor 401(k) plans?

Our team has significant experience working with safe harbor 401(k) plans. We help you understand each step of the onboarding process so you can start your plan quickly and easily. Plus, we have the expertise you need to handle every detail—from safe harbor 401(k) eligibility rules to investment options.How much does your service cost?
Our fees are a fraction of the cost of most providers. Plus, we’re always fully transparent about fees so there are no surprises for you or your employees.How easy will it be for me to administer our plan on an ongoing basis?
Our intuitive platform works to reduce your administrative burden. That means you’ll stay informed of what you need to do and when you need to do it—simplifying plan administration.Do you offer financial wellness support for employees?
Our high-tech solution enables us to give employees holistic, personalized advice on everything from contribution rates to investments. Plus, we can link employees’ outside investments, savings accounts, IRAs, and spousal/partner assets, so they can get a big picture view of their long- and short-term financial goals.

What is the deadline to adopt a safe harbor 401(k) plan for the 2021 plan year?

If you are looking to implement a safe harbor plan for the 2021 plan year, it must be live by October 1, 2021. Sign up with Betterment by August 2, 2021 to start reaping the benefits of a safe harbor plan this plan year!

Want to continue the conversation?
Let’s talk.>

Betterment is not a tax advisor. Please consult a qualified tax professional.

Did you miss our previous article…

Financial Advice From Betterment’s LGBTQ+ Community

Financial Advice From Betterment’s LGBTQ+ Community


While not everybody feels that their identity affects their finances, queer people face disproportionate levels of homelessnness, carry more debt, and have more healthcare hurdles than their straight, cis-gendered peers.

This Pride month, we’re highlighting stories from members of Betterment’s queer community and sharing the creative ways that they approach money in their everyday life.

Get to know our employees with a fun fact.

Troy Healey, 401(k) Client Success Manager (he/him): I lived in South Africa for a year.

Crys Moore, Product Design Manager (they/them): I’m an avid rock climber. I’ve climbed all over the U.S, as well as Mexico and Cuba.

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): In addition to my full time job, I’m also a professional dancer.

Ricky Whitcomb, Customer Support (he/him): I love cooking and run a food/cooking Instagram account.

Woot Hammink, Banking Operations Manager (he/him): My family has farms on three continents!

Maria Howe, Sales Development Representative (she/they): I almost never wear matching socks—must be my Aries energy.

The path to financial freedom looks different for everybody. Here are some of the goals we’re working towards.

Woot Hammink, Banking Operations Manager (he/him): My partner and I have been mulling over buying a home! It’s a big, scary investment in a place like New York City.

Crys Moore, Product Design Manager (they/them): Saving for a house.

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Saving for a trip to Italy, and also working towards 1.5 million in retirement.

Maria Howe, Sales Development Representative (she/they): Now that I’m on top of my student loans, my partner and I are starting to save for a home.

Ricky Whitcomb, Customer Support (he/him): Saving for my wedding.

Troy Healey, 401(k) Client Success Manager (he/him): Saving for a cruise ship trip for post COVID-19 travel!

Healthy habits make all the difference in doing what’s best for you and your money. Here are some ways our employees are reaching their goals.

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): I use auto-deposit for pretty much every account, and I also save any windfalls or extra money from dancing professionally towards my financial goals.

Troy Healey, 401(k) Client Success Manager (he/him): Automation! I deposit $100 every Tuesday into my cruise savings!

Ricky Whitcomb, Customer Support (he/him): Prepping my lunches as opposed to ordering out, and saving a percentage of my paycheck.

Woot Hammink, Banking Operations Manager (he/him):

First: Recurring deposits to a Home Ownership goal. We’ve got to start from somewhere.Second: We check in with each other frequently, and talk about what we’re open to and comfortable with. Since we’re not married, ownership gets even more complicated.

Maria Howe, Sales Development Representative (she/they): This may be counterintuitive, but after a lot of time spent in grad school and having a tight budget, little indulgences (like dinner out with my partner) are key to making sure I don’t go wild and break my budget.

Crys Moore, Product Design Manager (they/them): I auto-deposit into my house goal. Otherwise, I’d spend that money on something else.

Our approach to money can change drastically over time, and as we age, perspectives on money shift. Members of the BetterPride community shared advice to their younger self.

Ricky Whitcomb, Customer Support (he/him): Open a savings account and don’t touch it.

Crys Moore, Product Design Manager (they/them): Money is real and has real consequences. It’s not monopoly money. That student loan debt comes back around. Choose wisely young Crys!

Maria Howe, Sales Development Representative (she/they): I’d tell myself to go look up IRAs! I knew so little about tax advantaged accounts until working at Betterment. My money could have worked harder for me if I had known more.

Woot Hammink, Banking Operations Manager (he/him):  I’d first agree with my younger self that money should be more colorful than our green USD. I’d also take saving earlier more seriously, and spend less money at Dairy Queen.

Troy Healey, 401(k) Client Success Manager (he/him): Just make sure if you are going to spend it, you got it in the bank!

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Take it slow and steady. I always want to achieve my goals as fast as possible, but in reality I have to slow down and stay the course for a while before seeing results.

Has your identity influenced your relationship with money in any way? Why or why not?

Maria Howe, Sales Development Representative (she/they):  As a queer person who was socialized as a woman, I subconsciously didn’t think of myself as a future breadwinner during formative years. Now that my partner and I are at the point in our lives where we are saving for goals like a house and family, I’m more aware of living in a society where a gender wage gap exists and I’m working hard to catch up!

Crys Moore, Product Design Manager (they/them): Even though I have a ton of skin privilege because I’m white, being visibly queer sets me back compared to my cisgender heterosexual peers. Society works for them in ways it doesn’t work for me. Most things are a bit harder.

Sumaya Mulla-Carrillo, Social Media Coordinator (she/her): Yes and no—I don’t think it influences my spending or saving habits, but I do know that I’ll eventually have more expenses around having a child, or any legal fees that come with adoption. I’m always mentally preparing myself for that major life expense.

Ricky Whitcomb, Customer Support (he/him): When I was younger I definitely felt the need to have the nicest brands and newest styles and now I’m a very happy boring dresser who doesn’t spend his paychecks on jeans.

Troy Healey, 401(k) Client Success Manager (he/him): No! I am a frugal spender… frugality applies to gay or straight!

Woot Hammink, Banking Operations Manager (he/him): Definitely! Being in a “nontraditional” relationship blurs a lot of lines when it comes to long term planning and saving. I’ve never felt like I have a traditional “Game of Life” style plan, where a simple path can lead me to success.

Begin your financial journey
Join Betterment>

If you’re interested in joining our team, check out the Betterment careers page! We’re always looking for passionate candidates to join our company.

What Employers Should Know About Timing of 401(k) Contributions

What Employers Should Know About Timing of 401(k) Contributions

Timing of employee 401(k) contributions (including loan repayments)

When must employee contributions and loan repayments be withheld from payroll?

This is a top audit issue for 401(k) plans, and requires a consistent approach by all team members handling payroll submission. If a plan is considered a ‘small plan filer’ (typically under 100 eligible employees), the Department of Labor is more lenient and provides a 7-business day ‘safe harbor’ allowing employee contributions and loan repayments to be submitted within 7 business days of the pay date for which they were deducted.

If a plan is larger (>100 eligible employees), the safe harbor does not apply, and the timeliness is based on the earliest date a plan sponsor can reasonably segregate employee contributions from company assets. Historically, plans leaned on the outer bounds of the requirement (by the 15th business day of the month following the date of the deduction effective date), but today with online submissions and funding via ACH, a company would generally be hard-pressed to show that any deposit beyond a few days is considered reasonable.

To ensure timely deposits, it’s imperative for plan sponsors to review their internal processes regularly. All relevant team members — including those who may have to handle the process infrequently due to vacations or otherwise — understand the 401(k) deposit process completely and have the necessary access.

I am a self-employed business owner with income determined after year-end. When must my 401(k) contributions be submitted to be considered timely?

If an owner or partner of a company does not receive a W-2 from the business, and determines their self-employment income after year-end, their 401(k) contribution should be made as soon as possible after their net income is determined, but certainly no later than the individual tax filing deadline. Their 401(k) election should be made (electronically or in writing) by the end of the year reflecting a percentage of their net income from self employment. Note that if they elect to make a flat dollar 401(k) contribution, and their net income is expected to exceed that amount, the deposit is due no later than the end of the year.

Timing of employer 401(k) contributions

We calculate and fund our match / safe harbor contributions every pay period. How quickly must those be deposited?

Generally, there’s no timing requirement throughout the year for employer matching or safe harbor contributions. The employer may choose to pre-fund these amounts every pay period, enabling employees to see the value provided throughout the year and to benefit from dollar cost averaging.

Note that plans that opt to allocate safe harbor matching contributions every pay period are required to fund this at least quarterly.

When do we have to deposit employer contributions for year-end (e.g., true-up match or safe harbor deposits, employer profit sharing)?

Employer contributions for the year are due in full by the company tax filing deadline, including any applicable extension. Safe harbor contributions have a mandatory funding deadline of 12 months after the end of the plan year for which they are due; but typically for deductibility purposes, they are deposited even sooner.

Want a better 401(k)?
Learn More>

Did you miss our previous article…