The SECURE Act is the most sweeping piece of retirement legislation in over a decade. It helps remove some of the hurdles that small and mid-sized businesses face when they set-up employer-sponsored retirement plans
“Houston, we have a problem.”
Well, not just Houston — but all of America.
Roughly 10,000 Americans are reaching retirement age every single day, and because of the decline in traditional pension offerings over the past few decades, the burden of preparing for a financially-secure retirement is beginning to fall on employees rather than their employers for the first time.
As a result, we’re seeing an influx of under-prepared Americans reaching retirement age and feeling unsure of how they’ll be able to afford life post-career. This could potentially lead to economic issues down the road if/when a large number of seniors need to rely on government-funded public assistance to make ends meet.
… because of the decline in traditional pension offerings over the past few decades, the burden of preparing for a financially-secure retirement is beginning to fall on employees rather than their employers for the first time.
Something needed to be done to address the looming retirement crisis and help Americans get back on the path to retirement readiness. The first step in getting there includes opening up retirement plan access to workers of small businesses, who traditionally are less likely to have a 401(k) available to them to save in — but how can the government encourage small businesses to offer a plan if they haven’t already done so in the past?
Enter: the SECURE Act.
What is the SECURE Act?
The SECURE ACT (which stands for Setting Every Community Up for Retirement Enhancement) Act is a bipartisan, retirement-related legislation that passed at the end of 2019. It’s aimed to increase access to 401(k) plans and other retirement savings vehicles for small business owners and their employees.
[The SECURE ACT] is the largest piece of retirement-related legislation to be passed in more than a decade and will have lasting impacts on plan sponsors and workers alike …
It’s the largest piece of retirement-related legislation to be passed in more than a decade and will have lasting impacts on plan sponsors and workers alike — designed to break down some of the barriers small business owners face when it comes to offering a retirement plan and increase plan access for workers who currently don’t have a way to save for retirement.
What does the SECURE Act mean for your business?
As we mentioned earlier, the SECURE Act will impact small businesses and retirement plan sponsors that:
- Already offer a 401(k) plan, or
- Are considering offering a 401(k) plan
And that’s important, because a 401(k) plan offers an attractive option for employers and workers alike due to its tax advantages. Plus, it’s one of the main ways Americans save for their retirement.
Unfortunately, roughly half of all households in the U.S. don’t have access to a 401(k) plan — and one reason for this may be due to working for smaller employers, who are less likely to have a retirement plan. In all reality, small businesses often lag behind when it comes to retirement benefits.
SECURE Act provisions that may impact small businesses
While there were 30 provisions included within the SECURE Act, we’ll highlight 4 provisions that will be most impactful for retirement plan sponsors — specifically, small business plan sponsors.
Two of the provisions (increased tax credits available and extended year-end deadlines) already went into effect on January 1, 2020, while the other two (access to Pooled Employer Plans and new eligibility requirements) aren’t set to take effect until 2021.
1. Increased tax credits available for small employers starting a 401(k) plan
Prior to SECURE Act legislation, small employers were eligible to receive up to $500 in tax credits when offering a new 401(k) plan to help cover start-up and administration costs of the plan for up to 3 years.
With the passing of the SECURE Act, the available tax credit has increased to up to $5,000 per year for small employers, based on the number of non-highly compensated employees working for the company, which could cover up to 50 percent of eligible expenses for the first 3 years the plan is offered.
The increased tax credit is designed to offset costs associated with running the plan, as that’s the main barrier small business owners face when deciding whether or not to offer a 401(k) plan for employees to save in.
Keep in mind, requirements do apply*, so we recommend consulting with your tax professional to discuss the tax credits that are available to your business.
2. Extended year-end deadlines
The SECURE Act also gives business owners more flexibility in reducing their annual tax liability at year-end with extended year-end deadlines.
Prior to SECURE Act legislation, business owners had to adopt a retirement plan by the end of their tax year in order to reduce their tax liability for the year, which frequently led to last-minute decision-making and potential issues with plan compliance down the road.
The new legislation gives employers until their tax filing deadline, plus extensions, to establish a plan — giving them more time to weigh their options and set up the plan properly.
3. Access opened to Pooled Employer Plans
Another prominent provision within the SECURE Act opens up access to Pooled Employer Plans (PEPs), allowing unrelated employers to band together to offer a sort of collective 401(k) plan to employees. The idea is to combine a bunch of small plans into one big plan for more cost-effective administration and professional plan management.
Remember the saying “one bad apple spoils the whole bunch”? Well, the IRS has a similar rule that applies to one bad plan that’s part of the whole group of plans.
Fortunately, the SECURE Act eliminated the “One Bad Apple” rule, which in the past may have prevented employers from joining a PEP arrangement even if they were interested.
4. Long-term, part-time employees eligible to participate
This provision may be a big one for plan sponsors with long-standing, part-time employees, as it requires plan sponsors to implement dual eligibility requirements for participants in the plan. Previously, plan sponsors were not required to allow part-time workers to participate in their retirement plan.
In fact, only workers with at least 1 year of service working 1,000 hours were required to be eligible plan participants. The SECURE Act adds a new eligibility requirement, opening up plan access to employees who work at least 500 hours for the company for 3 consecutive years.
These employees will not apply to ADP or top-heavy testing, and matching contributions will not be required for this group, but beginning in 2024, employees meeting the above criteria will be eligible to participate in and contribute to the 401(k) plan.
The SECURE Act can have lasting impacts on small business owners and plan sponsors, on the way Americans prepare for their retirement — and, ultimately, on the way thousands of workers across the country set themselves up for financial success in the future.
And that was the whole goal of the SECURE Act, right?
Mission: back on target.
*Businesses may be eligible for a tax credit up to $5,000 of the administrative costs in the first three years of a new plan. Requirements for this credit include:
- Has less than 100 employees
- At least one non-highly compensated employee must be participating
- Employer must not have sponsored a qualified plan within the last three years
The startup credit is limited to 50 percent of a plan’s eligible expenses. The total annual credit can range from $500 to $5,000 depending upon the number of eligible non-highly compensated employees.