Thirteen years ago, the Pension Protection Act of 2006 was passed. This important of retirement legislation allowed participants to auto-enroll in 401(k) plans. However, the retirement system soon needed an update, which is why the House recently voted in support of the SECURE ACT, which stands for Setting Every Community Up for Retirement Enhancement.
Effective as of December 20, 2019, the SECURE Act implemented several new provisions that impact small business 401(k) sponsors and small business employees saving for retirement. Here’s what you need to know about the law as it stands today.
How Does the SECURE Act Affect Small Business Employers?
Key changes affecting small businesses include:
- Increased tax credits – when small business owners set up and run retirement plans.
- New incentives – for new plans with auto-enrollment.
- Greater scope – long-term, part-time workers can now participate in 401(k) plans.
- Expanded options – multiple, unrelated businesses can now partner under a SINGLE PLAN.
We’ll dive into each of these provisions in greater detail to explain how this impacts your 401(k) offerings.
The SECURE Act Increases Tax Credits for Small Businesses
No plan yet? No problem!
The time has never been better to start offering employees this competitive benefit.
Small business owners starting a retirement plan can expect three years of tax credits up to $15,000!
Your business is eligible for a “new plan” 401(k) tax credit if:
- 100 or fewer employees received at least $5,000 in compensation last year
- At least one plan participant is considered a “non-highly-compensated employee”
- Your employees did not benefit from a prior plan you offered within the past three years.
The credit period begins after December 31, 2019 and applies to 401(k), SIMPLE, SEP, and profit-sharing plans.
The original tax credit gave small business employers a tax credit of 50% of the cost to establish a retirement plan for the year in which it was created and two subsequent tax years. Back in 2001, this meant employers could receive $500/year in credits or $1,500 in total over a three-year period.
The new SECURE Act expands the new 401(k) plan tax credit to $250 per non-highly-compensated employee eligible to participate in the plan. The annual credit will be no less than $500, nor no more than $5,000.
The SECURE Act Adds Auto-Enrollment Tax Incentives for New and Old Existing Plan Sponsors
Small business owners starting a retirement plan with auto-enrollment can expect a tax credit of up to $1,500!
Retirement plans that include automatic enrollment to encourage employee participation enable small business owners to receive an additional credit of up to $500 per year, for the first three years of the plan. Good news for those who already have a 401(k) program! This new credit is also available to employers that convert their existing 401(k) plans to the automatic enrollment design.
So, to summarize, the new maximum eligible tax credit for offering a new 401(k) is now $5,500 per year (or $16,500 in total) under the new SECURE Act, a considerable improvement over the previous cap.
The SECURE Act Allows Long-Term Part-Timers Access To 401(k) Plans
Long-term part-time workers can join the company 401(k) plan!
About 21 percent of Americans hold part-time jobs, according to the US Bureau of Labor Statistics. In the past, these employees could not participate in employer-sponsored 401(k) plans unless they met a length-of-time service requirement – be it three, six, or 12 months. Unfortunately, an hourly measure might have been more useful in determining the dedication of these employees.
The SECURE Act allows a part-time employee to participate in the 401(k) plan if the PT employee has worked with the company: at least one year (or for 1,000 hours), OR for three consecutive years (with at least 500 hours of service). So, at minimum, employees who have worked 25 (20-hour) workweeks per year are now eligible for workplace 401(k) coverage.
Employers can elect to exclude the bare-minimum-requirement employees from testing under new relaxed nondiscrimination test standards and from the application of the top-heavy rules. Keep in mind though that certain plans, like Safe Harbor 401(k)s, do not require this compliance test.
Small Businesses Can Pool Together To Offer Retirement Plans
Small business owners will find it easier to pool together retirement plan offerings!
Nearly 40 million private-sector employees did not have access to a workplace retirement plan as of 2018, according to the US Bureau of Labor Statistics. In the past, they were simply out of luck. To increase retirement plan access, the SECURE Act allows unrelated businesses to join together under an open “Multiple Employer Program,” or MEP. Companies that lack the resources or the bureaucracy to handle a retirement plan independently can pool together to share the burden.
This law goes into effect in 2021 and eliminates the IRS’s “one bad apple rule,” meaning that the group cannot be penalized, even if one employer fails to satisfy the tax qualification rules for the MEP.
The Importance of the SECURE Act for Small Business Employers and Employees
The American workforce has changed considerably over the last decade. Small businesses now account for over 99 percent of companies in the US, with small business employees comprising roughly 40 percent of the total US workforce. Like their cohorts who work at large enterprises, these individuals possess similar financial needs, particularly in saving for their retirement.
In one survey, 80 percent of small business owners said they believe the SECURE Act will enable them to offer a competitive 401(k) plan that rivals those offered by big corporations. Nearly 9 in 10 agree that the legislation will provide significant tax advantages, help attract top talent, and improve employee retention. Thanks to the SECURE Act, it’s never been more accessible or advantageous for small businesses to invest in 401(k) plans.
Questions About the Secure Act? Ask Us.
Ubiquity is very encouraged by the congressional offering of this vital piece of retirement legislation that speaks to the needs of small business employers. We are hopeful that many more Americans will auto-enroll in a corporate-sponsored plan, making it easier to save money for their future and find security in their golden years. We will continue to monitor and keep you informed of regulatory changes affecting small businesses, so you feel cared for as part of the Ubiquity family.
Small businesses are invited to contact Ubiquity to learn more about starting a new 401(k) plan for employees or making changes to their existing ones. Since 1999, our firm has helped savers from coast to coast contribute over $2.2 billion toward their future with a flat-fee-for-service plan and zero hidden fees.
