Small-business owners secured a major recruitment tool and an enhanced tax credit offering with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act by the U.S. Senate. The bill, signed by President Trump on Friday, Dec. 20, 2019, is the most significant retirement savings reform legislation in nearly 15 years.
Many small-business owners have often faced hurdles – costs, administration, and compliance requirements – in establishing a retirement plan for employees.
“The tax credits this bill provides will allow virtually every small-business owner to put a retirement plan in place,” said Michael Majors, Senior Director of National Retirement Sales at Paychex. “This will not only help them attract and retain talent, it will make a difference in helping employers help employees retire with dignity.”
What employers need to know about the SECURE Act
First off, businesses seeking to lower their tax liability have a major enticement with the higher tax credit, plus there are additional credits available that could help further.
There are close to two dozen provisions in the SECURE Act, some benefiting employers, others employees. Here are some highlights:
- The maximum tax credit for employers who establish new retirement plans is now $5,000, up from $500.
- Small-business owners who implement automatic enrollment in the plan will be eligible for an additional credit of $500, which could help offset the costs of 401(k) and SIMPLE IRA plan administration. This credit is available to employers newly adopting plans and employers who convert an existing plan to an automatic enrollment design. The tax credit is available for three years beginning with tax years after 2019.
- Employers will have additional time to adopt a retirement plan. Beginning in tax years after 2019, the legislation allows a plan to be adopted as late as the tax filing deadline, including extensions, for the taxable year rather than by the last day of that taxable year.
- There is a fiduciary safe harbor to 401(k) plan sponsors who include annuities in offerings to plan participants. The employer would not be able to be sued if the provider of an annuity chosen for the 401(k) plan defrauds the participant or ends up insolvent.
- An Open Multiple Employer Plan (MEP) would allow two or more unrelated employers to join through a pooled plan provider to create economies of scale. There are specific guidelines that must be followed, including requiring the pooled plan provider to register with the Department of Labor and the IRS, be a named fiduciary, and act as the ERISA Section 3(16) plan administrator. This provision begins in plan years after Dec. 31, 2020.