This article will discuss how changes under the SECURE Act can improve small businesses' access to retirement plans. To learn more about how this new law affects your small business, speak with your estate planning or small business attorney. We will answer the following questions:
- What is the SECURE Act?
- What monetary incentives does the SECURE Act give small businesses?
- How does the SECURE Act increase small business access to retirement plans?
- What other benefits are found in the SECURE Act?
What Is The SECURE Act?
The Setting Every Community Up for Retirement Enhancement Act — signed into law on December 20th, 2019 — was one of the largest overhauls of the American retirement system in years. Provisions in the SECURE Act address age-related investment strategies, open up access to retirement plans for part-time workers, and incentivizes small businesses to offer 401(k) options to employees.
What Monetary Incentives Does The SECURE Act give small businesses?
A big focus of the SECURE Act is to get small businesses more involved in their employee's retirement. Increasing access is great, but a small business must be incentivized to take on the extra administrative work. The SECURE Act provides this incentive through the following:
- Small businesses can get a start-up retirement plan tax credit of $250 per non-highly compensated employee. To be counted, the employee must be eligible for a workplace retirement plan. The total credit amount maxes out at $5000, with a minimum of $500.
- Eligible employers should have 100 or fewer employees over three years, beginning after December 31st, 2019.
- The credit applies to multiple retirement plans, including 401(k), SIMPLE, SEP, and other profit-sharing plans.
- Employers that allow automatic enrollment can receive an additional credit of $500.
How Does The SECURE Act Increase Small Business Access To Retirement Plans?
Smaller companies can gain access to retirement plans through what is known as a multiple employer plan ("MEP"). A multiple employer plan is a single retirement plan utilized by multiple companies that don't share common ownership or control. However, MEP utilization is low due to rules set up by the Department of Labor and the Internal Revenue Service. To fix this problem, the SECURE Act created a new type of MEP, the "Pooled Employment Plan" or "PEP." The PEP eases some of the barriers provided by the DOL and IRS, such as removing the need for participating companies to be in the same industry.
PEPs are advantageous to small and medium businesses for the following reasons:
- PEPs remove the IRS's "One Bad Apple" rule that normally plagues MEPs. Under an MEP, if one employer fails to comply with the MEP rules, it can be put the tax qualification of the entire plan at risk. PEPs allow the plan providers to spin off a non-complying company's assets, preserving the integrity of the shared retirement plan.
- PEPs have lower upfront fees and maintenance costs;
- PEPs reduce the administrative burden by moving much of the maintenance and fiduciary responsibility to the Pooled Plan Provider ("PP Provider").
What Are Other Benefits Found In The SECURE Act?
Employer-sponsored retirement plans that utilize auto-enrollment enable employees to increase their contribution from 10% to 15%. The SECURE Act also allows individuals to convert a certain amount of their workplace retirement savings into "lifetime income investment," a type of predictable lifetime income stream.
If you're a small business thinking of offering your employees an employer-sponsored retirement plan, the SECURE Act has made it easier than ever. Also, check out our other article on the SECURE Act, How The SECURE Act Will Affect Your Retirement.
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