How the SECURE Act Impacts Small Businesses

Posted by Aaron Leatherwood, CPA, CFP®, CWS®, MS | February 10, 2020

Employees of small businesses tend to save less for retirement. This is in part due to a lack of access to retirement plans as small businesses are less likely than larger corporations to offer employer plans. In an effort to increase opportunities for employers to provide retirement savings opportunities to their employees, there have been several changes to employer-provided retirement plans.

 

Some of these changes included:

 

  • Retirement plan start-up cost credit increased - Eligible small businesses can claim a tax credit for starting up a retirement plan. Under the old rules, the credit was limited to $500 per year for up to three years. Under the new rules, the amount of the credit has been increased and is still be claimed for up to three years. The amount of the annual credit is the greater of:
    • $500, or
    • The lessor of:
      • $250 multiplied by the number of eligible employees, or
      • $5,000

  • New credit for automatic enrollment - The studies show that automatic enrollment in retirement plans increases retirement savings. So, the new law creates an incentive for employers to implement automatic enrollment by creating a tax credit. An eligible employer is allowed a $500 per year tax credit for up to three years when starting a new 401(k) plan or SIMPLE IRA that includes automatic enrollment. The credit is also available for employers that convert an existing plan to automatic enrollment.

  • Increased eligibility to participate in a 401(k) - under the old rules, if an employee worked less than 1,000 hours per year, then the employer did not have to cover them under their 401(k). However, the new rules create a new track for eligibility in addition to the old one. The new track requires an employer to cover an employee that works for three consecutive years where the employee completes at least 500 hours of service.

  • Enhancements to Multiple Employer Plans (MEPs) - MEPs provide small businesses access to larger 401(k) plans by allowing multiple employers to adopt a single plan. This helps the employer reduce operating costs and provide more benefit options via economies of scale. Under the old rules, there were two considerable drawbacks: first, if one employer failed to meet the qualifications requirements, it could result in the entire plan being disqualified. And second, they were limited to defined contributions plans. Less costly IRA-based plans were not eligible.  The new rules address these drawbacks. If one participant is disqualified it does not result in the disqualification of the entire plan and a new category of MEPs allows for IRA-based plans.

  • 401(k) auto-enrollment safe harbor cap raised - as mentioned earlier, studies show that automatic enrollment in retirement plans increase retirement savings. Under the old rules, auto-enrollment safe harbor plans allowed for contributions to increase every year up to 10% of salary.  The new rules create a cap of up to 15% of salary. 

 

Small business owners should always be mindful of tax law changes, understand how it impacts their business, and determine what action is appropriate. The collective impact of all of the rule changes should help the landscape for small businesses in helping their employees save for retirement.

 


 

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Topics: Planning