The Setting Every Community Up for Retirement Enhancement (SECURE) Act of December 2019 was designed to help Americans achieve retirement security. This legislation looked to broaden access to tax-advantaged retirement savings accounts and help participants keep money in these accounts longer. Shortly after the SECURE Act was signed into law, the world was hit with the COVID-19 pandemic, and the attention and focus on the SECURE Act rightfully was diminished.
Now over a year later, it’s important to keep some of these key provisions of the SECURE Act in mind that can be impactful to both plan sponsors and their plan participants.
Increased Retirement Plan Tax Credits
The SECURE Act increased the maximum tax credits for small employers (under 100 employees) who start new retirement plans from $500 per year to as much as $5,000 per year for three years (that’s a 900% increase!). The actual dollar amount is the greater of:
- $500 for a business owner with only one other employee
- $250 per non-highly compensated employee eligible for the plan, up to $5,000
For example, an employer with at least 20 non-highly compensated employees would qualify for the full $5,000 credit ($250 x 20). However, a small business owner with only one other employee would qualify for the $500 credit.
Eligible businesses can claim the startup cost for three years, so the new maximum credit total for startup costs is $15,000. This major bump in the startup’s costs credit makes it more affordable for small businesses to set up retirement plans.
Auto-Enrollment Tax Credit
To encourage small business owners to adopt automatic enrollment, the SECURE ACT provides a further tax credit for plans that add auto-enrollment of new hires. Adding this feature to retirement plans now can provide eligible businesses with an additional $500 tax credit for three years, so it can equate to a total of $1,500 over that time.
Additional Time to Adopt a Retirement Plan
Beginning in tax years after 2019, legislation now 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. (Note: this does not include a 401(k) plan.)
It used to be that many feasibility studies for business owners were done at the end of the year, when the deadline to establish a plan had passed, so business owners missed out on the potential of implementing a plan and receiving the potential tax deduction and savings opportunities. Now, under the SECURE Act, business owners can work with their retirement plan advisors and accountants to establish plans into the next year.
Long-Term, Part-Time Employee Changes
Long-term, part-time employees must be allowed to participate in an employer’s retirement plan if they work more than 500 hours over three consecutive years. However, this applies to salary deferrals only. Employers don’t have to provide matching or other employer contributions to these part-time employees.
This is a significant change from the 1,000-hour requirement for part-time employees in the past. This may cause issues and add additional administrative costs to employers who utilize part-time employees.
Childbirth or Adoption Withdrawal Option
The SECURE Act provides means and waives the 10% early withdrawal penalty for withdrawals up to $5,000 to cover expenses related to childbirth or adoption for distributions made after December 31, 2019.
Eliminate Advance Notice for Non-Elective Safe Harbor Contribution Option
An employer that makes safe harbor qualified non-elective contributions (QNECs) of at least 3% will no longer have to give a safe harbor notice before each plan year. However, employers that make safe harbor matching contributions will still need to give this advance notice.
This will allow employers to elect 401(k) QNEC safe harbor after the start of a plan year. Employers can amend their 401(k) plans during a plan year to retroactively implement a QNEC safe harbor, but only if the amendment is adopted at least 30 days before plan year-end. Alternatively, an employer can amend its 401(k) plan by the following plan year-end to convert the design into a QNEC safe harbor—but the employer will have to make a 4% contribution instead of the 3%.
Maximize SECURE Act Benefits for Your Company’s Plan
More and more workers are turning to their employer-sponsored retirement plan as their primary source of retirement income. That means you’re under pressure to deliver a group retirement plan that meets the unique financial needs of your employees.
The good news is that you don’t have to do it alone. Talk to a Wealth Enhancement Group advisor to find out more about how you and your business may benefit from these SECURE Act provisions.
This information was developed as a general guide to educate plan sponsors but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
CPFA, AIF®, QKA Brian leads a highly qualified team and oversees the retirement plan governance and fiduciary responsibilities for his clients, along with their administration, operations and design. He has more than 20 years of broad experience working in retirement solutions, including managing plans for large, multi-hundred-million-dollar corporations as well as small businesses. Brian supports his clients by designing customized retirement plans that are focused on specific goals and...Read More