Passage of the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) represents the most significant retirement tax reform in decades. In addition to the changes that impact individuals, the SECURE Act also includes changes designed to increase the availability and attractiveness of retirement plans. Employers and small business owners could be impacted by the SECURE Act provisions for retirement plans highlighted below.
Which SECURE Act Changes Impact Employers?
Tax Incentives for Employers
The SECURE Act includes a tax credit to incentivize employers to set up retirement plans. The act allows employers to receive a tax credit up to $5,000 for startup costs related to establishing an employer plan. The employer’s tax credit is $250 per eligible employee for a total of
- $500, for a business owner with only one other employee, or
- $250 per non-highly compensated employees 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.
The potential for the additional tax credit can significantly offset some of the financial burden for starting a new retirement plan. In addition, the benefit of having a retirement plan as another employee benefit has proven to have a positive impact toward attracting and retaining employees. Now can be a great time to consider starting a retirement plan that can be customized to meet the company and employee retirement savings needs.
Changes to Automatic Enrollment Provisions
Congress has observed that employees are more likely to save for retirement if they are automatically enrolled in a retirement plan instead of requiring the employee to elect participation. A new tax credit of $500 per year exists (for up to 3 years) for eligible employers that “convert” existing Section 401k plans to include automatic enrollment features. Eligible employers are generally those with fewer than 100 employees.
The $500 auto-enrollment tax credit isn’t just for new employer plans, so small businesses with an existing plan should consider adding an auto-enrollment feature if the plan doesn’t already have one.
Congress also increased the auto enrollment contribution percent. Plans that use a “qualified automatic contribution arrangement” to satisfy the safe harbor contribution requirements, with 100% vesting of employer (non-elective) safe harbor contributions, may allow for auto-escalation of elective deferrals beginning at 3% up to 15% of compensation, rather than the current 10% cap.
If you haven’t discussed the pros and cons of adding auto-enrollment into your 401k plan, then you should consider reaching out to have that discussion. About 68% of all 401k plans include auto-enrollment and that number has continued to rise over the years. With the additional $500 tax credit for up to 3 years now being available, adding auto-enrollment to your plan can be a win-win situation for employers and their employees.
Changes to Multiple Employer Plans
Multiple employer plans (MEPs) make it more affordable for small businesses to offer retirement plans. MEPs allow at least two separate employers to maintain a retirement savings plan while sharing the administrative costs. Currently, if one plan member fails to fulfill its obligations the entire plan would be disqualified. This risk of the entire MEP being disqualified if one of the employers failed to meet its obligations created a disincentive for employers to participate in these types of plans.
Beginning in 2021, however, “unrelated” employers may join together in a pooled employer plan, sometimes also called an “open MEP.” Participating employers will be protected from certain qualification failures caused by other participating employers, mitigating concern with the existing “one bad apple” rule (whereby administrative errors by one employer impacted other employers). In these instances, only the disqualified member would be penalized while the rest of the plan employers maintain a qualified status.
Employers should consider the benefits provided by participating in a multiple employer plan. MEPs have been around for many years but the law changes improve the ability to participate and not be jeopardized by any potential wrongdoing of other members. These changes will likely increase utilization and help to decrease plan administrative costs. Business owners will want to work with a Pooled Plan Provider to understand offerings and how they would apply to their company.
Goodbye 401k Credit Cards
Plan participants used to be able to borrow from their 401ks by taking out loans against the balance that must be repaid. In the past, some plans allowed 401k loans to be offered via a credit card, however it wasn’t clear that the credit card loans had to be repaid. The SECURE Act eliminates the ability for employers to offer 401k loans via credit card as part of their plan.
If you have a 401k plan loan card, STOP using it. The SECURE Act eliminated the use of these types of 401k loan cards immediately. You should contact your 401k loan service provider regarding how to best manage any existing outstanding loan balances and your loan payoff options.
Increased Access to Annuities
Employers have shifted from defined benefit plans, like pensions, to defined contribution plans like 401ks and 403bs. In doing so, they also shifted the burden and risk associated with funding longer retirements to employees. Realizing this, Congress is making it easier for employees to, in essence, fund their own pensions through annuities purchased within the employer plan.
The SECURE Act accomplishes this by making it easier for employers to offer annuities within their retirement plans. Specifically, plan sponsors are provided an optional safe harbor to satisfy their ERISA fiduciary obligations when selecting an annuity provider. The plan sponsor will be deemed to have satisfied its prudence requirement in the selection of an insurer provided certain specified conditions are met. The safe harbor protects fiduciaries from liability for any losses that may result due to an insurer’s collapse, bankruptcy or other inability to pay benefits. The new safe harbor rule will not apply to the selection of an insurance carrier to provide benefits under a terminating defined benefit pension plan.
Additionally, beginning in 2020, 401k plans, 403b plans, and governmental 457b plans may make a direct trustee-to-trustee transfer of a lifetime income investment to another employer-sponsored retirement plan or IRA.
All existing employer plans—large and small—will want to understand if annuities are offered within their plan. While the law changes make this possible, employers and employees will still want to closely evaluate their inclusion and whether they are appropriate to own or not. Annuities are complex financial instruments. Just because they are available doesn’t mean that they are the right decision for everyone. Employees will want to evaluate if they are appropriate, and then decide if the offering inside the employer plan is better or worse than something that could be purchased directly with a financial advisor.
How to Maximize SECURE Act Opportunities for Your Business
The SECURE Act is one of the larger pension plan changes in recent memory. This new law does several great things that can affect both a company’s opportunity to better manage their retirement savings plan and help employees save money for retirement and utilize those savings effectively over time.
Just as it has become important for employers to offer retirement plans to assist employees in effectively saving for retirement, it has also become a great tool for companies to attract and retain the best talent to remain successful. Many employees face significant financial burdens throughout their working lifetimes: buying a home, saving for college, paying for healthcare, preparing for retirement, etc. Helping employees put their financial situation in order not only helps them save for retirement, but can also decrease stress and increase productivity.
The SECURE Act focuses on truly helping employers (and ultimately employees) have the best opportunity to both save for retirement and further utilize their retirement savings effectively.
Plan Sponsors Are Not Alone
As defined benefit plans are getting rarer, 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 employee base and adheres to the complex laws, regulations and responsibilities required as a fiduciary.
The good news is that you don’t have to do it alone. You can work with a team of professionals that incorporates intelligent plan design support services, ongoing monitoring of vendors and investments, comprehensive retirement plan governance assistance and operational support to help you feel more confident when it comes to managing your group's retirement plan.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
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