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Small Business Retirement Plans and the SECURE Act

Recent legislation offers new opportunities for small businesses to offer retirement plans.

The SECURE Act passed at the end of 2019 had a number of features that affected individuals and their retirement accounts.

For financial advisers serving small business owner clients, the SECURE Act also offers several opportunities for small business retirement plans.

Tax Credit for a new Plan

Prior to the SECURE Act, small businesses could receive a tax credit of 50% of the start-up cost of the plan up to a maximum of $500.

Under the SECURE Act, the maximum credit amount has been increased to $5,000. This change went into effect for plan years beginning Jan. 1, 2020. The credit is calculated as the greater of $500 or the lessor of $250 times the number of non-highly compensated employees who are eligible to participate in the plan up to a maximum of $5,000.

The credit must be used within three tax years. Eligible small business retirement plans include a 401(k), SEP-IRA, SIMPLE IRA, a 403(b) and other qualified retirement plans. In order to be eligible for this credit, the business must:

  • Have 100 or fewer employees who each earned at least $5,000 in the prior year.
  • The company must have at least one non-highly compensated employee.
  • None of the employees can be substantially the same employees who over the past three tax years either received benefits from or contributed to a retirement plan with the same employer, a predecessor company or a company that is a member of the current employer’s control group.

For business owner clients who want to establish a new plan for their employees this can be at a least a bit of an incentive.

Extended Deadline for Establishing a new Plan

The SECURE Act extended the deadline for a business to establish a new qualified retirement plan. Previously the deadline had been the end of the calendar year in order for contributions to be deductible for that tax year. SEP-IRAs were a notable exception to this.

The SECURE Act changes this deadline to the employer’s tax filing deadline including any extensions if applicable. This makes sense as most businesses complete their year-end financials after the end of the year. This extension provides your business owner clients with a slightly longer planning horizon. If they are looking for some additional deductions after the close of the year establishing a new retirement plan might be a good option for them.

Credit for Adding Auto-Enrollment

The SECURE Act contains a credit for retirement plans adding an auto-enrollment feature to the plan. This can apply to a new or an existing plan such as a 401(k), SIMPLE IRA or other plan where this is an employee deferral component. The credit is $500 and can be claimed for up to three years.

Auto-enrollment features typically help boost the percentage of employees who participate in the plan. While the credit is a nice bonus, the potential for increased participation should be the planning aspect you stress with applicable clients. For plans that might have trouble passing non-discrimination testing each year, this might be the nudge that pushes them over the level that allows the business owner and other highly comped employees to max out their contributions.

Simplified Safe Harbor Notifications and Adoption

Previously, safe harbor retirement plans had to provide participants with an annual notification of the safe harbor contribution for the next year prior to the start of the year. As of the beginning of 2020, under the SECURE Act this notification is no longer required if the employer is making a non-elective safe harbor contribution of at least 3%.

The SECURE Act provides plan sponsors with a greater level of flexibility in the timing of when they adopt certain safe harbor provisions. Previously they had to do so prior to the start of the plan year, this has been revised to at least 30 days prior to the end of the plan year.

These changes, though not huge, do relieve some of the notification burdens of the plan sponsor and allows them greater flexibility.

Overall, if you advise small business owners or other clients offering a retirement plan for their employees, these changes offered by the SECURE Act might help business owners who are on the fence about offering a retirement plan and those who already offer one.