The “Setting Every Community Up for Retirement Enhancement” Act (“SECURE Act”) was signed into law at the end of 2019. The SECURE Act takes small, but impactful, steps towards addressing this country’s retirement crisis by incentivizing small business owners to sponsor retirement plans for their employees.
If you are a small business owner who has considered, or wanted, to offer a retirement plan for your employees but declined to do so because of costs or administrative burdens, now may be a good time to revisit this valuable employee benefit option. Below are four significant incentives the Act provides:
1. Broader Access for Employers
Historically, the cost, administrative burdens, and liability risks of running a sponsored retirement plan have been difficult for smaller companies to manage. Multiple-Employer Plans (MEPs) are appealing to business owners because they can reduce these problems, but many employers were left out due to the “common interest” requirement. Beginning in 2021, the “common interest” requirement will be removed and unrelated companies will be permitted to participate in and run MEPs through a pooled plan administrator. The SECURE Act also eliminates the “One Bad Apple” rule. Previously, this rule provided that a violation by one MEP participant disqualified the entire pool – this made employers understandably uneasy about joining a MEP. As a further boost, small business owners will see a substantial hike from the previous $500 tax credit offered to defray retirement package start-up costs. The tax credit has been increased to $5,000 a year for the next three tax years!
2. Incentives for Automatic Enrollment
Automatic enrollment is a great way to increase employee participation by encouraging them to start - and continue - saving. There is no doubt that lawmakers are pushing employers in that direction. An employee’s auto-enrollment contribution rate for certain plans used to be capped at 10%, but the cap has now been increased to 15% after an employee’s first year. By waiting until the employee’s second year for the increase, the SECURE Act is expected to reduce the number of individuals who drop out of plans due to high initial contribution amounts. The legislation also introduced a new tax credit (up to $500 a year for three years) for employers who launch new 401k and SIMPLE IRA plans with automatic enrollment.
3. Greater Inclusion for Part-time Employees
Many small businesses are staffed by part-time personnel, who, until now, had been essentially excluded from participating in their employer’s retirement benefits. Prior to the SECURE Act, part-time employees were required to log a minimum of 1,000 hours per year in order to qualify for their employer’s sponsored retirement plan. Beginning in 2021, a part-time employee will be allowed to participate in the retirement plan so long as they have worked at least 500 hours annually for three consecutive years. Although it may seem like an additional cost to add more individuals to a retirement plan, the SECURE Act does not require an employer to offer the same 401(k) benefits to a part-time employee as it would to a full-time worker. For example, an employer can choose to make matching contributions for its full-time employees, but opt to not offer matching to its part-time staff.
4. Safe Harbor for Annuities
While the benefits of annuities have been widely debated, some advisors find them to be helpful investment tools for retirement because they can provide a consistent stream of income at a future date. However, for the most part, annuities have been ignored in company-sponsored retirement packages due to the potential legal liability an employer could face in the future. Under prior law, an employer remained liable if an insurer didn’t follow through with making guaranteed payments to the employee - leaving the employer vulnerable to a future lawsuit. The SECURE Act now shifts this liability risk back to the insurance company (but only if the employer selects an annuity provider that meets several requirements). This feature now makes annuities a friendlier option for employers to include in a benefits plan.
The bottom line is: The incentives provided by the SECURE Act should encourage employers who may have been considering sponsoring a retirement plan, or were hesitant to look into it in the past, to take action.
David A. Lucas is an attorney in Miller, Miller & Canby’s Estates & Trusts and Business & Tax practice groups. Give David a call today at 301-762-5212 to discuss how your business may benefit from the new provisions of the SECURE Act.
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