SECURE Act for Small Businesses

Five things business owners should know about the SECURE Act.

In late 2019, Congress passed and President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Nearly half of American workers do not have access to a retirement plan through their jobs and the under-saving of those who do is well documented. With the goal of improving the retirement outlook for many Americans, most of the SECURE Act’s provisions became effective on January 1. Some aspects of the new law pertain to individuals, but here we will focus on several of the law’s major business-related provisions.

1. Start-up Tax Credits – Employers with up to 100 employees that adopt a new 401(k), SEP or SIMPLE IRA Plan may now claim a tax credit of 50% of the setup and administration costs up to $5,000 in each of the first three years the plan exists. The previous limit was $500 annually for up to three years.
2. Automatic Enrollment – Plans that add an automatic enrollment feature are eligible for an additional $500 tax credit for up to three years. With automatic enrollment, contributions are automatically deducted from new employees’ pay once they satisfy the plan’s eligibility requirements. Contributions typically start at 3% and employees can change the amount or opt-out completely with no penalty.
3. Open Multiple Employer Plans (MEPs) – A MEP (also known as a Pooled Employer Plan or PEP) is a retirement plan adopted by two or more unrelated employers for the purposes of sharing administrative costs and pooling investments. Prior to the new law, only “closed” MEPs were allowed, wherein the businesses had to share a common owner or membership in an industry or trade group. That barrier has now been removed, allowing non-related businesses to participate in MEPs. The SECURE Act also eliminates the “one bad apple” rule which previously could result in the disqualification of the entire MEP in the event of a fiduciary violation by just one participating employer.
4. Extended Deadline to Adopt a Plan – Prior to the new law, a plan had to be adopted by the last day of the business’ tax year (commonly, December 31). Employers can now adopt new 401 (k) plans up to the tax filing deadline, including extensions, for their business tax returns.
5. Part-time Employee Participation – Under the SECURE Act, employees who have worked at least 500 hours in three consecutive years must be allowed to participate in a business’ 401(k) plan. Previously, employees who did not work at least 1,000 hours could be excluded from the plan.

The SECURE Act is the most significant retirement plan legislation since the Pension Protection Act of 2006. Whether you are considering a new retirement plan for your small business or you are curious how the new law might impact your existing plan, you can contact your financial advisor or tax professional to learn more.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James.

Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.