What Business Owners Should Know about the Secure Act

The SECURE Act, which passed with wide bipartisan support in December 2019, goes into full force in 2020 with key changes for small business owners offering or planning to offer retirement plans. The far-reaching bill includes several provisions targeting savers and retirees and their ability to save for and secure their retirement future. Because small businesses employ the vast majority of workers in this country, they are at the center of a few of these provisions. Here’s what small business owners should know about the SECURE Act.

Increased Tax Credit for Starting a Retirement Plan

The SECURE Act increases the Retirement Plans Startup Costs Tax Credit to 50% of plan startup costs, up to $5,000 a year for three years. That’s up from a maximum of $500 for three years. This credit goes a long way to offsetting expenses needed to set up, administer, and educate employees about the plan.

Additional Tax Credit for Using Automatic Enrollment

Studies have shown that adding an automatic enrollment feature – automatically enrolling employees in employer-sponsored retirement plan – increases the likelihood that employees will save for retirement. The SECURE Act includes an incentive for employers to add this feature with a tax credit up to $500 a year to offset plan costs. Between the Retirement Plans Startup Costs Tax Credit and the automatic enrollment tax credit, businesses can claim up to $16,500 in tax credits over three years.

Expanding Plan Eligibility to Part-Time Employees

Small businesses are having a difficult time in this tight labor market attracting and retaining good, part-time employees. With the SECURE Act, small employers can now offer 401(k) benefits to part-time employees who work at least 500 hours per year over a three-year period. That’s down from 1,000 hours so it should allow employers to cast a wider net to include seasonal employees and those they don’t want to lose to better opportunities.

Improves the Ability of Small Employers to Offer Retirement Plans

Small employers can now band together under more liberal multiple employer plan rules to make it easier to offer 401(k) plans at less cost and with limited fiduciary liability. This will give small businesses as a collective group more bargaining power to negotiate lowering their costs and better plan provisions.

Business Owners also Stand to Gain Individually under the SECURE Act

To help business owners secure their financial future, the SECURE Act provides for the following:

Removes the age limit on IRA contributions. Recognizing that an increasing number of Americans are working well past retirement age, the bill lifts the 70 ½ age cap for making tax-deductible contributions to IRAs. The only requirement now is that you have earned income.

Increases the age for making required minimum distributions. Under previous required minimum distribution (RMD) rules, retirees were required to begin withdrawing from their retirement accounts upon reaching age 70 ½. The SECURE Act postpones RMDs until age 72. With life expectancy increasing, there will likely be more efforts to push RMDs out to age 75.

For business owners with kids or planning to have kids, the SECURE Act offers a couple of significant benefits:

Penalty-free withdrawals to cover birth or adoption expenses. The Act includes a provision allowing 401(k) participants to withdraw up to $5,000 from their plans without penalty to cover the expenses of a qualified birth or adoption.

Tax-free 529 plan withdrawals for student loan repayment. This new rule is particularly significant for parents who have funds left over in their 529 College Savings Plans and want to help their child repay their student loans. Now, up to $10,000 annually can be applied to qualified student loan repayment.

While many of these provisions might be considered minor tweaks, they are significant enough to warrant additional financial and tax planning especially if you are considering establishing or expanding an employer-sponsored retirement plan.