How the SECURE Act Helps Small Business Owners Start a Retirement Plan

Including Incentives for Solo Business Owners

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If you’ve thought about offering your employees a retirement plan, a 2019 law that changed employer retirement plans could help your small business get going.

The new law, officially called the Setting Every Community Up for Retirement Enhancement Act of 2019 (or the SECURE Act) was passed in December 2019 as part of an appropriations bill. Several new or improved incentives in the law encourage employers to set up employer-sponsored pension plans for employees and to increase employee participation.

Changes that might affect your business include

  • A tax credit to encourage employee enrollment and an increased tax credit for starting employee plans
  • A way to allow more part-time workers to participate in your retirement plan
  • More time to adopt a new retirement plan
  • Increased opportunity to join a multiple-employer plan

Increased Tax Credit for Starting a Plan

Small businesses that meet specific criteria for eligibility may already get a tax credit for costs related to starting an SEP, SIMPLE IRA, or another qualified plan. 

The new law has increased the tax credit for plan startup costs to make it more affordable for small businesses to set up retirement plans. The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of $500 or the lesser of $250 multiplied by the number of eligible employees who are not highly compensated who participate in the plan, or $5,000. This credit is available for three years.

A small employer is eligible to claim the credit if they meet several criteria, including 100 or fewer employees who received at least $5,000 in compensation for the previous year.

You can use Form 8881 Credit for Small Employer Pension Plan Startup Costs to claim the credit and add this form to your tax return. 

New Tax Credit for Auto Enrollment Plans

Auto enrollment 401(k) plans are a proven way to encourage employee participation by automatically enrolling them in the employer’s plan unless they elect otherwise. Your business can contribute to an auto enrollment plan by matching the amount your employees decide to contribute, contributing a percentage of each employee’s pay (a nonelective contribution), or both. The plan must specify the percentage of the employee’s wages that will automatically be deducted from their paychecks to contribute to the plan.

The SECURE Act created a new tax credit of up to $500 per year to employers to encourage them to set up auto enrollment plans. The tax credit is meant to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan startup credit allowed under present law and is available for three years. The credit is also available to employers who switch from an existing plan to an automatic enrollment format.

It also increases the cap for enrolling employees from 10% to 15% of employee pay.  Employees can make an initial contribution of at least 4% up to the cap, change the amount of their contributions, or choose not to contribute. 

Increased Part-Time Worker Participation 

Previously, employers generally were able to exclude part-time workers (under 1,000 hours a year) from defined contribution plans. The SECURE Act requires employers to allow part-time employees to enroll if they have either one year of 1,000 hours or three consecutive years of at least 500 hours. 

Extension of Plan Adoption Time 

The new law allows employers more time to adopt a new retirement plan, up to the due date of the tax return for the tax year (including extensions). For example, a business with a tax year end of Dec. 31, 2019, would have until Oct. 15, 2020, to adopt a plan for 2019, if they filed an extension. This gives companies additional time to adopt a plan and the opportunity for employees to receive contributions for the earlier year. 

Increased Opportunity to Join a Multiple Employer Plan

A Multiple Employer Plan (MEP) allows different employers to join together in one retirement plan. This type of combined plan can benefit businesses in lower administrative costs and better investment choices.

Previously, these were “closed” plans, in which the businesses had to be related by industry. A new Department of Labor rule enacted in July 2019, however, allows small and medium-sized businesses to join in Association Retirement Plans (ARPs), and working owners without employees—including sole proprietors—can participate.

The Bottom Line

The SECURE Act is part of the current pension law, the Employee Retirement Income Security Act (ERISA) of 1974, administered by the Pension Benefit Guaranty Corporation (PBGC) under the Department of Labor (DOL). The above sections of the SECURE Act apply to employers and employees and are complex. Each one has qualifications, restrictions, and requirements. Because this law is so new, the DOL and the IRS haven’t released detailed regulations yet (as of February 2020). If you are interested in starting a retirement plan for your small business, or you want to take advantage of a tax credit, consider working with an attorney or plan administrator.