Update (Aug. 16, 2023): A provision of the SECURE Act takes effect in 2024 that changes the eligibility requirements for long-time part-time employees to participate in a workplace retirement plan.
Original article
Small-business owners secured a major recruitment tool and an enhanced tax credit offering with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act by the U.S. Senate. The bill, signed into law Dec. 20, 2019, is the most significant retirement savings reform legislation in nearly 15 years.
Many small-business owners have often faced hurdles – costs, administration, and compliance requirements – in establishing a retirement plan for employees.
“The tax credits this bill provides will allow virtually every small-business owner to put a retirement plan in place,” said Michael Majors, Vice President of HR Solutions Sales at Paychex. “This will not only help them attract and retain talent, it will make a difference in helping employers help employees (with saving for retirement).”
What employers need to know about the SECURE Act
First off, businesses seeking to lower their tax liability have a major enticement with the higher tax credit, plus there are additional credits available that could help further.
There are close to two dozen provisions in the SECURE Act, some benefiting employers, others employees. Here are some highlights:
- The maximum tax credit for employers who establish new retirement plans is now $5,000, up from $500.
- Small-business owners who implement automatic enrollment in the plan will be eligible for an additional credit of $500, which could help offset the costs of 401(k) and SIMPLE IRA plan administration. This credit is available to employers newly adopting plans and employers who convert an existing plan to an automatic enrollment design. The tax credit is available for three years beginning with tax years after 2019.
- Employers will have additional time to adopt a retirement plan. Beginning in tax years after 2019, the legislation allows a plan to be adopted as late as the tax filing deadline, including extensions, for the taxable year rather than by the last day of that taxable year.
- There is a fiduciary safe harbor to 401(k) plan sponsors who include annuities in offerings to plan participants. The employer would not be able to be sued if the provider of an annuity chosen for the 401(k) plan defrauds the participant or ends up insolvent.
- An Open Multiple Employer Plan (MEP) would allow two or more unrelated employers to join through a pooled plan provider to create economies of scale. There are specific guidelines that must be followed, including requiring the pooled plan provider to register with the Department of Labor and the IRS, be a named fiduciary, and act as the ERISA Section 3(16) plan administrator. This provision begins in plan years after Dec. 31, 2020.
What employees need to know about the SECURE Act
Employees will also benefit from the SECURE Act, the biggest gain being the opportunity to save for retirement because their employer has new opportunities or financial incentives to offer 401(k) and SIMPLE IRA plans. Highlights include:
- On Jan. 1, 2024, a provision of the SECURE Act takes effect that lowers the hours of service from 1,000 to 500 a year in three consecutive years for long-term part-time employees to be eligible to participate in an employer’s retirement plan.
- On Jan. 1, 2025, aSECURE 2.0 provision impacting eligibility takes effect that changes the number of consecutive years of service to two for long-time part-time employees (along with 500 hours of work in each year).
- Maximum age for traditional IRA contributions repealed, starting with tax years after Dec. 31, 2019.
- Increases by 1½ years the age at which required minimum distributions (RMD) must begin, taking into account longer life expectancy. This allows plan participants who attain age 70½ after Dec. 31, 2019, to wait until age 72 to take their RMD.
- Waives the 10 percent early withdrawal penalty for withdrawals up to $5,000 to cover expenses related to childbirth or adoption for distributions made after Dec. 31, 2019.
- Participants will have a clearer picture of their retirement readiness in the future, as benefit statements will be required to include a lifetime income disclosure at least once per year. Effective date is pending further guidance from the DOL.
What can businesses gain from the SECURE Act?
Tax credits alone are a huge incentive and can help small businesses in several ways; most notably, the ability to lower one’s tax liability and increase cash flow. Additionally, the ability to add a highly sought-after benefit such as a retirement plan can help recruit and retain top talent.
With any new law or regulation, however, there are always additional compliance obligations or extra administrative work. Paychex understands and wants to help employers take advantage of these opportunities that could help grow their business.
Paychex is the nation’s largest provider of retirement plans, with more than 100,000 according to PLANSPONSOR magazine. We understand the complexities that challenge business owners and can offer retirement solutions and services to help make administering a plan simpler.
The provisions of the SECURE Act are many, and Paychex will continue to provide updates as we receive additional published guidance from the DOL, IRS, or other affected agencies that will offer clarity on specific operation of these rules.
