Despite the ongoing political disputes in Washington, there is strong bipartisan support to make it easier for more Americans to save for retirement and for employers to offer retirement plans to employees. On May 23, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act passed the House of Representatives in a resounding 417-3 vote. This major piece of legislation is expected to make it through the Senate during the current term.
Just like the Tax Cuts and Jobs Act back in 2017, the SECURE Act has new rules governing retirement plans, including 401(k) plans, that affect plan holders and businesses sponsoring plans.
The best part? This new piece of legislation will have a significantly positive impact on current and future 401(k) plans, including the nine outlined below.
1. An increased tax credit for businesses starting a plan
The SECURE Act proposes beefing up the current Retirement Plans Startup Costs Tax Credit. Currently, qualifying businesses can receive a credit for up to 50% of startup costs, up to $500 a year for three years (for a total of $1,500).
The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000.
Since the credit still applies for three years, your small business could receive a total tax credit of up to $15,000 to offset expenses needed to set up, administer, and educate employees about the plan.
2. Additional tax credit for automatic enrollment
Research has found that automatic enrollment in workplace retirement plans improves the chances that workers build up a nest egg. To encourage administrators to add an automatic enrollment feature to the plan, the SECURE Act creates a new tax credit of up to $500 per year to employers to defray startup costs for new 401(k) and SIMPLE IRA plans that include automatic enrollment.
This tax credit for automatic enrollment is in addition to the plan start-up credit, is available for three years as well, and can be claimed by employers converting an existing plan to one with automatic enrollment.
Between the tax credit for start-up cost and the one for automatic enrollment, your small business could receive up to $16,500 in tax credits over a 3-year period.
3. Inclusion of long-term, part-time employees
In this tight labor market, some employers are having a hard time recruiting and retaining talent. Since a 401(k) is a powerful way to secure talent, the SECURE Act provides more flexibility on the hours per year requirement for long-term, part-time employees to qualify for a workplace retirement plan.
This is a great benefit for seasonal employees and those who have to take parental leave. In the past a part-time employee had to maintain at least 1,000 hours per year. Now, the rule is modified to also allow eligibility by completing at least 500 hours every year over a three-year period.
4. Penalty-free withdrawals up to $5,000 for the birth or adoption of a child
In the past, some plans may not have allowed any hardship distributions; if they did, they often didn’t cover the birth or adoption of a child. This now changes with the SECURE Act, making it easier for plan holders to take a penalty-free distribution (no 10% IRS penalty, but applicable income taxes still apply) in the event of a birth or adoption of a child. Keep in mind though that plan administrators are still allowed the option to require the withdrawal to be in the form of a loan.
However, that loan may no longer be using a credit card arrangement. See below.
5. Prohibition for plan loans to be in the form of a credit card or similar arrangement
It doesn’t make sense to take a loan from your 401(k), and 7 in 10 American workers say their non-mortgage debt has impacted their ability to save for retirement.
One dip into your 401(k) can quickly turn into another. In a one-year study of 180,000 borrowers from 401(k) plans, 25% of them took out a third or fourth loan, and 20% of them took out five or more loans.
A 401(k) loan feature is meant to be a last-resort form of financing. To make sure that stays that way, the SECURE Acts enforces that plan loans are not distributed through credit cards and are not used for routine or small purchases.
6. Penalty-free withdrawals of up to $10,000 from 529 education savings plans (ESAs) for the repayment of certain student loans
Student debt is becoming a major issue to more and more workers. In the 2019 Retirement Confidence Survey, the number of respondents indicating that a student debt loan assistance program would help them better prepare or save for retirement went up by 39% from 2018.
The legislation expands 529 education savings accounts to cover costs associated with registered apprenticeships, homeschooling, qualified student loan repayments (including those for siblings), and private elementary, secondary, or religious schools.
While small businesses can’t offer 529 education savings accounts, this change proposed by the SECURE Act is still worth noticing. It’s signaling a strong concern of American workers and presenting an opportunity for employers to provide an attractive benefit to join a company: 401(k) student loan repayment program. Such a program enables part-time and full-time employees eligible for a employer-sponsored 401(k) who contribute a minimum of their pay toward student to receive an equivalent employer match deposited into their 401(k) plans. Here’s how a 401(k) student loan repayment plan could work for your small business.
7. Increase in age requirement for required minimum distributions (RMDs)
The SECURE Act raises the required minimum distribution age to 72 from 70 ½. This change streamlines tax filing for plan holders, plan administrators, and employers, and reduces the complications associated with the half-year calculations.
8. Extension of plan eligibility for tax filing
Before, a plan had to be created by December 31st to be eligible to be used in the filing of a return for that year. Now, the SECURE Act extends that date to the actual filing due date (April 15th of the next year).
Since a small business owner wears many hats, this gives the ones wearing the “accountant hat” extra time to process new workplace plans and allow employees joining between January 1st and April 15 to delay taxes on retirement savings on the previous year’s return.
9. Improved bargaining power for groups of small businesses
The more, the merrier. And the more leverage that you have when negotiating with a plan provider! This is why the SECURE Act would also allow small businesses to band together with a multiple employer plan (MEP), giving them more bargaining power with costs and provisions, and a way to reduce administrative burden.
This change encourages small businesses to combine efforts when shopping around for plans and potentially allows more workers to access retirement plans. Also, it’s good news for owners of controlled groups.
The SECURE Act goes on to provide additional changes that affect not only small businesses but also a broader set of organizations and individuals. To review the full text of this proposed legislation, go here.
Interested in setting up a 401(k) plan for your small business?
Want to make the best out of the upcoming changes with the SECURE Act?
Human Interest has helped several eligible small businesses to set up, implement, and maintain a 401(k). We’ll take care of creating employee accounts, processing contributions every pay period and syncing them with your payroll provider, and ensuring that compliance testing and paperwork is completely taken care of.
If you would like to learn more about the process of setting up a 401(k) or any other plan that better suits your organization’s needs, please click here to contact us and we’d be happy to help!
Article ByDamian Davila
Damian Davila is a Honolulu-based writer with an MBA from the University of Hawaii. He enjoys helping people save money and writes about retirement, taxes, debt, and more.