Most business owners want to take care of their employees and do what is right for them. They know that sponsoring a retirement plan can help their employees and also help the business by retaining top talent. Unfortunately, there are obstacles that prevent them from doing so.
A 2017 Pew survey found that 71% of small- and medium-sized business owners said that one of the reasons they do not sponsor a retirement plan is that it is too expensive to set up. That was the main reason over one-third of them cited for not offering a plan. (1) The government realized this, so in 2019 Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Act includes three provisions to help small businesses sponsor retirement plans.
Plan Start-Up Tax Credit Increase
A tax credit for retirement plan start-up costs already existed before the enactment of the SECURE Act. Employers who established a SEP plan, SIMPLE IRA, or qualified retirement plan could claim up to 50% of their start-up costs for three years, with a maximum of $500 a year.
Starting in 2020, that tax credit has increased to up to $5,000 per year for three years. The credit is calculated as 50% of the start-up costs but cannot exceed $5,000 or $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan. Eligibility for the credit has not changed and the employer must still have 100 or fewer employees earning at least $5,000 per year; the plan must include at least one rank-and-file employee; and the employer cannot have maintained a qualified retirement plan for three years prior.
Automatic Enrollment Tax Credit
The SECURE Act provides another tax credit for employers who utilize automatic enrollment. The credit is worth $500 a year for up to the first three years that there is an automatic enrollment feature for a new or existing 401(k) or SEP IRA plan.
This credit is available to employers who have 100 or fewer employees earning $5,000 a year and include at least one rank-and-file employee in their plan. It can also be claimed in conjunction with the plan start-up tax credit as well.
Plan Establishment Deadline Pushed Back
Previously, a business had to adopt a retirement plan by the end of the business’s tax year. The problem with that is that many small businesses have not calculated net profits by December 31 in order to know if they can afford to start a retirement plan.
The SECURE Act gives business owners time to assess their situation and set up a retirement plan. Effective for the 2020 tax year, the new deadline is the same as the business’s tax filing deadline, including extensions. Employers also have until that deadline to make employee contributions for the tax year.
How I Can Help
The SECURE Act helps to remove one of the major barriers to small business owners sponsoring a retirement plan. It provides more flexibility with timing and helps to cover initial costs. However, establishing a retirement plan is complex and takes a lot of work and knowledge.
I can help remove that barrier. As a pension consultant, I partner with financial advisors to help their business-owner clients set up and run their company retirement plans. If you have a client that wants to take advantage of these beneficial provisions of the SECURE Act, email me today at email@example.com to learn more about how I can help.
About Kenny Phan
Kenny Phan is a Managing Partner/Pension Consultant at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.