February 3, 2020 | Tax Planning
If you’re a business owner in Maine who provides some form of retirement plan or account for your employees, you should be aware of the new Setting Every Community Up for Retirement Enhancement (SECURE) Act. Signed into law late last year, its primary purpose is to help individuals save for retirement. But it also contains provisions that help simplify the administration of retirement plans for employers and allow more employees to participate in 401(k) plans.
Here is how the SECURE Act may affect business owners.
Increased Small Employer Credit for Plan Start-Up Costs
Current law allows a federal income tax credit for qualified start-up costs incurred by eligible small employers that adopt a new qualified retirement plan, SIMPLE-IRA plan or Simplified Employee Pension (SEP) plan.
To qualify, the plan must cover at least one non-highly compensated employee. Qualified start-up costs are expenses connected with the establishment or administration of the plan or retirement-related education for employees with respect to the plan.
The credit is available for up to three years, beginning with either the year the plan is first effective, or the year preceding the first plan year.
Before the SECURE Act, the credit equaled the lesser of $500 or 50% of the qualified start-up costs. For tax years beginning after 2020, the SECURE Act increases the credit to whichever is greater:
- $500 or the lesser, or
- $5,000 or $250 times the number of non-highly compensated employees who are eligible to participate in the plan.
New Small Employer Automatic Enrollment Credit
To encourage employees to save for retirement, 401(k) plans and SIMPLE IRA plans sometimes have an “automatic enrollment” feature. This feature makes automatic deferral contributions at a specified rate unless the employee elects otherwise.
The SECURE Act has a new federal income tax credit of up to $500 per year for small employers that have plans with an automatic enrollment feature. It applies to either newly established 401(k) or SIMPLE IRA plans or existing plans that are modified to include an automatic enrollment feature.
New Savings Opportunities for Some Part-Time Workers
Prior to the SECURE Act taking effect, employers could generally exclude part-time employees who work fewer than 1,000 hours per year from coverage under 401(k) plans.
Now, 401(k) plans plans beginning after 2020 must allow an employee to make elective deferrals (salary-reduction contributions) if the employee has both:
- Worked at least 500 hours per year with the employer for at least three consecutive years.
- Reached age 21 by the end of the three-consecutive-year period.
If the employer allows long-term part-time employees to participate in an automatic enrollment 401(k) plan, the employee must automatically make elective deferrals at the default rate unless the employee affirmatively elects not to make contributions or to make contributions at a different rate.
Important: The SECURE Act change doesn’t require long-term part-time employees to be made eligible to participate in other features of a 401(k) plan. For example, a plan can continue to treat a long-term part-time employee as ineligible for employer nonelective contributions and employer matching contributions if the employee hasn’t completed a year of service, as defined under the standard eligibility rules.
Extended Deadline for Adopting a Retirement Plan
Under the SECURE Act, the plan adoption date can be as late as the due date (including any extensions) for the employer’s return for the tax year for which the employer wants the plan to become effective. This favorable change is available for plans adopted after 2019.
Important: This SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferrals (salary-reduction contributions) under a 401(k) plan.
The SECURE Act makes important tax-law updates and features several technical changes that can affect employers who offer retirement plans. To get a full understanding of how it may affect your business and employees, contact us at Filler and Associates and we can work together to clarify your tax situation.