Business Resource Center

How The SECURE Act Affects Small Business Owners

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The SECURE Act provides more time for employers to review year-end financials, consider the tax benefits, and set up a qualified retirement plan.

1. Expanded tax credits

The federal government already provides tax incentives for employers to create and maintain retirement plans, but the SECURE Act expanded the credits available.

Retirement Plan Startup Costs Tax Credit

Under the previous law, eligible small businesses could claim 50% of retirement plan startup costs, up to a maximum credit of $500 per year2 for three years.

The SECURE Act expanded this credit by increasing the limit to the greater of:

  • 1. $500, or
  • 2. $250 multiplied by the number of non-highly compensated employees eligible for the plan (up to a maximum of $5000).

The employer can still claim the credit each year for the first three years of the plan. So rather than having a potential maximum credit of $1,500 ($500 for three years), a business could potentially receive up to $15,000 in tax credits ($5,000 for three years).

Automatic Enrollment Tax Credit

The act also created a new tax credit for employers who start 401(k) plans that include automatic enrollment provisions. Automatic enrollment3 allows employers to enroll employees in a plan and deduct contributions from the employee's wages unless the employee opts out or elects to contribute a different amount. Under the old law, the maximum contribution an employer could automatically withhold from the employee's pay was 10%. The act also raised that cap to 15% of the employee's wages.

Regardless of the amount withheld, the new credit is worth up to $500 per year for the first three years of the plan. It's also available to small businesses that convert an existing plan to an automatic enrollment design.

Both the expanded Retirement Plan Startup Cost Tax Credit and the new Automatic Enrollment Tax Credit go into effect starting with the 2020 tax year.

"This will certainly be beneficial to small business owners who are interested in starting a retirement plan," said Chris Helton, a Vice President of Investments with Synovus Securities, Inc. "It can cost several thousand dollars for a small business to start a retirement plan, but for most companies, the cost is justifiable because starting a retirement plan helps with hiring, recruiting, and retaining valuable employees. An additional tax credit certainly won't hurt, and this can help offset those initial costs."


2. Easier to offer retirement plans

Multiple Employer Plans (MEPs) make it easier and more economical4 for small employers to offer retirement plans by allowing several small businesses to join together under a pooled plan provider (PPP). The PPP handles all compliance and administrative work, such as approving employee loans from their plan, hardship withdrawals, and distributions.

Before the SECURE Act, employers could only participate in an MEP if they shared a common economic interest, such as members within a professional or trade association. The SECURE Act allows completely unrelated businesses to participate in an MEP and eliminated the IRS's "one bad apple" rule, which stipulated that if one employer in the MEP did not meet qualification requirements, the entire MEP could be disqualified.

The change makes it easier for small business owners who haven't yet established a retirement plan to join an MEP starting in 2021.


3. Part-time employees qualify for retirement plans

Prior to the SECURE Act, if an employee worked less than 1,000 hours per year, they were generally ineligible to participate in their employer's 401(k) plan.

The SECURE Act requires employers with a 401(k) plan to open enrollment to longterm, part-time employees generally defined as any employee who worked more than 1,000 hours in one year (roughly 20 hours/week) or 500 hours over three consecutive years. The company does not need to offer employer matching or profit-sharing to these employees.

This provision of the act benefits employees who might not have access to an employer-sponsored plan but creates a potential administrative burden on employers. Any company-sponsored retirement plan with 100 or more participants must submit audited financial statements5 with the plan's Form 5500.6 Being required to add long-term, part-time employees could cause plans that haven't required an audit in the past to exceed the 100 participant threshold, likely increasing compliance costs.


4. Plan adoption timeline extended

The SECURE Act also grants business owners more time to set up a plan and make tax-deductible contributions. Under the previous law, an employer had to set up the plan by December 31 in order to deduct contributions to the plan on that year's tax return. The SECURE Act extended that cutoff to the deadline of the employer's tax return, including extensions.

This change would allow companies looking to reduce their tax liability to start a retirement plan for the previous calendar year before filing their tax return for that year.

For example, a company wanting to set up a qualified retirement plan for 2020 would have until their tax filing deadline in March or April of 2021 (depending on the business structure) to establish the plan and make tax deductible contributions. Requesting an extension of time to file the 2020 tax return would grant the company an additional six months to make a contribution and deduct it on the company's 2020 tax return.

For example, under the old rules, a company reviewing their year-to-date financials in December might not have enough time to set up a plan an make tax deductible contributions to reduce their tax bill by the end of the year. By extending the deadline to the due date of the company's tax return, a business owner who has been thinking of starting a retirement plan for employees, but wasn't sure whether they could afford it, has more time to take action and reduce their taxable income.

"It takes the guesswork out of it in that first year," Helton says.


Bottom line

The effective dates for different provisions of the SECURE Act vary by plan year, tax year, and calendar year. The Society of Human Resource Management's list of effective dates by provision7 outlines those deadlines dates in detail.

In the meantime, it's a good idea to start discussing these changes with your financial advisor or broker.

If you're considering starting a retirement plan for your small business or making a change to your existing plan, Synovus Retirement Plan Services can help. We work with some of the top brokers in the space, provide expert advice on plan components that will meet the requirements of regulators, and can connect you with a plan that is the right fit for your plan participants and your company. 

Important disclosure information

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

  1. House Committee on Ways & Means, "The Setting Every Community Up for Retirement Enhancement Act of 2019 (The Secure Act)," accessed March 3, 2020. Back
  2. IRS.gov, "Retirement Plans Startup Costs Tax Credit," updated December 21, 2019, accessed March 3, 2020. Back
  3. IRS.gov, "Auto Enrollment Fact Sheet," accessed March 3, 2020. Back
  4. AICPA.org, "Multiple Employer Retirement Plans and Multiple Employer Welfare Arrangements," accessed March 9, 2020. Back
  5. DOL.gov, "Selecting an Auditor for Your Employee Benefit Plan," accessed March 3, 2020. Back
  6. IRS.gov, "Form 5500 Corner," updated December 20, 2019, accessed March 3, 2020. Back
  7. SHRM.org, "SECURE Act Alters 401(k) Compliance Landscape," accessed March 3, 2020. Back