New changes to the Setting Every Community Up for Retirement Enhancement Act, known as the SECURE ACT, provide several attractive cost-saving benefits, including enhanced tax credits for eligible small businesses that offer retirement plans.
What is the SECURE Act?
Signed into law on December 20, 2019, the SECURE Act was created to make it easier to save for retirement and increase the availability of retirement plans to more people. Recently, the House Ways and Means Committee approved a second bill, the Securing a Strong Retirement Act of 2021, nicknamed the SECURE Act 2.0. The new legislation modifies some of the retirement account rules included in the 2019 SECURE Act.
Key areas include:
- Expanding coverage and increasing retirement savings
- Preservation of income
- Simplification and clarification of retirement plan rules
- Technical amendments
- Administrative provisions
- Revenue provisions
Enhanced Tax Credits for Small Businesses
As an incentive to help small businesses provide retirement plans to workers, the SECURE Act offers enhanced tax credits that help small businesses significantly lower their costs.
Currently, eligible small businesses can claim a tax credit for three years for starting a retirement plan. The credit equals 50 percent of administrative costs, up to a maximum of $5,000 per year. The tax credit increases to 100 percent of expenses for employers with up to 50 employees. Here’s how it works.
How Tax Credits Are Calculated
The SECURE Act tax credit applies during the first tax credit year (the year the retirement plan is established) and each of the two taxable years immediately following. The tax credit available to small businesses is the greater of $500 or, the lesser of $250 for each Non-Highly Compensated Employee (NHCE) eligible to participate in the retirement plan, or a maximum of $5,000.
Here are a few examples of how the tax credits are calculated:
Employer with one eligible NHCE: 1 x $250 = $250 but qualifies for the $500 tax credit
Employer with 5 eligible NHCE’s: 5 x $250 = $1,250 tax credit
Employer with 10 eligible NHCE’s: 10 x $250 = $2,500 tax credit
Employer with 20 or more eligible NHCE’s: 20 x $250 = $5,000 tax credit
Employer Must Establish a New Retirement Plan. The tax credit is only available when an employer establishes a new retirement plan, including 401(k) plans. The tax credit is not available for employers who established a retirement plan in the past three years, which substantially covers the same employees as the new plan.
Automatic Enrollment of Participants. In order to qualify for the tax credit, plans must automatically enroll participants upon eligibility. For a plan with automatic enrollment (in 2020 or later), a $500 credit is available in the year automatic enrollment was activated and for each of the following two years. A new plan that implements automatic enrollment would be eligible for both credits.
The Tax Credit Can Not Be Used as a Deduction. The tax credit reduces the employer’s tax liability dollar-for-dollar. For example, if the tax credit is calculated to equal $2,000, the employer’s tax liability is reduced by $2,000.
The IRS provides additional information about tax credits for retirement plans start up costs here.
Cost and Time Savings. The enhanced credits and automatic enrollment are just a few ways the SECURE Act helps small businesses save time and money. The Act also significantly reduces the time-consuming administrative burden by eliminating various disclosures and documents that employers were required to provide participants not enrolled in the company’s plan. And for employers who choose not to establish a retirement plan, the Act would also make it easier to join a multiple employer plan (MEP) option.
Enhances Your Employee Benefits Package. Great benefits attract and keep great employees. Today, with record-low unemployment rates, that’s more important than ever before. The SECURE Act gives small employers an advantage by making it easier to offer a competitive and affordable retirement plan as part of its overall benefits package.
Please Note: This information is for general reference purposes only. Because laws, regulations, and filing deadlines are constantly changing, check with the appropriate organizations or government agencies for the latest information and consult your employment attorney and/or benefits advisor regarding your responsibilities to ensure you’re compliant with all of the laws that apply to your business. In addition, your company may be exempt from certain requirements and/or be subject to different requirements under the laws of your state.
Propel HR President Lee Yarborough
Propel HR President Lee Yarborough was recently elected Chair of the National Association of Professional Employer Organizations (NAPEO) Board of Directors. She spoke with PEO Insider magazine to share where she thinks the industry is headed and how NAPEO can continue to grow. Download a pdf version of the full interview: A Passion To Serve
You Got This! Lee was also featured on the podcast, TWO FEET IN. In season 2 of the podcast, Coach Heather Macy highlights “inspiring women who are focused on empowering other women.” In this short but in-depth conversation, Lee talks about changes in the workplace due to the pandemic, faith over fear, listening instead of giving advice, making smart business decisions, trusting her intuition, and her favorite version of herself. Available on Apple Podcasts, Spotify or wherever you listen to podcasts.
About Propel HR. Propel HR is an IRS-certified PEO that has been a leading provider of human resources and payroll solutions for 25 years. Propel partners with small to midsized businesses to manage payroll, employee benefits, compliance and risks, and other HR functions in a way that maximizes efficiency and reduces costs.