How the SECURE Act May Change Your Mind About Offering an Employee Retirement Plan
In late December 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The act is designed to increase access to tax-advantaged accounts for more Americans and keep older Americans from outliving their retirement assets.
One of the biggest steps the SECURE Act takes is to incentivize small businesses to offer a retirement plan for employees.
Small Business Benefits in the SECURE Act
The act has several provisions that will add incentives for small businesses to create retirement plans for their employees.
The site Society for Human Resource Management (SHRM) outlines all of the benefits here, but here are a few of the highlights you need to know about.
- The SECURE Act increases the tax credit incentive for starting up a retirement plan. The credit increases from the current $500 to up to $5,000 in some circumstances;
- There’s another tax credit for small businesses that create an automatic enrollment plan for new employees. It’s an additional $500 credit for three years;
- The act will also give companies more time to adopt new plans and simplify some of the rules and requirements for safe harbor 401(k) plans.
In-Plan Annuities for Retirement Plans
The other change the SECURE Act offers is an expansion of the ability for employers to offer a group annuity to employees.
According to Investopedia, “An annuity is a financial product that pays out a fixed stream of payments to an individual. These financial products are primarily used as an income stream for retirees. Annuities are created and sold by financial institutions, which accept and invest funds from individuals. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.”
Until now, employers have been wary of annuities because if their provider is out of business when the payouts begin, the employer can be held responsible. The SECURE Act makes it so employers can be protected from liability if the annuity provider has met a series of requirements for the past seven years.
Those requirements include:
- The annuity provider has a license provided by the state insurance commissioner;
- The annuity provider has filed audited financial statements as required by state laws;
- The annuity provider meets the statutory requirements in all the states that the annuity provider does business.
Other Retirement Changes in 2020
In a separate move, the IRS increased the 401(k) contribution limit.
The contribution limit has increased for employees who take part in a 401(k), 403(b), most 457 plans, and the Thrift Savings Plan. The contribution limit has increased from $19,000 to $19,500. The catch-up contribution limit for employees 50 and over has increased from $6,000 to $6,500.
You can find the details on the IRS site here.
Conclusion
These new incentives to start and maintain an employee retirement plan may be just the push your business needs to get the ball rolling. If you’re considering adding an employee retirement plan, check out this previous post that looks at your retirement plan options.
You also want to consider if this is the right move for your business. Consult your accountant before you make any moves and if you need any advice on what tax credits do and do not apply to your specific situation, feel free to contact us here at the Tax Credit Group.