What Employers Should Know About the Secure Act Tax Credit

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was mainly intended to help individuals save more for retirement. But the new law also contains provisions that help simplify the administration of retirement plans for employers and allow more employees to participate in 401(k) plans.

There are several provisions in the SECURE Act that may affect business owners. Read below to learn about the SECURE Act and related tax credits for small businesses and other savings opportunities.

Increased Small Employer Credit for Plan Start-Up Costs

Under current tax law, a federal income tax credit is allowed 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: 1) the year the plan is first effective, or 2) the year preceding the first plan year if the employer so elects.

Before the SECURE Act tax credit changes, the credit equaled the lesser of:

  • $500, or
  • 50% of the qualified start-up costs.

The SECURE Act tax credit increases this credit amount. For tax years beginning after 2019, the new limit equals the greater of:

  • $500, or
  • The lesser of 1) $5,000, or 2) $250 times the number of non-highly compensated employees who are eligible to participate in the plan.

New Small Employer Automatic Enrollment Credit

401(k) plans and SIMPLE IRA plans may have an “automatic enrollment” feature that encourages employees to save for retirement. Such plans stipulate that employee elective deferral contributions (salary-reduction contributions) for eligible employees are automatically made at a specified rate unless the employee elects otherwise. For example, an employee might affirmatively elect to abstain from making contributions or to make contributions at a different rate.

For tax years beginning after 2019, the SECURE Act establishes a new federal income tax credit of up to $500 per year for small employers that establish new 401(k) plans or SIMPLE IRA plans that include an automatic enrollment feature. This SECURE Act tax credit for small businesses is also available to small employers that modify existing plans to include an automatic enrollment feature.

New Savings Opportunities for Some Part-Time Workers

Before the SECURE Act, employers could generally exclude part-time employees who work fewer than 1,000 hours per year from coverage under 401(k) plans.

Under the SECURE Act, for plan years beginning after 2020, 401(k) plans must allow an employee to make elective deferrals (salary-reduction contributions) if the employee has both:

  1. Worked at least 500 hours per year with the employer for at least three consecutive years
  2. Reached age 21 by the end of the three-consecutive-year period

For determining whether the three-consecutive-year standard has been met, 12-month periods beginning before January 1, 2021, don’t count.

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. The SECURE Act makes various other technical changes to the 401(k) plan rules to coordinate those with the new rule for long-term part-time workers.

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

Before the SECURE Act, a qualified retirement plan had to be adopted by the last day of the employer’s tax year to be effective for that year. The plan could then receive deductible contributions that were made by the due date (including any extensions) for the employer’s federal income tax return for that year, and the employer could deduct those contributions on that return.

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: The SECURE Act 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.

Got Questions?

The SECURE Act made important tax-law changes that can affect employers that offer retirement plans. These changes are generally favorable to your business and will encourage workers to save more for retirement.

If you need professional advice regarding the SECURE Act and its related tax credits for small businesses or other tax details, we are here to help. Please contact our experienced CPAs for further information or if you need any assistance on this topic.

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