How the SECURE Act Makes Offering a Retirement Plan More Affordable
It’s likely difficult for any of us to remember what life was like back in December 2019, never-the-less what legislation was passed. But on December 20, 2019, perhaps the most impactful retirement plan security legislation in decades was signed into law.
The Setting Every Company Up for Retirement Enhancement Act (SECURE Act) is intended to make retirement plans more accessible and affordable and ultimately bridge the huge savings gap by encouraging more Americans to contribute.
For any employer considering a company sponsored retirement plan—and even ones who aren’t!—there are some noteworthy incentives for offering this important benefit.
- Tax credit for implementing a 401(k). For small businesses that sponsors a plan for the first time, a tax credit of up to $5,000 per year for three years should serve as a great catalyst. This can help offset upfront costs that may have prevented a company from getting started. NOTE: This is not a deduction. Instead, the tax credit reduces the employer’s tax liability dollar-for-dollar.
- Auto-enroll credits. Any small plan that implements automatic enrollment in 2020 or later is eligible for a $500 credit for three years. This applies to both existing and new plans and can be combined with the start-up tax credit for additional savings.
- Provisions to better support employees. There are a number of provisions intended to support today’s modernized work environment and the multitude of life distractions that can prevent people from saving:
- Portability of lifetime income options: If a plan terminates, employees can now preserve the tax-qualified status of a collective investment trust, annuity, or mutual fund by rolling them over into a 401(k) plan or other tax-qualified plan.
- Protection for parental leave/part-timers: Employees who work 500 or more hours during any consecutive three-year period can participate in their plan, thus eliminating a previously penalization for those taking a leave or working flexible hours. These provisions won’t be effective until 2021.
- Extended RMD age: Recognizing that people are working longer, the age at which employees must begin withdrawing from their retirement plan has been changed from 70 ½ to 72.
- Change to 529 college savings plans: 529 plans can now be used for apprenticeships and other non-college/university activities.
- Penalty-free withdrawals for the birth/adoption of a child: Parents can withdraw up to $5,000 from their retirement plan without penalty for the birth or adoption of a child. They can also pay back that money into their retirement plan to get the benefits of compounding and earnings.
- The bill is quite far-reaching and includes other benefits such as those geared toward firefighters, newspaper employees, and other categories of workers.
These also apply to those already offering a plan, so it’s important to communicate any changes to participants. For those considering a new plan, these measures should be taken into consideration when identifying the appropriate plan design.
Of course there is much more to the SECURE Act. But the financial incentives for starting a plan are significant and can really open up doors for small companies that might otherwise have been deterred by start-up costs. This is a true opportunity to help employees save...while helping the company save, too.
Want more tips for how to do more with less? Click here to watch Namely & Vestwell discuss Weathering Economic Uncertainty While Maintaining a Robust Health & Wealth Offering.
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