SECURE Act Makes it Easier for Small Businesses to Offer Retirement Benefits

A key tenet of the American Dream is that people who work hard and save diligently can retire with enough resources to enjoy the rest of their lives and perhaps leave something to their kids. And many workers expect their companies to help them save for retirement, usually in the form of an employer-sponsored plan.

For small business owners, offering retirement benefits to employees can be a challenge. Many want to do the right thing for their employees and stay competitive, but it’s a complicated process and seems too expensive for companies with limited resources and small teams.

What are the options for business owners and their employees who haven’t taken part?

To stimulate more plans and more participation, Congress recently passed the SECURE Act, the most significant retirement policy legislation since the Pension Protection Act in 2006. The act’s 30 different provisions offer new incentives for employers to adopt retirement plans and for workers to contribute.

Two key changes, in particular, were made to strongly encourage new employer-sponsored plans:

• Starting in 2021, two or more unrelated small companies can join a pooled employer plan, which cuts costs for employers and participants. Previous rules required commonality of interest for multiple employer plans (MEPs). This reduces the administrative cost by leveraging the size of a larger group.
• The tax credit for offering a new plan increases 10 fold to a maximum of $5,000, depending on the number of non-highly compensated eligible employees, with eligibility for small employers to get an additional $500 credit each year for up to three years when they add automatic enrollment to their plan.

The SECURE Act also brings important changes that affect employers who currently sponsor plans and the employees who participate:

• Broader eligibility for long-term, part-time employees. A new dual eligibility requirement says a part-time employee can meet either the existing one-year-of-service requirement (1,000-hours per year) or complete three consecutive years with more than 500 hours of service per year.
• Penalty-free withdrawals up to $5,000 in case of birth or adoption to help cover related expenses. Allowing access to funds without penalty in these life events encourages more participation in plans.
• Delay of required minimum distributions (RMD) until age 72, as people are living and working longer. The previous deadline for RMD was age 70 ½. It also provides more years for people to contribute to individual retirement accounts, for the same reason.
• Increased cap on automatic enrollment plans to 15% of pay. Previously, safe harbor 401(k) plans that include a qualified automatic contribution arrangement (QACA) could not automatically enroll or escalate employee contributions above 10% of the employee’s eligible compensation. A higher ceiling means a longer period of increasing contributions for plans that adjust upward each year.
• Required lifetime income disclosure statements. To improve employee understanding of how far their retirement savings will go, employers will have to provide participants with information illustrating the monthly payments a participant would receive if the account balance was used to provide lifetime income through an annuity. The idea is that seeing this figure may motivate some individuals to bump up their savings rate.

While these changes don’t neatly solve concerns about the long-term future of the American workforce, the SECURE Act provides some solid incentives for small business owners to start a retirement plan, administrative relief for employers who offer them and key measures to inform and enable participants to make the most of their retirement savings.

Whether you’re a business owner or an employee, it’s a good time to talk with your financial advisor about making the most of these developments.

John Ehmig is a trust advisor for Pinnacle Financial Partners. He is based at the firm’s office on North Main Street in High Point, NC, and can be reached by phone at 336-313-6931 or email at John.Ehmig@pnfp.com.