For new small business owners, sponsoring a 401(k) retirement plan for themselves and their employees may seem too complex and cost-prohibitive to even consider. However, a new law aimed at providing workers with more retirement options also incentivizes employers to jump on board with this highly valued benefit offering.
Passed in December 2019, the SECURE Act ("Setting Every Community Up for Retirement Enhancement") has the potential to change the way small businesses approach retirement planning by offering new retirement plan tax incentives.
Jason Lumpkin, shareholder of Schneider Downs Wealth Management Advisors, said SECURE will help both employers and employees.
"SECURE is a step in the right direction," Lumpkin said. "It addresses some major concerns about workplace retirement plans [from a SMB perspective] and gives insight into what the IRS views as an ideal retirement plan design."
[Read: How Can I Offer My Employees a 401(k) Plan?]
The SECURE Act: An overview for small businesses
The SECURE Act aims to simplify the retirement plan process and allow more small businesses to provide retirement plans to employees.
"Provisions for enhancing the tax credit for putting a 401(k) in place will wipe out the out-of-pocket expense for many SMBs," Lumpkin said. "The additional credit for automatic enrollments and increases in contribution rates have had an extremely positive impact on overall participation and average contribution rates."
This kind of impact means small businesses can become more competitive at attracting and retaining top talent. Jessica Curtin, compliance analyst at Paychex, said retirement plans can play a major role in a candidate's search for the right employer.
"An employer-sponsored retirement plan is among the top benefits that employees seek, so having a 401(k) plan makes an employer appealing to potential new employees and helps with the retention of current employees," she said.
The benefits and challenges of SECURE Act's provisions
There are three main benefits to take advantage of under this new law: tax credits for establishing new retirement plans, tax credits for establishing automatic enrollment plans and the creation of Multiple Employer Plans (MEP) and Pooled Employer Plans (PEP).
Curtin said the small employer maximum tax credit for new retirement plans is increasing from $500 to $5,000. This means small business owners can receive a tax credit up to $5,000 for the first three years of a plan. Likewise, the tax credit for setting up automatic enrollment features on a retirement plan is $500 for the first three years.
One of the biggest benefits, however, is that multiple, unrelated employers can participate in the same retirement plans through MEPs and PEPs, beginning January 1, 2021.
"This design is expected to simplify offering a retirement plan by removing most of the administrative requirements for the individual employer," said Curtin.
An employer-sponsored retirement plan is among the top benefits that employees seek.
Jessica Curtin, compliance analyst, Paychex
[Read: How to Offer an Employee Retirement Plan]
Access to new systems means more options, but it can also mean more challenges. Lumpkin said that while PEPs and MEPs can provide new options for employers, they may also limit flexibility.
"One of the largest challenges in terms of jumping into a PEP or MEP is loss of control and flexibility over retirement plan itself," he said.
Alexander Papson, manager of fiduciary solutions at Schneider Downs Wealth Management Advisors, agreed, noting that small businesses should do their best to find the right guidance.
"Don't assume that the newest and greatest PEP or standalone plan is available," Papson said. "It may not be right. Explore all options, sort through the pros and cons from an unbiased perspective."
As for other challenges, Curtin said there are many effective dates, protocols and other aspects to SECURE that need guidance from the IRS and DOL before they can be implemented. There are also a number of requirements and qualifications that need to be met to take advantage of some incentives.
[Read: Understanding Employee Retirement Plan Options]
How can I take advantage of the SECURE Act for my business?
Curtin, Lumpkin and Papson all said small business owners should consider looking for additional help in implementing SECURE benefits. The overall goal of the law is to simplify the process and provide benefits to employers, but that doesn't mean small business owners should try to tackle setting up retirement plans without some form of guidance.
Partnering with a financial advisor, CPA or other financial professional will allow a small business to create retirement plans in an efficient, legal way. Curtin said the minutiae and logistics of setting up the right plans for your small business can be difficult to navigate, and it's essential to find help.
"Small business owners should partner with their attorney, CPA, HR provider and/or other professionals who have the expertise to help determine the best way to maximize the benefits provided under the SECURE Act," she said. "These specialists can also help keep existing plans in compliance with current laws and regulations."
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