The SECURE Act (Setting Every Community Up for Retirement Enhancement) of 2019 and, subsequently, the Further Consolidated Appropriates Act, aka SECURE 2.0, were signed into law in 2019 and 2020, respectively.
Simply referring to both collectively as the Act, it contains more than 90 substantive changes to retirement plan law, the most sweeping change in the past sixteen years, completely changing the landscape for how we view private sector retirement savings arrangements.
SECURE Act Qualifications & Benefits
One common theme is expanding coverage so that more workers have access to employer-based programs to save for retirement. Along with that comes numerous incentives, lowering barriers to entry for small employers and certain financial incentives to subsidize employer contributions for the first five years of participation.
For example, a small employer is allowed to claim a tax credit for certain “start-up” costs relating to a new plan, as well as certain contributions to eligible employees. These tax credits are significantly more valuable than deductible expenses because the credit offsets dollar-for-dollar an employer’s tax liability. The qualified start-up costs include expenses incurred in the establishment or administration of the plan and expenses attributable to retirement-related education of the employer’s employees. To qualify, the plan must cover at least one non-highly compensated employee.
An eligible small employer is an employer who has 100 or fewer employees who received more than $5,000 in compensation in the prior year. However, the employer will not be eligible for the credit if the employer maintained any plan (qualified plan, SEP, or SIMPLE) during the three tax years preceding the tax year for which the employer intends to claim a credit.
All employers that constitute a control group under IRC §414(b) or (c) are treated as a single employer for purposes of applying this provision IRC §45E.
The Start-up Cost Credit Amount
The credit is 50% of qualified start-up costs for small employers (defined in the previous section above). The SECURE Act increased the maximum credit for taxable years beginning January 1, 2020, to be the greater of:
- $500 or,
- the lesser of $5,000, or $250 for each eligible non-highly compensated employee
The credit is an aggregate credit, regardless of the number of plans adopted by an eligible employer and is applicable for the first three years of the plan.
Additional credit for automatic enrollment. An additional credit of $500 is available if the plan includes an Eligible Automatic Contribution Arrangement (EACA).
Additional Credit for Employer Contributions
The SECURE Act adds a new section, IRC §44E(f), which provides an additional tax credit for employer contributions to an eligible plan. The employer credit is for contributions up to $1,000 per employee whose FICA wages are not in excess of $100,000 (indexed for inflation).
The credit starts at 100% and begins to phase out in years three through five. Other phase-out rules apply as the employee headcount increases above 50. However, the opportunity here is to create a more robust plan that escalates the retirement readiness of all employees.
For example, in some respects, 401(k) plans are not materially different than any other employer expenditure in the course of their business. It’s either an investment in the business that drives a strategic business objective or an expense. The tax credit for employer contributions creates a phase-in opportunity that can transition a company’s 401(k) plan from an expense to a valuable resource that builds enterprise value for the organization.
If one of the strategic business objectives is to recruit and retain key talent, then the tax for employer contributions can reduce the employer’s out-of-pocket cost by 26% to 50% in the first few years of the arrangement.
Realizing the need for all U.S. workers to have access to an employer-sponsored retirement vehicle, the Act seeks to expand availability by including “Long-term Part-time” (LTPT) employees. Gig workers and non-permanent employees commonly fall into this category.
Under this new provision, all employees who have worked at least 500 hours but not more than 1,000 per year for three consecutive years are considered LTPT employees. If the plan currently excludes this group of employees, then their inclusion doesn’t impact compliance testing or employer contributions. However, since it will result in a larger number of employees participating in the plan, certain plans will likely have more than 120 participants with a balance on the first day of the year, triggering an annual audit.
With more than 90 changes impacting a plethora of plan provisions, there are opportunities and pitfalls. Correctly navigating them can transform a company’s retirement plan into a valuable resource, furthering the organization’s business objectives while enhancing enterprise value.
Check out our free on-demand webinar to learn more about the opportunities and challenges of the SECURE Act 2.0. You’ll gain additional info on the tax credit benefits, phased provisions, and how to overcome unintended consequences without formal guidance.
