The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) expands retirement plan coverage and increases retirement saving opportunities for individuals and business owners. Most changes are effective for the plan or tax year beginning after December 31, 2019. Below are some of the changes meant to encourage small- to mid-sized businesses to adopt and maintain qualified retirement plans.
Increase to Tax Credits for Start-up Costs
Under the SECURE Act, small employers with 100 or fewer employees can receive a tax credit of up to $5,000 each year for the first three years. The credit is the greater of (a) $500 or (b) $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan, up to $5,000. The credit applies for establishing a new retirement plan, including a SEP or SIMPLE IRA.
An additional tax credit of up to $500 per year for three years applies to small employers who adopt a 401(k) plan with automatic enrollment features. This also applies to current 401(k) plans that add automatic enrollment provisions.
Extended Adoption Date for New Plan
The SECURE Act allows a new plan to be treated as effective for the prior tax year if adopted by the due date, including extensions, of the sponsoring employer’s prior year tax return.
Safe Harbor 401(k) Plan Rules Relaxed
Safe Harbor 401(k) plans have strict rules to avoid nondiscrimination testing requirements. With the SECURE Act rule changes, a plan can elect to make non-elective safe harbor contributions (3% of compensation minimum) any time before the 30th day before the close of the plan year. The election for safe harbor status can be made even later if the amendment provides a non-elective contribution of at least 4% of compensation and can be made up to the close of the following plan year. The requirement for safe harbor notices for non-elective safe harbor plans was eliminated.
Part-time Employees in Qualified 401(k) plans
Effective for plan years beginning after December 31, 2020, qualified 401(k) plans must allow long-term part-time employees to become eligible to participate in 401(k) contributions. Employees working at least 500 hours of service for three consecutive years will be eligible to make 401(k) deferrals. Service prior to January 1, 2021 is excluded. Part-time employees can still be excluded from all employer contributions. This new requirement will allow part-time employees to save for retirement at no additional benefit cost to the employer.
If you have any questions or would like more information, please contact James Reid at jreid@windes.com or 844.4WINDES (844.494.6337).