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How Does the SECURE Act Impact Employers?

The Setting Every Community Up For Retirement Enhancement (SECURE) Act, which took effect Jan. 1, 2020, has many significant impacts on individuals nearing retirement. It may also help small businesses offer better benefits to current and prospective employees.

The new law contains two main provisions aimed at incentivizing small businesses to offer retirement plans. These include increasing the amount of tax credits companies can claim for setting up a plan and allowing unrelated small employers to participate collectively in open Multiple Employer Plans (MEPS) to reduce the administrative costs and duties of an individual business.

Employer Tax Credits for Retirement Plans
First, the SECURE Act increases tax credits for the start-up costs related to establishing a 401(k) retirement plan from $500 to up to $5,000 annually for the first three years the plan is in effect. There is also a tax credit of up to $500 annually for three years for employers who require their workers to automatically enroll in their company’s retirement plans.

Retirement Plan Eligibility for Part-Time Workers
As an added bonus, part-time employees who were previously excluded from having the ability to participate in a retirement plan now have the option to participate if they meet certain requirements. The SECURE Act allows part-time employees who have worked more than 500 hours a year for three consecutive years to participate in an employer’s 401(k) retirement plan. In addition, part-time employees who worked 1,000 hours or more during the past year must also be granted access to the plan.

Employer Protections for Offering Annuities
New rules also allow small businesses to add annuity options to their existing retirement plans. Traditionally, employers have been hesitant to offer annuity contracts due to liability concerns. Today, plan sponsors are offered protections from liability when selecting an insurer. As a result, businesses may start offering retirees investment vehicles that will pay out for a longer period of time.

Increased Access to Multiple Employer Plans (MEPs)
Finally, the SECURE ACT makes it easier for small businesses burdened by compliance issues and administrative costs to join together to offer an MEP. Previously, businesses seeking to form an MEP were required to have a common connection or similarity, such as being in the same industry. Starting in 2020, more relaxed rules make it easier for unrelated businesses to form a MEP and for smaller firms to offer employees access to a retirement plan.

What steps should employers take now that the retirement law has changed? Employers should expect the U.S. Department of Labor to provide additional guidance on new MEP provisions that take effect in 2021. Beyond MEPs, it is important for small businesses to focus on the wide-ranging provisions contained in the SECURE Act and to avoid the tendency to take advantage only of the tax credits. Employers must also prioritize educating employees about their plans and why they should participate.

Pacific Federal is a subsidiary of Zenith American Solutions.