Are you familiar with the SECURE Act? If you're running a small business, you should be.
The new bill, which stands for Setting Every Community Up for Retirement Enhancement (Washington loves its acronyms), was passed by Congress and signed into law by the president in December and took effect Jan. 1. While many have focused on the new options it will provide for individuals saving for retirement, it’s important for small-business owners to know how to most effectively leverage the legislation so that we can use it to provide better benefits for our current and prospective employees.
What should a small business owner know?
For starters, if your company doesn’t already have a 401(k) retirement plan, now’s the time to do it. The new law offers tax credits of up to $5,000 for the start-up costs related to establishing an employer plan, depending on certain factors. There are also increased credits available for employers who require their workers to automatically enroll in their company’s retirement plans.
Although employees can always opt out, this feature has proven to be a good motivating technique.
“Congress has observed that employees are more likely to save for retirement when they are automatically enrolled to save instead of requiring the employee to elect participation,” says Glenn Meyer, a senior vice president at Wealth Enhancement Group, a financial planning firm, in Fort Washington. An added bonus: Part-time employees who were once excluded from such retirement plans now have the ability to participate if they meet certain requirements.
If you’ve got older employees, then pay attention: The new law can help keep them contributing to your company for even longer — as long as they’re willing. Older workers are now allowed to continue to add to their retirement savings until they’re at least 72 before they are required to take minimum distributions. Replacing an older, more experienced person can be a tough challenge for business owners, particularly during this tight labor market.
“I see this as a big positive,” says Erik Strid, CEO at King of Prussia’s Concentus Wealth Advisors. "As life expectancies and working life have increased for many Americans, this change allows investors to continue to defer the payment of tax on their plan balances for a longer time, which I think is overdue, given how life expectancy has increased.”
The new law now allows small-business owners to band together to buy better plans. This means that we — or associations we belong to — can create buying groups.
“It’s a much-needed, cost-effective option for small-business owners to provide retirement benefits to employees,” says Greg Sarian of Sarian Strategic Partners in Wayne. "Employers can now provide valuable, attractive retirement benefits, banding together to share resources in a more cost-effective manner than they have had before.” Sarian says that small businesses will now have more institutional investment choices and lower cost investment strategies and fees by combining with other small businesses.
The act will now allow small businesses to add annuity options to their existing retirement plans. Before the law, withdrawals had to be taken in lump sums, and then taxed. Now, plan administrators can help retirees move their savings into investment vehicles that will pay them out for a longer period of time. This option could be attractive for some, but small employers still need to be cautious.
“While the law changes make this possible, employers and employees will still want to closely evaluate their inclusion and whether they are appropriate to own or not,” Meyer says. "Annuities are complex financial instruments, and just because they are available doesn’t mean that they are the correct solution for all.”
Finally, the new SECURE Act expands the benefits allowed under 529 plans. 529 plans enable a tax-incentivized way for employees and their employers to put money away for their children’s (and other relatives') future higher-education expenses.
Such plans have significantly grown in popularity among my clients as an employee benefit because they’re inexpensive to set up, portable, and offer a way for parents to defray the exploding costs of higher education. The money is contributed after tax but can grow tax free until withdrawn. The new law now permits 529 plans to be used to pay for apprenticeship programs and allows up to $10,000 of withdrawals to pay back student loans, which should be a very attractive thing to offer to younger workers graduating university with debt.
How important is all this? Very.
A 2019 study from the Society for Human Resource Management found that retirement benefits ranked second in importance (after health care) among all the benefits that employers offer. The new SECURE Act should help small employers provide even better options for their workers
“With the job market being hot and staffing difficult, retention is key, and having a retirement plan can be a differentiator relative to other small businesses,” Meyer says. “It’s definitely a positive step.”
— Gene Marks is the founder and president of the Marks Group, a small-business consulting firm based in Bala Cynwyd.