Small Businesses need to know this about The Secure Act
The other day, I posted my very first blog post on what individuals need to know about the new Secure Act, which was recently added into the budget by Congress. Overall, it’s a win, and most (including me) believe it should help more Americans save for retirement. (We’re dismally behind as a nation, as many of you sense by the average balance in your company’s retirement plan.) The encouraging part for me is that we had more unique traffic to our site from the Kansas City metro for that article than we’ve ever had in a single day. I guess people want to know about this stuff! So here you go, the Secure Act highlights, small business version.
The Act Allows Open MEPs. (Huh?) MEP is short for “Multiple Employer Plan.” Think of it like a handful of small businesses joining together to provide scale to their retirement plan. Plans have largely fixed administrative costs in them, and by pooling together, businesses can take advantage of sharing those costs. This is potentially great for smaller companies.
Before the Act was put in place, MEPs had to meet the “common interest” provision. Meaning they had to share some sort of interest outside of just joining the plan. For example, a group of restaurants and bars in Westport could join together for a MEP. Now, the Secure Act will allow unrelated employers to participate in a MEP.
It’s early, but me being a perpetual opportunist, this could be big. For a lot of small businesses, 401k plans are cost prohibitive. Let’s say, hypothetically, you have a group of business-owner friends. One’s a lawyer, one’s a dentist, one’s a plumber, and the other a consultant. You can now form your own MEP, (provided you play be the rules,) and spread some of the plan’s burdens across all the businesses. I’m kind of nerdy, but this has my wheels spinning…
A couple random pieces to close this one out: There used to be a “one bad apple” rule that, if one employer wasn’t doing things right, the entire plan was penalized. The Secure Act provides relief for this. The MEP still has to “spin off” the bad apple, but the plan as a whole can continue, provided it follows some rules. Also, the Act allows a consolidated Form 5500 for these pooled plans. But careful here, the penalties are higher for not filing one, or not following the other guidelines. (See a financial professional for the details.)
Safe Harbor 401(k) Plans and Timing of Plan Amendments and Adoptions. Unless you’re a CFO or CPA, this one has a good chance of making you as overwhelmed as trying to dodge Kansas City potholes. (Sorry Quinton, if you're reading.) So I’ll just say this: The Act very generally permits employers to add a safe harbor feature (which avoids plan testing) to their existing 401(k) plans during the year. Before the Act, you had to establish safe harbor prior to the plan year starting. This should incentivize some employers to add safe harbor mid-year, which is generally seen as a good thing for employees.
Startup Tax Credit for Small Employer Plans is bumped up significantly. Prior to The Act, employers received a $500 tax credit on their business tax for starting a qualified plan. The amount has been increased up to $5,000 in certain cases. The details are, (like a lot of legislation,) kind of complicated, so see your CPA about it if you’re considering starting a plan this year or later. Also, an additional $500 credit is given to the employer if their plan adds an auto-enrollment feature.
Long-Term Part Time Employees are now required to be included in the plan. Before, only full time employees were generally required to be offered participation. Now, Long Term PTE’s are required to be offered. What constitutes a LTPTE? At least 500 hours of service each year for three consecutive years, and older than 21. As a side note, even though they must be included, they can be excluded from your plan’s employer contributions and non-discrimination requirements.
Summary
If you can’t tell by now, The Secure Act is designed to encourage employers AND employees to get going on their retirement savings. We all know Social Security isn’t cutting it, and pensions are nearly a thing of the past. This Act is the biggest piece of retirement legislation in years. It’ll take some time to be the “new norm,” but all in all, we at BMG Advisors believe it is good for America, and are here to help if you need us.
- Adam Hawley is an LPL Financial Advisor and Partner at BMG Advisors. “Plan Your Story”