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 (SECURE Act), was passed by Congress and signed into law by the President in December and took effect on January 1st. 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 they can use it to provide better benefits for current and prospective employees.
If your company doesn’t already have a 401(k)-retirement plan, now is a great time to implement one. 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.
A 401(k) plan is essentially a savings plan with varying investment options that you provide to your employees that allow for a tax break on money deposited for retirement. Desired contributions to these plans are generally taken out of an employee’s paycheck and invested in a specific fund set up by you, the employer.
As the employer, you will need to decide the parameters for such a fund. There are options available that you can provide for your employees that can help increase their satisfaction with a retirement fund, such as matching their contributions up to a certain percentage – and providing benefits like this can help with employee retention.
The two most common 401(k) plans that most employers provide include traditional and Roth. A traditional account is taxed upon withdrawals and a Roth account is established with funds that have already been taxed, making withdrawals from a Roth tax-free for your employees.
401(K) Plan Offerings as a Retention Tool
Most employers offer 401(k) plans as a method of retaining employees. After all, staff is more likely to stay with a company if they are provided with benefits, and the majority of the workforce holds businesses that offer 401(k) plans in high value. Offering a 401(k) plan allows your workers to save more money for retirement than other methods, and if you offer to match, your retention rates are likely to be much higher. 401(k) offerings by an employer are one of the best tools to retain employees and to provide for their well-being in the future.
When will the SECURE Act affect me as a business owner?
Implementation dates for the SECURE Act:
- 100+ employees: June 2020
- 50+ employees: June 2021
- 5+ employees: June 2022
Can my employees withdraw funds from their account 401(k) before retirement and will this affect me as an employer?
Yes, employees may withdraw funds from their 401(k) account before retirement, however, the IRS may charge a 10% penalty fee for early withdrawal. However, some retirement plans allow early withdrawals without penalty for up to $5,000 for special circumstances such as:
- Having a Child
- Medical Emergency
- Family Emergency
Early withdrawals from a 401(k) plan will not have an effect on you as an employer, however, the reasoning behind the withdrawals and possible penalty fee may have an effect on the employee.
What does it mean for an employer to be “vested” in a 401(k)?
Being “vested” means that as an employer, you make contributions or match contributions of an employee to their 401(k) account. Being vested as an employer is a great way to retain employees and attract potential candidates.
As an employer, providing a 401(k) plan for your employees is one of the most beneficial things you can do for your business. Potential and current employees love to see that a business provides retirement funds, whether you are a small or large company. Employees of small to medium-sized businesses may even appreciate a retirement fund to a greater extent!
What are the tax credits for small businesses?
Currently, small businesses starting new 401(k) plans can get up to $500 per year in tax credits for the first three years to help with 401(k) administrative costs. The SECURE Act increases this credit to up to $5,000 depending on how many non-highly compensated employees are eligible for the plan.
Additionally, the SECURE Act creates a new tax credit of up to $500 per year to employers who start 401(k) plans that include automatic enrollment. The credit is in addition to the expanded new plan credit and would be available for three years and up to $1,500. The credit would also be available to employers that convert an existing plan to an automatic enrollment design. This means that the new maximum eligible tax credit for offering a new 401(k) is now $5,500 for up to 3 years or $16,500 in total.
Do you need further advice about setting up retirement savings account for your employees? RTR Consulting has more than 20 years devoted to developing effective and efficient human resources policies, procedures, and best practices for small, start-ups, and medium-sized businesses. Contact us today if you need consulting on keeping your business running smoothly.