How the SECURE Act Made Employer-Sponsored 401(k) Plans More Accessible

How the SECURE Act Made Employer-Sponsored 401(k) Plans More Accessible

by | Accounting News, Business Consulting, News, Tax Planning, Tax Planning - Individual

The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules for employers on retirement plans, making it easier for employers to offer 401(k) plans and for employees to take part in them. Here’s how.

Multiple Employer Plans

Known as MEPs, multiple employer plans permit businesses to band together to offer employees a defined contribution plan such as a 401(k) or SIMPLE IRA, effectively allowing workers access to the same low-cost plans offered by large employers. While MEPs existed before the SECURE Act, here’s how they are now easier to establish and maintain.

  • The “one bad apple rule”, where one employer’s failure to comply jeopardized the entire plan, was done away with.
  • The “common nexus” requirement, which restricted the MEP option to small business employers who operated either in the same industry or same geographic location, was eliminated, permitting an “open MEP” that can be administered by a pooled plan provider (typically a financial services firm).
  • MEPs with fewer than 1,000 participants (and no more than 100 participants from a single employer) are excluded from a potentially expensive audit requirement.
  • Small business employers are also eligible for new tax credits for offering retirement savings options to employees.

Changes to Safe Harbor Plans

A provision of the SECURE Act provides more flexibility for employers who offer safe harbor 401(k) plans, which are 401(k) plans with an employer match that allows for avoidance of most annual compliance tests. If a 401(k) includes a Safe Harbor provision, the employer makes annual contributions on behalf of employees, and those contributions are vested immediately. Flexibility offered by the SECURE Act includes:

  • Increasing the automatic enrollment escalation cap under a qualified automatic contribution arrangement (QACA) 401(k) plan from 10 to 15%.
  • Removing the notice requirement for nonelective contributions. (The notice requirement is still applicable, however, for plans that implement the safe harbor match.)
  • Whereas pre-SECURE Act, switching to a safe harbor plan had to be done before the start of the plan year, employers are now allowed to switch to a safe harbor 401(k) plan with nonelective contributions anytime up to 31 days before the end of the plan year. Amendments after that time are approved if (1) a nonelective contribution of at least 4% of compensation is granted for all eligible employees for that year, and (2) the plan in amended by the close of the following plan year.

Automatic Enrollment Credit

The SECURE Act added an incentive for small businesses to feature automatic enrollment in their plans by allowing businesses with fewer than 100 employees to qualify for a $500 per year tax credit when they create a new plan that includes automatic enrollment. Business can also take advantage of this by converting an existing plan to one with an automatic enrollment. The tax credit is available for three years following the year the plan automatically begins enrolling participants.

Part-Time Employee Participation

Previously, employers could exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in January of 2021, the SECURE Act requires employers to include employees who work at least 500 hours in three consecutive years. This means that in order to qualify under this rule, employees would need to meet the 500-hour requirement for three years starting in 2021 in order to become eligible in 2024.

Choosing the Right Plan for Your Business

  • Research 401(k) plan options for your business, keeping in mind that retirement plans can be customized to meet the needs of you and your employees.
  • Carefully read through costs and fees of each plan. Recordkeeping fees, transaction fees, and investment fees are some to be mindful of, and these fees might increase if you add more employees and the plan grows (i.e. low-cost plans upfront might not be the best plan for your business in the long term.)
  • Look for a 401(k) plan that presents a variety of investment opportunities for employees in terms of stocks, bonds, broad-based international exposure, and emerging markets.

Work with a financial expert who can help you establish and oversee a 401(k) plan. These professionals can include third-party administrators, recordkeepers, and investment advisors and managers.

Top 5 Retirement Misconceptions

by | Accounting News, News, Retirement, Tax Planning - Individual

From Millennials who seem to never save for retirement to Boomers who are now wondering if what they’ve saved will be enough, retirement seems to be a never ending topic of worry and anxiety for most. Below are five of the top misconceptions regarding retirement and how to be more prepared when your time comes.

  1. I will just continue to work when I’m “retired”
    Many Americans believe that even when they “retire” from their full-time roles, they will continue to work at least part-time, whether for financial reasons or simply to stay active and social. However, the reality of that idea is actually somewhat slim. In fact, about 79% of workers polled by the Employee Benefit Research Institute said their plan is to work for pay during retirement. The actual percentage of those who work in retirement? Around 29%. Although many plan to work, life and the workforce may look drastically different when retirement comes, so it’s better to be prepared rather than assume the money will continue to flow.
  1. Social Security is going bankrupt, so I cannot count on the system
    While it’s safe to say there is plenty that could be done to improve the Social Security system, it seems many in the workforce believe the future of our government retirement system is significantly worse than it is. Even if the government takes no steps to repair the financial situation of Social Security, the system will continue collecting payroll-tax income and other revenue to pay beneficiaries most of their benefits for decades. According to a report by Social Security trustees, after the year 2034, the system would only have enough funding to pay 77% of scheduled benefits. So, while most beneficiaries would need to adjust their spending, they would only need to calculate a 23% differential, not a complete loss.
  1. My Social Security benefits won’t be taxed
    Unfortunately, this is not entirely true since the Social Security Administration does in fact levy taxes on those receiving benefits, namely those who are bringing in other income. For retired singles who make more than $25,000 annually (outside of their SS benefits) and couples who make more than $32,000, they could be taxed up to 50% of their benefits. Singles making more than $34,000 annually and married couples making more than $44,000 could see up to 85% of their benefits taxed. Thus, you may want to consider the financial value of working during retirement, as limiting your income could actually be more profitable.
  1. I’ll invest more in cash than stocks for my long-term strategy
    When surveyed about the best assets to invest in for 10-plus years, most Americans responded with cash or real estate rather than stocks, bonds or gold/precious metals. While real estate is certainly not a poor long-term investment, cash holdings, like money-market accounts, only yield dividends that are on pace with inflation at the time, which is anything but reliable. Stocks statistically offer higher, more significant dividends, but many individuals avoid them out of sheer lack of knowledge of the market. Therefore, consider doing your homework, or working with a reliable financial advisor before you assume that cash holdings are your best bet.
  1. I can make up for my lack of retirement planning early on by saving more in the final years
    When questioned about which strategy would be most effective in “making up time” for retirement planning, most Americans answered they would save 3% more of their salary in the last five years leading up to retirement, over working for two more years or delaying Social Security benefits for two years. Unfortunately, this is actually the least effective method when comparing the three, so you may want to consider a few extra years in the workforce if you are able, or at least considering holding off on those benefits.

Although it is virtually impossible to prepare for everything that may come up during retirement, it is possible to be educated and avoid common pitfalls. So before you jump right into that part-time role, or you hold off on saving now in lieu of saving more later, or you start right in on receiving Social Security benefits, consider speaking with a financial advisor to determine a plan that makes the most sense for you and will help you feel secure when the big “R” rolls around.