Now that tax season is upon us, many of you have probably been hearing from your financial planner or CPA that there are revisions and/or implications to your retirement plans and taxes due to the SECURE Act that was passed by the Senate and signed into law at the end of last year. The Setting Every Community Up for Retirement Enhancement Act of 2019 includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets.
The new act allows millions of small business and their workers to now have a new opportunity for a more secure retirement. With 28 million small businesses making up 99.7% of all U.S. firms, small businesses are big business for the country’s economy. But what defines a small business? The size standards are not a one-size-fits-all type of mold. Instead, it depends on the kind of industry you are in. Surprisingly, small businesses with fewer than 20 employees make up 89.6% of all U.S. business enterprises. And on top of that, 23 million businesses in the United States actually have no employees at all—meaning only the business owner will operate in a holistic capacity.
As of 2018, there were 60.9 working dentists per 100,000 people in the country (ratios vary by state) with an estimated 200,000 working dentists, according to the American Dental Association. Dentists are more likely to work as an independent business than other medical professionals. Nationally, about 47% of physicians owned their own practice in 2016, according to a Physician Practice Benchmark study, which used American Medical Association data. About 77% of all dentists owned their own practice in 2017, according to the ADA.
Why This is Important
As mentioned in one of my previous articles, there is a retirement crisis in this country. According to the U.S. Global Investors survey, 65% of Americans have little or nothing saved for retirement. The number one reason why Americans aren’t saving is that they have too many other expenses. The SECURE Act aims to encourage employers who have previously shied away from these plans, which can be expensive and difficult to administer, to start offering them. A key motivation for promoting employer-sponsored retirement savings plans is that those who use them typically save considerably more than those who rely upon individual savings plans such as IRAs.
Let’s remember a few important reasons why you should offer a retirement plan:
- Employer tax breaks: contributions on behalf of employees are tax deductible up to set annual limits AND employers may be eligible for a tax credit
- Employee retention: 35% of employees consider retirement benefits a key reason to take a job and 47% say retirement benefits are an important reason to stay with the employer
- Investing in your own retirement!
Sources: Investment News, U.S. Small Business Administration, Census Bureau
With the passage of the SECURE Act, there is a pathway to mend the retirement crisis and help workers of all ages save for their future.
Small Business Advantages
There are several major provisions to note that can impact small businesses sponsoring 401(k) plans or SIMPLE IRA plans:
- Introduction of the Pooled Employer Plans (PEP), which is a type of the Multiple Employer Plans (MEP), that will allow for unrelated employers to join together to create a single retirement plan in the same 401(k). Also, the elimination of the “bad apple rule” that was found previously in MEPs, which disqualified a pooled plan if a single plan sponsor was not in compliance with the plan guidelines. PEPs are ideally advantageous because plan participants are able to eliminate filing individual Form 5500 and individual plan audits, and also potentially there are cost savings by leveraging their individual plan assets with more and more adopting employers.
- Make it easier for small businesses to set up 401(k)s by increasing the cap under which they can automatically enroll workers in “safe harbor” retirement plans, from 10% of wages to 15%.
- Create a new tax credit of up to $500 per year to employers who start 401(k) or SIMPLE IRA plan that includes automatic enrollment, as well as a credit to employers whom convert an existing plan to automatic enrollment design.
Additional significant components to consider from the SECURE Act, but not all the take-aways within the legislation, that are beneficial to small businesses or individuals saving for retirement are:
- Elimination of the lifetime “stretch” provision for non-spouse beneficiaries of inherited IRA and other retirement accounts, replaced by a 10-year distribution cap
- Enable businesses to sign up part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service.
- Push back the age at which retirement plan participants need to take required minimum distributions (RMDs), from 70½ to 72, for those who are not 70½ by the end of 2019.
- Allow the use of tax-advantaged 529 accounts for qualified student loan repayments (up to $10,000 annually).
- Grant penalty-free withdrawals of $5,000 from an IRA or 401(k) after the birth or adoption of a child. You can repay funds as a rollover contribution.
- Encourage employers to include more annuities in 401(k) plans so it can give participants lifetime income during retirement. (Remember though that annuities can be expensive and driven by sales commission.)
There are many advantages the SECURE Act can provide in the coming years. Speaking with your advisor and CPA to find out all the details of the regulations can be key for augmenting your retirement strategy. And whatever the motivation might be, the new provisions are sure to enhance retirement security by expanding your own retirement savings, simplifying plan administration for small business owners, and refining the industry rules.