Below are three of the most popular small business retirement plan options and a breakdown of how both the SECURE Act of 2019 (SECURE 1.0) and the SECURE 2.0 Act of 2022 (SECURE 2.0) provisions enhanced these plans.
With a simplified employee pension (SEP) plan, the employer contributes to its eligible employees’ Traditional IRAs. Contributions are discretionary; the employer can decide from year to year whether to make contributions.
SIMPLE IRA Plans
In a savings incentive match plan for employees of small employers (SIMPLE) IRA plan, the employer must contribute to its eligible employees’ SIMPLE IRAs. Employees can also contribute through pretax salary deferrals. All employees age 50 and older are eligible for “catch-up” deferral contributions.
Key benefits for both SEP and SIMPLE IRA plans include the following.
- Administrative ease
- No IRS Form 5500 reporting
- No nondiscrimination and top-heavy testing requirements
- Start-up tax credit
Owner-Only 401(k) Plans
An owner-only 401(k) plan, or Individual(k)™ plan, is a qualified retirement plan (QRP) designed for businesses with no employees. These plans allow for salary deferrals and discretionary matching and/or profit sharing contributions.
Key benefits include the following.
- Simpler plan design and documentation than conventional 401(k) plans
- Less administrative expense than conventional 401(k) plans
- Significantly higher tax-sheltered contribution limit than SIMPLE IRA plans
- Designated Roth account contributions allowed
SECURE 1.0 and SECURE 2.0 Changes
The following provisions have some immediate impact on SEP, SIMPLE, and owner-only 401(k) plans.
Increased RMD Age
One provision that affects all three plan types is the increased RMD age (the age when plan participants generally must begin taking required minimum distributions (RMDs). SECURE 1.0 changed the RMD age from age 70½ to age 72, starting in 2020.
SECURE 2.0 increased the RMD age again from age 72 to age 73, starting in 2023, and to age 75 in 2033 (or the year of retirement, if later, for certain QRP participants who are not 5 percent owners). Individuals already required to take RMDs before these changes are not affected.
Extended Deadline for Owner-Only 401(k) Establishment
Before 2020, employers wanting to establish a 401(k) or other QRP generally were required to adopt the plan by the end of their business tax year. But attempting to establish a new plan at year-end could cause unwanted stress, leading to hasty decisions and compliance problems.
Starting with the 2020 tax year, SECURE 1.0 gave employers until their tax return due date, plus extensions, to establish and fund a plan. Employers, however, still had to make a deferral election by the last day of their plan year. Practically, this was not possible because the plan was not established by year end.
SECURE 2.0 further changes this rule—starting with the 2023 plan year—to allow for a retroactive deferral election for the first plan year, eliminating the earlier barrier. Elective deferrals must be contributed by the employer’s tax return due date, without extensions. This provision applies only to sole proprietors and owners of single-member LLCs.
SECURE 1.0 provides a tax credit to small employers (those who had 100 or fewer employees who received at least $5,000 compensation from the employer for the preceding calendar year) that include an eligible automatic enrollment feature in their new or existing 401(k) plan or SIMPLE IRA plan. The maximum annual tax credit is $500 for each of the first three years that the plan is maintained, beginning with the 2020 tax year.
SECURE 2.0 includes a provision that will require most 401(k) and 403(b) plans established on or after December 31, 2022, to contain an automatic enrollment feature, starting in the 2025 plan year. The following employers are exempt from this requirement.
- Small businesses—that normally employ 10 or fewer employees
- New businesses—those in existence for less than three years
- SIMPLE 401(k) plans
- Church plans and governmental plans
Small Employer Plan Start-Up Credits
In the past, eligible employers that established a new retirement plan could have received a tax credit of up to 50 percent of the plan start-up costs for the first three years that a plan was in place. An eligible employer is defined as an employer with 100 or fewer employees—including at least one non-highly compensated employee—who received at least $5,000 in compensation for the preceding year. The start-up credit applies to 401(a) defined contribution plans (including 401(k) plans) and defined benefit plans, 403(a) annuity plans, SEP plans, and SIMPLE plans.
SECURE 1.0 increased the maximum start-up tax credit from $500 to $5,000 per year, effective January 1, 2020. While this tax credit remains unchanged for employers with 51 – 100 employees, SECURE 2.0 increased the maximum credit amount for eligible employers (those with 50 employees or less) from 50 percent of qualified plan start-up costs to 100 percent.
SECURE 2.0 also created a new tax credit: an employer contribution credit. This credit is available to small employers that establish a new retirement plan and make contributions for employees whose compensation does not exceed $100,000 for the year. The credit cannot exceed $1,000 per eligible employee and is phased out over a five-year period.
The employer contribution credit applies to 401(a) defined contribution plans (including 401(k) plans), 403(a) annuity plans, SEP plans, and SIMPLE plans: it does not apply to defined benefit plans. Employers with up to 50 employees may receive the full employer contribution credit. The credit is phased out for employers with 51 to 100 employees. Specifically, the credit shrinks by 2 percent for each employee over the 50-employee threshold.
Military Spouse Retirement Plan Eligibility Credit for Small Employers
SECURE 2.0 provides certain employers with a general business tax credit for immediately including military spouses in their defined contribution plan. Because military families may move repeatedly throughout a servicemember’s career, spouses may have to wait to become eligible to participate in a plan at each new location. This rule is meant to help level the playing field for military spouses, providing a $200 credit for each military spouse participating in an eligible small employer’s defined contribution plan, including a 401(k) or 403(b) plan. Another credit (up to $300) applies to employer contributions (not elective deferrals) made to each military spouse.
SIMPLE and SEP Roth IRA Plans
SECURE 2.0 allows employers to treat SEP or SIMPLE IRA employer and employee contributions as Roth contributions, effective for taxable years beginning after December 31, 2022. At the time of this writing, additional IRS guidance was needed in order to implement this provision.
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