Last week we discussed the effects of the brand new SECURE Act from an estate planning point of view—that is, from the perspective of a person who saved money in their IRA or 401(k) and wants to pass it on to their heirs at their death. This week, we want to briefly discuss the other side of that coin—employers who set up plans for their employees to save money for those eventual “Golden Years.” (Cue the David Bowie music.) If you’re an employer and haven’t done so in a while, now is a good time to call your plan administrator and ensure your plan still works for you and your employees. And as we’ll see below, if you don’t have a 401(k), now might be a great time to pursue that course of action…
If you own your own business and have NOT set up a 401(k) or other retirement plan for your company, you may have resisted doing so because the thought of setting up a complex structure (and incurring the attendant fees) may have seemed overwhelming or not worth the stress. Well, an overriding concern of the SECURE Act—and all of the qualified retirement programs the government allows—is that they want to encourage individuals to save for their personal retirements. Doing so theoretically decreases the cost to taxpayers of taking care of older people in the long run. To encourage people to save, they offer tax advantages to those individuals—be it tax-deferred growth in a traditional IRA or post-tax growth in a Roth system.
The SECURE Act follows that philosophy by offering an attractive enticement to get employers to set up plans, to in turn encourage their employees to save for themselves. For those employers who were worried about the complexity and expense of setting up a qualified program for their employees, the government allows several employers to band together to create Multiple Employer Plans (or “MEPs”). You can think of this as analogous to the way groups of companies under healthcare providers get cheaper health insurance rates for their employees. The SECURE Act now allows unrelated employers to group together under MEPs. This may be a good option for small business owners who were previously gun-shy about setting up 401(k)s or similar plans.
By that same token, the SECURE Act also offers two other new features to persuade employers to offer retirement plans for their employees, both of which will positively impact the employer’s bottom-line as soon as they are implemented via tax incentives, no waiting necessary.
The first is an increased Small Business Tax Credit for new retirement plans given to an employer for taking the positive step of setting up a plan for their employees. This credit existed in the past, but the amount has just been plumped up to be even more attractive. It’s now up to $5,000 per year for the first three years of a brand-new retirement plan. Not earth-shattering, but also not nothing.
The second is another tax credit, this time for employers who build in an auto-enrollment feature in their plans. You may have seen the studies (or read the entertaining and thought-provoking book Nudge by Cass R. Sunstein and Richard H. Thaler) about how defaults matter when it comes to things as disparate as organ donation programs and employer-offered retirement plans. The basic premise is that when it comes to complex decisions about nebulous concepts far in the future (like one’s own death, or retirement), most people just go with the flow and choose whatever is put in front of them. More people choose to donate their organs and tissue to needy patients, saving and improving lives of innumerable donees, when they have to opt out of that choice, rather than opt into it. Same with retirement planning: it’s better to make people tell their employer they don’t want to save, rather than force them to ask to save. This is because like dieting, most people know they need to eat healthier (and save more for retirement), but putting down that cookie (or setting aside a portion of your paycheck for saving) is a lot easier said than done. The government knows this, and so they want to encourage employers to create plans where employees are already deemed to be a part of the plan, rather than the reverse. The SECURE Act codifies this by giving a small tax credit ($500 per year for three years) for small business owners who begin auto-enrolling their employees into their retirement plans. Again, the employees can always opt out, but apparently only a few rarely do, setting themselves up for a more comfortable retirement when that day finally comes.
This is a lot of material to take in, and this blogpost only scratches the surface of this new Act. Further, the rules that govern qualified retirement plans are some of the most complex in the Internal Revenue Code. You shouldn’t make any changes based solely on what you read on the internet, without consulting a professional who practices in this field. Please call me at 314-288-0061 or email daniel.julius@stocklegal.com if you want to discuss the implications of this Act, or estate planning in general, and if we don’t have an answer, we’ll find it for you. I look forward to hearing from you!
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