How Can Your Small Business Benefit from the SECURE Act?

The Hartford

At a time when many businesses are desperately trying to bounce back from the financial setbacks of COVID-19, setting up a long term retirement program can seem like the least of your concerns. However, did you know that small businesses that offer 401k plans are eligible for a number of tax credits and financial reimbursements? In this episode, Jon Aidukonis and Gene Marks advise small business owners on how they can take advantage of all the provisions offered by Congress’s SECURE (Setting Every Community Up for Retirement Enhancement) Act.

Executive Summary

1:48—Today’s Topic: How Can My Small Business Benefit from the SECURE Act?

3:14—The SECURE Act is a legislation that offers financial incentives to small businesses that help their employees save for retirement.

4:34—Under the SECURE Act, businesses with less than 100 employees are eligible for a $15,000 reimbursement if they set up a 401k plan.

5:10—The SECURE Act will also offer your business a three-year tax credit of $500 if your existing 401k plan has automatic enrollment.

6:01—Lastly, the SECURE Act provides the big holders of the 401k plan with the option of pooling all their assets together so they can negotiate lower fees.

8:30—Small business owners who choose to offer a 401k plan are encouraged to consult with their providers to ensure that they are fulfilling all their fiduciary responsibilities.

9:52—You and your employees can put away up to $56,000 a year, pre-tax, into a retirement program, but keep in mind that there are discrimination tests set in place to ensure that both you and your employees are actively contributing.

12:22—While you and your employees will have access to your retirement funds, there will be penalties each time you withdraw money. However, you can borrow against your 401k without incurring any penalties, only standard interest.

14:37—Recently, there have been attempts to pass the SECURE Act 2.0, which enables companies to make 401k contributions based on their employees’ student loan payments.

16:17—The SECURE Act 2.0 will also expand your ability to contribute to Roth IRA’s.

16:56—Under the SECURE Act 2.0, Roth IRA’s and 529 plans would allow you to put away any previously taxed income and grow that amount tax free until you’re ready to withdraw it. Any withdrawals that were spent on higher education would not incur any taxes either.

Links

Transcript

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Jon: Hello everybody and welcome back to another episode of Small Biz Ahead, the small business podcast presented by The Hartford. This is Jon, I am joined by my co-host Gene. Gene, how is it going?

Gene: Jon, I am doing fine. Hey, have you watched Squid Game yet?

Jon: I haven’t. And it’s been one of those things that has been keeping me up at night as I need to watch it because the reviews are so polarizing and it sounds absolutely like a roller coaster ride of a watching experience.

Gene: Yeah. So I watched the first two episodes already, loved it and now I’m going to be traveling for a little bit over the next few weeks. I’ve downloaded that, I’m all ready to watch the rest of the series. So, my recommendation is to watch it in Korean, the original language, not dubbed. So many people watch these things dubbed, and I think you lose so much and then you’ll just read the subtitles. It’s okay to read the subtitles. It makes up for it.

Jon: I guess so. I don’t think I’ve ever watched a foreign language film without something. I guess I’ve watched some with the subtitles, I don’t know. I’m going to have to check it out, and our audience, let us know in the comments, what do you think? I feel like every time I go on social media, I hear about Squid Game. I don’t really know what it’s about. I hear it’s kind of like a weirdly mortal combat meets reality show meets.

Gene: Like Hunger Games on steroids.

Jon: Yeah. I don’t get it from the descriptions that I hear, but I feel like I need to give it a chance and figure it out, but what do you think? Do you watch it? Should we watch it? Should we do an episode on it? Are there lessons to learn for small business owners, who knows? But what we’re actually here to talk about today is the SECURE Act and retirement plans, which sounds equally as exciting to Hunger Games in a foreign language.

Gene: But important Jon. I mean, we have like a retirement crisis going on in this country. I mean, there is not enough. I think like the average American has got something like $5,000 saved in the case of an emergency. You have so many workers that are out there that are clearly unfunded in their retirement, let alone you’re putting money away for higher education or sending your kids to college and all of that. So it’s an important topic and as business owners, we need to be putting away for our retirement and also looking after our employees as well.

Jon: It’s true and it’s interesting because I don’t think that that’s really uncommon, to your point. I think for most people, 5,000 say even like 2000, is a lot of money, especially right now to kind of have, is liquid backup in case something was to happen. So I feel like there’s been a lot of talk the past couple of years about long term saving and access to savings, and should we and shouldn’t we? And I think about even like the CARES Act and some of the forgiveness on penalties if you wanted to access your 401k. But then all the messaging that comes out that’s like you really shouldn’t do that because it’s the last case scenario. And some people are like, we don’t know if we have tomorrow because everything’s unsettled right now. So maybe we can talk a little bit just about what this SECURE Act is and how it kind of came to be.

Gene: Sure. Well, this really kind of started a few years ago, Jon. I mean, Motley Fool did a big study on retirement savings. They found that in 2019, the average retirement savings account, the average for American households, we were talking about 5,000. It’s actually $65,000, which you would think like, oh, okay, 65,000 sounds like a lot, but obviously that’s not a lot of money. Even if you are making 10% interest a year on that, that’s 6,500 bucks a year, clearly not enough to live off of. The problem gets even worse as you get younger. I mean, people under 35 years old have only saved $13,000 for retirement. And it says 28% of Americans have no retirement savings at all. So, it’s a big issue. So Congress got together, you would think Congress can’t get anything done.

Well in 2019, Congress passed something called the SECURE Act . It became law. It was a bipartisan bill and it was focused on retirement plans. And what Congress wants to do is it wants businesses to help their employees save more for retirement. And they looked at the statistic that more than half of small business owners in this country don’t even have a 401k plan set up, which is crazy when you think about it, because it doesn’t cost that much. So what the SECURE Act did is they said, listen, if you’ve got less than a hundred employees in your business and you set up a 401k plan, a retirement plan for you and your employees, we will reimburse you up to $15,000 for the cost of setting up that plan. So they do it through tax credits. So that’s basically saying to all of us that if we don’t have a retirement plan, we should set up a retirement plan, because the government will pay us to do it.

They’ll take care of all the fees and expenses for setting up the plan. So that was the first big thing that the SECURE Act did. It did two other big things as well, Jon. The second thing is, if you have an existing 401k plan, the SECURE Act says to you, look, make a little change to the language, make it automatic enrollment, which means that any of your new employees that come on board, they are automatically enrolled in the plan. Now, they can opt out if they want to, but you should just change the language that automatically enrolls them. And if you do that, we will give you another tax credit of $500 for the next three years. So basically the government is saying, we’ll give you 1500 bucks just by changing the terms of your 401k plan, which really doesn’t change anything at all.

Because again, if somebody gets automatically enrolled, they can still opt out. So why not take advantage of that? And then the third thing, Jon, that the SECURE Act did is this, it allows the big holders of 401k plans to pool all of their assets together so that they can get and negotiate lower fees on commissions and management fees from the institutions that actually hold the assets. And what does that mean for a small business? Well, it means this, you should talk to your 401k plan provider. Maybe you use one of the big investment companies or maybe you use your bank, or maybe you use your payroll service.

And you should ask them about pooling funds and reducing fees, because they have those opportunities available, those options available for you, and they can set you up so that your same retirement plan can get managed for a lower cost of capital and therefore, save you on fees going forward. So those are the three big things that the SECURE Act does. Again, it rewards employers for setting up a new retirement plan, it rewards employers through tax credits for just making it automatic enrollment, and it gives the ability to reduce our fees on those retirement plans over the next… by consolidating the funds together with other businesses. Does that make sense?

Jon: It does. I mean the first two items feel kind of like a no brainer, right? Like a no regrets move. So I remember my first salary job, I was outvoted. So I’m not typically the financially responsible one in my world, especially not in my early 20s. And I took my first kind of adult job. I was in a staff meeting with all the managers for this company and only two of us were like, yeah, we should have a 401k plan. Everyone’s like, I’d rather have the money in my paycheck, so they eliminated the option. So the fact that even for kind of, no matter how small your business is, there’s a way to kind of do it without cost. But that’s great, because I think there are some people who care about it, but historically, any cost is an additional cost.

So when you’re counting pennies, that’s hard as an employer if only two people out of 30 are going to take advantage of it. So I think that’s awesome. The question I have is on point 3, right? So that feels like a little bit of that too good to be true moment. So, if it does let these kind of big 401k providers pool funds and get better rates, is there a downside impact there to a business owner who converts their plan or is there any risk there or are they kind of protected through other regulation or kind of how this program’s designed?

Gene: That’s a really, really good question because another part of the SECURE Act though is just that Jon, it’s saying to you, hey, we’re going to give you these tax credits and we’re going to give you this potential to save money by having your provider pool assets. However, we are going to require more from you. So there’s new rules about fiduciary responsibilities for employers over these 401k plans, which means that we as employers need to make sure that the 401k plans are administered correctly and there’s enough choices for our employees and that we’re giving them the right kinds of communications as well so they can make the right kinds of investment decisions. And it’s putting more of the onus on the employers to take more responsibility for doing that. Again, giving more fiduciary responsibilities. Now, before you panic on that, these things are… they’re not that difficult, and if you partner up with a good provider that I don’t know if we… the Vanguards, the Fidelitys, all the ones that are out there that do a good job managing 401k plans.

They’ve got all the paperwork, they guide their business owner clients through the process. They’re looking after us and looking over our shoulders to make sure that all the rules are being followed and the things are being done. So, but to answer your question, yeah. I mean, the downside is we have to be more responsible about the money that people are putting away. Let me tell you something else, Jon, about these 401k plans, just if you’re listening to this and you don’t have a 401k plan. For starters, if you set up a 401k, you are allowed between… Your employees can contribute and you can contribute to their accounts and to your own account, up to $56,000 a year, pre-tax, can be put away into a 401k plan. Even one of those SEP IRAs, one of those single employer pension plans as well, you can put away up to $56,000 a year.

And the more that your employees put away, the more you can put away. So you can’t just set up a 401k plan and then you can just immediately say, put $56,000 and being it’s all good. No, no, no. There’s discrimination tests, meaning that you can put away up to 56,000 a year, as long as your employees are participating in the plan also put away a certain amount so that you’re not fully taking advantage of this to their detriment.

So be aware that there are some discrimination tests, but you want that. You want to encourage your employees to put money away for retirement, because not only does it help them, obviously in the long term, Jon, I don’t know, man, I’ve seen many of my clients with older employees that didn’t put money away for their retirement. And my clients share this, when you’re running a business, you care about your people, I can’t tell you how many times I’ve seen those older employees have to go back to their former employers, and basically ask for a handout. Like can you help me in my retirement days or can you give me some spare work or something to do? Do you know what I mean? So, the more your employees are putting money away, the more you protect yourself about having to be in that situation.

Jon: For sure. And I think the one interesting thing about a 401k versus kind of another savings plan, right, is it does kind of force you to be regular about your contribution as an employee, but there’s also ways to access it for key moments. And I think that’s what I kind of had to educate myself on when I first opted in it, just as a worker, right? So when you’re ready to buy a house, if something really drastically happens, or even if you kind of need a short term loan, you can kind of self-fund some things. And those probably aren’t the best reasons to open up a savings account, but I think they are rational points to remind people of, if you are an employer who’s trying to kind of get people to opt in.

Gene: So you’re a hundred percent right. I mean, first of all, if you’ve got my retirement money that you put away and you need it, you can always withdraw it. You’re going to pay a penalty to the IRS. The penalty should be pretty steep, like 10%, but it’s not like you don’t have access to that money. You do have access to the money. You’re just being encouraged not to withdraw it. But your point is very well taken. With no penalties involved, you can borrow against your 401k. And you’re going to pay a market rate of interest and as you and I are having this conversation, these rates are still relatively low. So as you pay back the money, you’re actually paying yourself, because the money goes back into your 401k plan. The other thing that people do when they have 401ks is that it gives them an opportunity to get into the different markets.

And this does get back to the fiduciary duty of the business owner. Good businesses will offer a 401k plan with a bunch of investment choices, both risky and completely non-risky and leave it up… give the employees enough information so they can make their own decisions as to how they want to invest it. But it is an opportunity for you to be a little bit of an investor and try and take advantage of some stock market gains or even interest rate appreciation and government bills. So those are all options that you would now have, as long as you’re putting money away for your retirement. And as an employer, I think you should be encouraging that.

Jon: Yeah, no, I think you’re right. And I think kind of lastly on that is we talk a lot lately about mindset and productivity, right?

Gene: Right.

Jon: And there is something about, I think, we don’t know what we don’t know that still has everyone, I think a little bit unsettled, and I don’t know that that’s going to go away anytime soon. So just as someone with a workforce, someone who depends on people to be able to show up for you every day, this is kind of a really easy way to maybe reinforce that as an employer, you can be a sense of security and stability in a world where much is still kind of evolving and changing, and unknown on a daily basis. So just back to kind of taking that time to do something for you and making sure that you have a culture and kind of the things that employees need to feel safe and secure. This is a, I feel like an easy way to do that. And from the information you’re sharing Gene, something that’s pretty cost effective, if not free, for you to be able to provide.

Gene: Agree. Now, keep an eye out there Jon. I’ve been telling my clients as well that we’ve been talking about the SECURE Act , which is the… That’s what this bill is called, but keep an eye out for something called the SECURE Act 2.0, which is another version of the SECURE Act that was being talked about, and then COVID came and kind of wiped that out. But SECURE Act 2.0 is going to give us the ability to put away more money for their employees, particularly older employees, which is good news to hear. And really also importantly, and I think this is of interest, the SECURE Act 2.0 will give the ability for companies to make 401k contributions based on student loan payments.

So in other words, they can help their workers pay off student loans or save for retirement. And right now, if you want to help your employees pay down their student loans and that’s become a real popular benefit, increasingly popular, you don’t really get any advantage. You can’t deduct it, at least not… In 2020, you can, but after 20… Sorry, in 2021, you can deduct student loan repayments. So, that’s just a small provision of the SECURE, of the CARES Act , but in future years after 2021, you won’t be able to deduct any student loan repayments you’re making for your employees. SECURE Act 2.0 will allow you to do that, if it ever passes. And I think that that’s something that’s also really driving because we have a retirement crisis and we also have a student loan crisis as well.

The other thing that SECURE Act 2.0, Jon, will do is it will expand our ability to make contributions to Roth IRAs. And I just want to make sure I mention this in this conversation as well, Jon, you can put money away into after-tax IRAs. In other words, after tax savings accounts. A Roth IRA is one of them, where you can put money away. It’s you’ve already been taxed on it, but then it grows tax free. So it’s an opportunity for your savings to grow without you being taxed on it until you withdraw it. The other thing to think about is 529 plans. Also with 529 plans, you put money away after you paid your taxes on it, but it grows tax free and then you can withdraw it without any tax. You don’t have to pay any taxes as long as you use it for higher education.

So the 529 plans, the Roth plans are already in effect. The SECURE Act 2.0, the one that is being talked about in Congress, it’s something I really hope to see in the next year or two, that will expand this SECURE Act to help us with student loan repayments, as well as some of these after tax savings plans as well. So, just keep an eye on that.

Jon: That’s something to, yeah, it’s good to know. It’s good to keep our eyes out. And I think we’re going to, for sure, probably be hearing about proposed legislation as we enter the fall season because it’s that time of the year.

Gene: Okay.

Jon: So.

Gene: [crosstalk] is. It certainly is. And you know you and I are going to be talking about this more as time goes by, because it’s going to become news.

Jon: I have a feeling you’re right. All right, everyone. Well, let us know what you think. Do you have other questions on kind of long term savings plans? Do you feel like this is a good deal for small business owners? Your staff asks you to provide these kind of benefits. We’re talking a lot lately about retention and is there a workforce? What are they looking for? How do you stay competitive as an employer? So let us know if you like content like this. In the comment section, make sure you visit our blog at sba.thehartford.com and please rate and review us wherever you listen to your podcast. This was another episode of Small Biz Ahead, the small business podcast presented by The Hartford, and thank you all for listening. We’ll talk to you soon.

Gene: Take care everybody.

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