How the SECURE Act Creates Unique Opportunities for Small Businesses

1st Feb 2021

Fountain pen on Defined Benefit plan document

With anticipated tax changes from the Biden administration, many small business owners are concerned about having enough money saved for retirement. While the SECURE Act may have created some obstacles, there are some little-known provisions that may help advisors and their clients. The bill, which was signed into law December 2019, seeks to incentivize employers to offer retirement plans and improve individual retirement savings for Americans without adequate retirement savings. The SECURE Act includes significant provisions aimed at increasing access to tax-advantaged accounts and preventing older Americans from outliving their assets. What’s more, the bill gives businesses extra time to establish new high-contribution retirement plans. An employer has until their business’ tax return due date, including extensions, to establish a retirement plan for the previous year. The SECURE Act tax filing deadline varies based on the employer’s business entity type. In short, the SECURE Act can be seen as a game changer for the retirement planning industry.

SECURE Act Offers Incentives for Small Business

Below are some key incentives for small businesses, including a key provision that gives certain small businesses and self-employed professionals additional time to adopt new tax-qualified retirement plans such as Defined Benefit plan and Cash Balance plan. This change allows advisors and CPAs more time to work with their clients to open plans and potentially save big on taxes.

  • Safe Harbor Plans: The SECURE Act makes it easier for small business owners to set up “safe harbor” retirement plans that are less expensive and easier to administer.
  • Defined Benefit Deadline Extension: The deadline for a business to establish a qualified plan has been extended (past a company’s fiscal year) to a business’s tax filing due date, including extensions. The new extended deadline only applies to qualified plans that are entirely employer funded, such as profit sharing plans, Defined Benefit plan and Cash Balance plans (not 401(k) plans).
  • Required Minimum Distributions Delayed: The age at which retirement plan participants need to take required minimum distributions (RMDs) has been delayed to 72 from 70½. The act allows traditional IRA owners to keep making contributions indefinitely.
  • Startup Tax Credit: The bill increases the business tax credit for plan startup costs to make setting up retirement plans less expensive for small businesses. The tax credit increased from $500 to $5,000.

Example of a SECURE Act Deadline Extension

A manufacturing company that is an S corp wants to create a new Cash Balance plan. The company’s fiscal year ends December 31st and its traditional tax return deadline is the following March 15th. Because of the SECURE Act’s deadline extension, this year the business must adopt the plan by March 15 for the 2020 plan year. However, if the company is unable to meet its traditional deadline, they can file an extension and will have until September 15, 2021, to open the new Cash Balance plan for 2020.

There Is Still Time to Design a Retirement Plan for the 2020 Plan Year

Defined Benefit plan and Cash Balance plans help self-employed and small business owners accelerate retirement savings by allowing business owners to make very high contributions – the largest deductible contributions approved by the IRS. If you or your client is self-employed or a small business owner who wants to boost retirement security, now is the time to open a Defined Benefit plan or Cash Balance plan for 2020. Get an estimate of your contributions and tax savings with our online DB calculator.

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