These new rules result from cost-of-living adjustments (COLAs) for contributions and benefits, as well as new laws under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a measure that became law on Dec. 20, 2019. With the job market continuing to be tight, offering a retirement plan may be an important way for small businesses to attract and retain valued employees.
Be sure that your 401(k) or other qualified retirement plan reflects the latest dollar amounts for contributions and benefits. For 2020, the maximum salary reduction contribution by employees is $19,500 ($26,000 for those who are at least 50 years old by the end of 2020). If you have a profit-sharing plan or Simplified Employee Pension Plan (SEP), the maximum contribution amount for 2020 is $57,000 ($1,000 more than in 2019). In figuring contributions and benefits, you can consider only compensation up to $285,000 (up $5,000 from 2019).
There are two tax credits that may induce you to take certain actions with respect to retirement plans. Both apply for plan years beginning after Dec. 31, 2019 (i.e., 2020 retirement plans for the calendar year).
- Credit for starting a plan. For small employers only, there’s a credit for starting a qualified retirement plan that covers at least one employee who is not highly compensated (i.e., you can’t use this credit if the plan only covers you as the owner, or you and your spouse). The former credit of up to $500 credit for up to three years is replaced by a credit that’s the greater of (1) $500, or (2) the lesser of (a) $250 for each employee who is not highly compensated but who’s eligible to participate, or (b) $5,000. This credit also runs for up to three years.
- Credit for adopting an automatic enrollment plan. This credit is $500 for up to three years for creating or adopting an automatic enrollment plan in which eligible employees are automatically put into the plan when eligible to participate but can opt out or reduce automatic contributions. This credit is in addition to the one above.
Watch the timing on paying out required minimum distributions (RMDs). Starting this year, RMDs don’t have to begin until your employee or former employee turns 72, if he or she did not reach age 70-and-a-half by Dec. 31, 2019. Of course, if your employee is still working at the company and is not a more-than-5-percent owner, RMDs can be postponed until retirement, regardless of age if your plan allows for it.
Be sure to file Form 5500 on time if you’re required to do so. The form for 2019 is due on July 31, 2020, assuming your plan is on a calendar year basis. The failure-to-file penalty has been increased greatly for delinquent returns. Instead of the $25 per day penalty (not to exceed $15,000) that applied last year, the penalty effective for returns due after Dec. 31, 2019, is $250 per day, up to a maximum of $150,000.