Not everybody loves the “Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019” (H.R. 1994), currently stalled in the Senate after the House approved it May 23 in an overwhelming 417-3 vote.
While Republican Texas Senator Ted Cruz has put a “hold” on the bill, keeping it from fast-track passage, a small business advocate is opposing it because they think the bill’s “revenue-raisers” unfairly burden small businesses.
Despite the bill’s multiple provisions expressly intended to help more small businesses provide 401k plans for their employees (open MEPS, incentives to defray plan startup costs), the Small Business Council of America (SBCA) is urging the Senate to vote against the SECURE Act because the organization says it will have a detrimental effect on small business retirement plans, owners and employees.
“If the Senate passes the SECURE Act, owners will take funds out of the company as additional compensation and invest them in more tax-advantaged assets rather than making contributions to retirement plans for themselves and their employees,” says SBCA Chair Paula Calimafde. “This will harm small business employees who enjoy significant employer contributions.”
Concern over end of Stretch IRAs
The SBCA also takes issue with the SECURE Act’s attempt to raise revenue by eliminating the “Stretch IRA.” The SBCA notes most employees, including owners, roll over their 401k plan assets to an IRA upon retirement. Under this provision of the SECURE Act, inherited IRA or retirement plan assets for most non-spouse beneficiaries, usually children, would be forced into taxable income within a 10-year period.
Currently plan or IRA assets must only be brought into taxable income over the beneficiary’s life expectancy. SBCA said it believes this negative change in the tax treatment for beneficiaries (most often children) will trigger the premature freezing or termination of employer contributions to a significant portion of small business retirement plans.
The Senate has its own legislation—the Retirement Enhancement and Savings Act (RESA) (S. 972) which is similar to the SECURE Act and which would also eliminate the Stretch IRA. While still a concern, the SBCA says the RESA approach would be less damaging to small business owners and not as likely to trigger the loss of employer contributions to retirement plans.
“Both provisions would present significant retroactive changes in the law with no grandfathering for account balances already accumulated in the plan,” Calimafde said. “If owners had known Stretch IRAs would be eliminated, they could have saved for their retirement in assets which they could leave to their children with little to no tax consequences.”
If the SECURE Act becomes law, the SBCA says it is likely that small business advisors will advise their clients to contribute to the plan only an amount they are certain to use during their lifetimes. Once they reach the advised amount, owners are likely to stop employer contributions.
As a result, the SBCA said in a June 25 statement that “employees stand to lose the generous plan contributions made by the owners and are unlikely to have these foregone contributions paid to them as additional salary.”
Additional provision concerns
The SBCA says the bills also present age inequity issues. Older Americans will not be able to divert the tax disaster awaiting their children because they have already saved for their retirement in retirement plans at Congress’ encouragement.
The SBCA says to combat this inequity, it is urging the Senate to either adopt the RESA provision or allow distributions to be paid out within 15 years, rather than 10. The SBCA believes a 15-year payout period is sufficiently long so that owners will not be advised to stop making employer contributions in order to protect their beneficiaries from an income tax disaster.
The SBCA also has grave concerns about Section 403 of the SECURE Act, which dramatically increases the penalties for failure to file certain retirement plan returns, particularly Form 5500. The penalty for a failure to file this Form would increase from $25 to $250 per day, not to exceed $150,000, up from $15,000 today.
“It doesn’t take an expert to figure out which group of businesses are most likely to be late filing these forms and pay the increased penalties—big companies with accounting and benefits departments or small businesses without in-house resources?” Calimafde said.
“We cannot support the revenue raisers in this bill because they single out small businesses, their owners and employees to pay for the lion’s share of the bill. Even though there are many parts of the bill we do support, overall the negative impact of the revenue raisers, primarily on small business, is not acceptable.”
The SBCA is a Wilmington, Del.-based national nonprofit organization which represents the interests of more than 100,000 privately held and family owned organizations exclusively on federal tax, employee benefit and health care matters.
SEE ALSO:
• New 401k Legislation Drives Optimistic Outlook for MEPs
• Small Biz Warms Up to Retirement Plans