The Small Business Job Protection Act (SBJPA), signed into law in 1996, contains a number of provisions impacting various aspects of small business operations, from retirement plans to changes in S Corporation structures. The small business community greeted many of the changes contained in SBJPA with considerable enthusiasm, since it was widely interpreted as an act that eliminated a number of unnecessarily burdensome provisions. The act touched on a wide variety of areas relevant to small businesses, especially in the area of pensions. Changes made by the law can be found in such areas as the definition of highly compensated employees, deferred compensation arrangements, family aggregation rules, minimum pension participation rules, "safe harbor" rules for qualified cash or deferred arrangements (CODAs), notice requirements, limits on matching contributions, distributions of excess contributions, elective deferrals includible as compensation, early participation nondiscrimination rules, plan distributions and QJSA waivers, employee leasing provisions, and modification of GATT interest and mortality rate rules. Small business consultants strongly advise business owners who wish to take full advantage of the myriad changes included within SBJPA to consult with a tax advisor or other accounting professional.


Some observers estimate that the Small Business Job Protection Act has directly impacted as many as two million small businesses currently structured as Subchapter S corporations. For instance, the law allows S corporations to increase its shareholders from 35 to 75, giving businesses heightened capacity to attract additional investors and capital. Another change that benefited small business owners concerned an expansion in the kinds of organizations that can be shareholders. Under the SBJPA, qualified pension plans became eligible to be shareholders in S corporations after January 1998. Since many pension plans are willing to invest in promising young businesses, S corporation owners have been able to turn to these entities as a source of significant capital.

The SBJPA also provided S corporation owners with greater flexibility in structuring their businesses. Prior to the passage of the SBJPA, S corporations could not own more than 79 percent of another company, but with the new law, they may now own 100 percent of affiliated companies. Finally, business experts note that the SBJPA expands the number of allowable beneficiaries when an S corporation puts together a small business trust.


The SBJPA established a simplified retirement plan for small businesses that is known as the A SIMPLE retirement plan. Under these plans, which are designed for employers with 100 or fewer employees who do not maintain another employer-sponsored plan, employers and employees work together to help ensure that workers have adequate financial security when they reach retirement age. Under the law, employees may make elective contributions of up to $6,000 annually. The employer is required to make matching contributions and do so every year. The SBJPA also requires that businesses contribute at least 1 percent of all employee's compensation or be subject to significant penalties.

The law also impacts other elements of pension plans. For example, for the years 1997, 1998, and 1999, the 15 percent excise tax on excess distributions from pension plans was suspended. Moreover, the act introduced safe-harbor formulas for 401(k) salary deferral and matching contributions that eliminated requirements that employers conduct annual nondiscrimination testing. "Under the 1996 act, small employers can adopt matching 401(k) plans without concern about whether non-HCEs [highly compensated employees] elect to participate," wrote Michael Collins and Charles Sherman Jr. in Journal of Accountancy. "Depending on how attractive non-HCEs find the safe-harbor matching formula, the use of the safe harbors may reduce substantially the employer contributions businesses must make on behalf of these employees…. The safe-harbor formulas provide away for employers to avoid nondiscrimination testing by adopting a plan with a relatively generous employer match—one that includes a contribution of at least 4 percent of pay on behalf of all eligible employees (depending on employee contributions). Safe-harbor matching contributions must be 100 percent vested at all times. Such contributions generally may not be distributed to employees until the earlier of when they terminate employment or reach age 59 1 2 ." In addition, under the SBJPA, distributions from a qualified plan must begin by April of the calendar year following the later of: 1) the calendar year in which the employee reaches 70 1 2 years of age, or 2) the calendar year in which the worker retires.


Mulleneaux, Natasha M. "Retirement Plan Reform: The Aftermath of the Small Business Job Protection Act of 1996." Taxes: The Tax Magazine. August 1997.

Schneider, Mark N., and Marilyn C. Doolittle. "Small Business Job Protection Act Adds Simplicity (and Complexity)." The Tax Advisor. June 1997.

Sharp, Jr., Joel, and Hewitt D. Shaw Jr. "Subchapter S Reform: The Small Business Job Protection Act of 1996." Journal of Corporate Taxation. Spring 1997.

Sherman, Jr., Charles W., and Michael J. Collins. "The Safe-Harbor Solution." Journal of Accountancy. July 1999.

West, Diane. "401(K)s Catch on at Small Companies." National Underwriter Life & Health. June 9, 1997.

Other articles you might like:

Follow Founder
on our Forum or Twitter

User Contributions:

Comment about this article, ask questions, or add new information about this topic: