Small Business Job Protection Act of 1996

What Is the Small Business Job Protection Act of 1996?

The Small Business Job Protection Act of 1996 is a piece of U.S. legislation that had substantial implications for small businesses. The act altered some federal minimum wage requirements and increased the wage, simplified pension rules, and adjusted taxes for small businesses. It also made adjustments to S corporation regulations on safe harbor provisions and rules governing worker employment status while simplifying the administration and maintenance of 401(k) defined-contribution plans. The last provided an incentive for employers to offer this type of retirement plan to their employees.

Understanding the Small Business Job Protection Act of 1996

The Small Business Job Protection Act of 1996 is an important piece of legislation that made it easier for small businesses in the United States to operate and create jobs. The law is one of several acts passed by Congress and signed by the president to increase the competitiveness of small businesses relative to larger firms. It was sponsored by Rep. Bill Archer (R-TX), and President Bill Clinton signed it into law on Aug. 20, 1996.

In addition to increasing the minimum wage, the act significantly expanded the number of corporations that could take advantage of S corporation elections. It also made it far simpler for small businesses to offer 401(k) retirement accounts, which allowed small firms to compete with larger companies by attracting employees with their benefits packages.

The law has several subsections. The first amended the Internal Revenue Code (IRC) and increased the amount that a small business may expense for tax purposes to $25,000. The second decreased the work opportunity tax credit from 40% to 35% and redefined members of targeted groups with respect to the credit. The third increased the number of S corporation shareholders permitted in a firm from 35 to 75, granting S corporation status to larger firms.

This subsection also permitted financial institutions to hold safe harbor debt and certain tax-exempt organizations to become S corporation shareholders. The fourth, titled “Pension Simplification,” addressed 401(k) individual retirement accounts and employers’ ability to match the retirement contributions of employees. Other subsections were concerned with foreign ownership of small businesses and foreign tax compliance.

The act also modified some federal minimum wage requirements and increased the wage from $4.25 an hour at the time to $5.15 an hour. In 2007 Congress again raised the wage—this time to $7.25 an hour (effective in 2009), where it remains 12 years later, in 2021.

Special Considerations

The act created the financial asset securitization investment trust (FASIT). This was an entity used to secure debt and issuance of asset-backed securities. However, FASITs were abused by Enron during its scandalous activities around the year 2000, and they were repealed under the American Jobs Creation Act of 2004.