If you offer—or have—a retirement plan like a 401(k), you need to know about the new rules outlined in the SECURE Act.
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On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act of 2019—better known as the SECURE Act— was signed into law. (The Act wound up being wrapped into a year-end spending bill and was not passed as a stand-alone law.)
The SECURE Act is a collection of individual rules designed to encourage employers to offer retirement plans—and encourage employees to save more for their retirement. Many of the rules took effect on January 1, 2020.
Some of the changes streamline the administration of retirement plans (which can be done through 401(k) providers like Guideline and Gusto). Other changes are meant to educate and benefit plan participants directly, which can include both you and your team.
This article will give you a rundown of the key changes small employers and employees should know about.
1. Changes to group retirement plans
Here are the two main ways the SECURE Act impacts group retirement plans.
Multiple Employer Plans (MEPs)
Previously, only related employers were allowed to band together in MEPs for defined contribution plans, including 401(k)s. The SECURE Act now allows these arrangements among unrelated employers that have a “pooled plan provider”—like an investment firm—to administer the plan.
Combined annual reports
Plans can file a consolidated Form 5500 if they are defined contribution plans (such as 401(k)s) with:
- The same trustee (the person or group that holds the plan assets in a trust)
- The same named fiduciary or fiduciaries (the person or people who manage the plan assets)
- The same administrator
- The same plan year
- The same investments or investment options for participants and beneficiaries
And now, let’s dive into the age updates outlined in the SECURE Act.
No more age limit on traditional IRA contributions
Previously, you couldn’t contribute to a traditional IRA once you hit age 70½. The SECURE Act repeals that limitation.
Higher age for required minimum distributions (RMDs)
The old rule was that once you hit age 70½, you needed to take required minimum distributions (RMDs) from your traditional IRA, whether you wanted to or not. The RMD requirement is still in effect, but now it doesn’t kick in until age 72.
3. Special incentives for small employers that offer retirement plans
Both of these credits are available only to small employers, defined as those with 100 or fewer employees in the previous year who earned at least $5,000.
Bigger credit for pension plan startup costs
Small employers who set up pension plans for their employees had previously been eligible for a $500 tax credit. Now, you may be eligible for a tax credit of the greater of #1 or #2 below, for up to three years:
- $500, or
- The lesser of a) $250 times the number of rank-and-file employees eligible to participate in the plan, or b) $5000.
Credit for automatic enrollment
If you establish a new 401(k) plan or SIMPLE IRA plan that includes automatic enrollment, or convert an existing plan to automatic enrollment, you’re eligible for a new tax credit for up to $500 per year for three years. This is in addition to the startup credit described above.
4. Rules designed to benefit participants and encourage more saving
A lot of the rules in the SECURE Act are intended to help people save more for retirement. Here’s a breakdown.
Higher cap for auto-enrollment
If you automatically enroll employees in a 401(k) plan—which means they participate unless they opt out—you could previously put no more than 10 percent of their pay into the plan. The SECURE Act raises the limit to 15 percent.
Retirement plans now can’t distribute loan proceeds via credit cards or similar arrangements
U.S. retirement accounts are structured to discourage loans and early distributions, but they are permitted in some limited circumstances. Previously, some plans allowed borrowers to access those funds through credit card arrangements, which made things very simple—perhaps too simple.
According to a preliminary summary of the SECURE Act provided by the Ways & Means Committee, the new provision is designed to discourage loans from being “used for routine or small purchases, thereby preserving retirement savings.”
New lifetime income disclosure requirement
At least once a year, plan administrators must now provide participants in defined contribution plans (which includes 401(k)s) with a statement showing the monthly payments they would receive if the total account balance were used to provide a lifetime income stream.
The Secretary of Labor plans to create a model disclosure form administrators can use within a year of the SECURE Act’s passage.
Expansion of Section 529 plans
These savings plans, commonly associated with saving for college, have now been expanded to cover costs associated with certain apprenticeships and up to $10,000 of student loan repayments (including for siblings). As an employer, you can offer 529 plans to your team as an employee benefit.
Increased flexibility for annuities
Annuities provide regular, fixed payments over a period of time. The SECURE Act allows direct trustee-to-trustee transfers of annuities, so that participants who change employers or retire can avoid surrender charges and fees.
Previously, annuities that were part of employer plans were subject to “you can’t take it with you” rules, which meant a job change generally required a lump-sum cash out. Now, annuities can be moved into other plans instead.
New 401(k) access for long-time part-timers
Previously, employers could exclude part-time employees who worked less than 1,000 hours a year from their 401(k) plans. Now, if you offer a 401(k), you need to allow in anyone with one year of 1,000+ hours of service or three consecutive years of 500+ hours of service.
(This provision does not apply to collectively bargained plans, meaning those that are part of a deal with a union or other employee group.)
Penalty-free withdrawals for birth or adoption
Participants may now make penalty-free withdrawals from IRAs or 401(k)s of up to $5,000 for “qualified birth or adoption distributions,” meaning those that are made within one year of the birth or adoption.
These distributions are not subject to the 10 percent early withdrawal penalty but are still considered taxable income, unless they are repaid within 60 days.
5. Other important changes that impact small businesses
Below are two more big updates that will affect small employers.
Increased timing flexibility for new plans
If you implement a new retirement plan before the due date (including extensions) of your business tax return for a given year, the plan will take effect on the last day of the tax year.
For example, if your business tax return for 2020 is due on April 15, 2021, and you implement a new 401(k) plan on April 14, 2021, the plan will be considered effective as of December 31, 2020.
The penalty for failure to file a tax return has been increased to the lesser of $435 or 100 percent of the tax due.
Additionally, various penalties for Form 5500 nonfiling have been increased, up to a maximum of $50,000 in certain cases. The goal here, according to the Ways & Means Committee, is to encourage timely and accurate return filing and “overall tax administration.” Luckily, most 401(k) providers file these forms automatically.
Luckily, most 401(k) providers file these forms automatically.
The SECURE Act includes perks for employers and employees alike
Most of the SECURE Act’s changes are good news for both employers and employees, though retirement plans haven’t gotten much simpler to administer overall.
To make things easier on your end, talk to your plan administrator, investment advisor, or an employee benefits attorney if you have specific questions about the post-SECURE Act landscape.