You have likely heard about the new SECURE Act. What is it, what is changing, and why is it important?
The Setting Every Community Up for Retirement Enhancement Act, referred to as the “SECURE Act”, was signed by President Trump on December 20, 2019, and has many moving parts. It has introduced some of the most significant changes to workplace retirement plans in over a decade.
The big headlines of the SECURE Act are major changes to IRAs and 401(k)s, including the ability to delay distributions, reduced flexibility for inherited IRAs and other provisions focused on employers and retirement plans.
The changes went into effect starting January 1, 2020. There is a lot to the SECURE Act, but we have summarized some of the big changes for individuals, employers and retirement plans.
Changes for INDIVIDUALS:
Pre-SECURE Act: If you inherited an IRA from someone other than your spouse, you were required to take distributions from that account, but you could stretch out those payments over your entire life.
Now, under the SECURE Act: If an IRA owner dies in 2020 or thereafter, the account’s beneficiaries* must withdraw all of the money from the inherited IRA within 10 years of the year of death. (*Some beneficiaries, including spouses and minor children, are exempt from this rule.)
Required Minimum Distributions
Pre-SECURE Act: Individuals had to begin taking annual required minimum distributions (RMDs) from tax-deferred retirement accounts, such as Traditional IRA accounts, once they turned 70½ years old.
Now, under the SECURE Act: The age that RMDs must start has been pushed out to 72. This is applicable only for individuals who reach 70½ at or after January 1, 2020.
Age Limits for Contributing to an IRA
Pre-SECURE Act: Individuals could contribute to a Traditional IRA up until age 70½. (Anyone with earned wages could contribute to a Roth IRA, regardless of age).
Now, under the SECURE Act: There is no age limit for contributing to any type of IRA, so long as you have earned income equal to or greater than your contribution (although contribution limits are still in place). If you’re married and file taxes jointly, each of you can make a contribution so long as the combined amount does not exceed the couple’s taxable income.
Changes for EMPLOYERS:
Part-Time Employee Eligibility for 401(k) Plans
Pre-SECURE Act: Part-time workers could be excluded from participating in employer retirement plans if they did not work a minimum 1,000 hours in a 12-month eligibility period.
Now, under the SECURE Act: Employers are required to include longtime part-time workers in defined-contribution plans. Eligible employees must have at least 500 annual hours of service for three consecutive years and be age 21 or older. However, these participants can be excluded from safe harbor contributions, nondiscrimination and top-heavy requirements.
Employer Retirement Plan Start-Up Tax Credit
Pre-SECURE Act: The U.S. Government offered a tax credit to small businesses starting up a new retirement plan, to help offset start-up costs. The credit limit was 50% of ordinary and necessary eligible startup costs, up to a maximum of $500 per year for each of the first three years of the plan.
Now, under the SECURE Act: The SECURE Act increased the credit for small businesses starting retirement plans to $5,000 per year for three years. The maximum credit is now $15,000 over three years.
Retirement Plan Automatic Enrollment Tax Credit
Pre-SECURE Act: Did not exist.
Now, under the SECURE Act: The SECURE Act created an additional tax credit of up to $500 per year for three years for employers who set up new retirement plans (401(k) plans and SIMPLE IRA plans) that include automatic enrollment. The tax credit can also be claimed if converting an existing plan to include automatic enrollment. This credit is in addition to the startup retirement plan tax credit outlined above.
Late Filing Penalties
Pre-SECURE Act: 401(k) plan sponsors are required to file an annual Form 5500, and if late, the IRS charged a penalty of $25 per day, up to a maximum of $15,000. For Form 8955-SSA reporting to the Social Security Administration, the penalty for late filing was $1 for each participant not reported and for each day multiplied by the number of days the failure continued, up to a maximum of $5,000.
Now, under the SECURE Act: The late filing penalties for Form 5500 increased to $250 per day, not to exceed $150,000. Late filing fees for Form 8955-SSA also increased to $10 per participant per day, not to exceed $50,000.
Changes in RETIREMENT PLANS:
Pooled Employer Plans
Pre-SECURE Act: Multiple employers who could prove they had “commonality of interests” could sponsor a group retirement plan, called a Multiple Employer Plan (“MEP”).
Now, under the SECURE Act: Unrelated employers can band together to form pooled employer plans ("PEPs"). The idea is to enable greater scale for small company retirement plans in hopes of reducing administrative costs and duties for participating employers. PEPs will not be available until after December 31, 2020, as additional guidance by the IRS and DOL is still forthcoming.
Pre-SECURE Act: Employers were able to offer annuities in their 401(k)s, but less than 10% actually did so due to risk, as business owners would be held liable if the insurance companies providing those annuities did not live up to their claims guarantees.
Now, under the SECURE Act: The Act extends legal protections to businesses that follow specific rules when selecting a 401(k) annuity provider, thereby increasing the likelihood of annuities being offered in company retirement plans.
NOTE: Generally speaking, we do not believe annuities are a good investment. Please be sure to speak with us first if this is something you are considering, or must consider, with your employer’s retirement plan.
We hope this summary has been useful, and if you have any questions, please do not hesitate to contact us for more information!