The SECURE (Setting Every Community Up for Retirement Enhancement) ACT is a bi-partisan bill that is intended to expand retirement plan coverage to more workers, reduce hurdles for saving, and acknowledges that employees are working and living longer. It provides the most comprehensive legislative enhancements to retirement plans since the Pension Protection Act of 2006. It was enacted on December 20, 2019, and it will affect retirement plans in numerous ways:
Significant changes include:
- Increase Small Employer Incentive Credits – Encourages small businesses to start retirement plans thereby expanding coverage to more workers. The income tax credit for plan startup costs will increase from the current cap of $500 to $5,000 under certain circumstances and applies for three years. An additional three credit of $500 was created for plans that add automatic enrollment. Thus, up to $16,500 of tax credits are available over three years to offset startup costs. This is effective for tax years beginning after December 31, 2019.
- Increase Auto-Escalation Cap – The safe harbor automatic escalation cap increased from 10% to 15%, effective for plan years beginning after December 31, 2019. Auto escalation increases participants’ deferral percentages by a fixed amount each year (ex: 1%). The increase in cap recognizes that many workers may be behind in saving for retirement and this is a gradual way to increase how much they save.
- Increase in Required Minimum Distribution (RMD) Age – The IRS previously required participants in 401(k) plans to commence taking distributions from their account once attaining age 70 ½ in order to prevent perpetually deferring taxes by passing them to their beneficiaries. This age has been increased to age 72* for distributions to be made after December 31, 2019 in recognition that many Americans are working and living longer.
*If you have already begun taking your RMD prior to the end of 2019, you must continue even if you are under age 72.
- Limit on RMD Period – Non-spouse beneficiaries must now take all required distributions within 10 years except under certain circumstances. This eliminated the “stretch” provision of many retirement plans and IRA’s that allowed withdrawals from inherited accounts to be stretched over the life of the beneficiaries. This is applicable to accounts inherited after December 31, 2019 and enables the IRS to offset some of the tax benefits of the other provisions by recognizing revenue sooner.
- Participation for Part-time Employees – This change allows for long-term, part-time employees to be eligible to participate in their employer’s retirement plan. Previously, employees could be excluded if they had not worked 1,000 hours over a 12-month period. This is now reduced to 500 hours for employees working for an employer for three consecutive years that have reached age 21 by the third year. Employers can, however, exclude these employees from safe harbor contributions, nondiscrimination and top-heavy requirements. This is effective for plan years after December 31, 2020.
Additional changes include:
- Multiple Employer Plans (MEP) – Allows employers to establish open MEPs, which are plans in which two or more unrelated employers without a common interest join a plan with pooled service providers. It also eliminates the “one bad apple” rule by treating assets in the failed plan as generally being transferred to another plan maintained by the employer sponsoring the failed plan. This is effective for plan years beginning after December 31, 2020.
- Election of Safe Harbor Status – Allows employers to add a safe harbor feature, thereby allowing the plan to avoid most annual compliance tests, to their existing plan once the year has started if they make a non-elective contribution of at least 4% for all eligible employees (regularly 3%). This can help employers to correct failed ADP/ACP or top-heavy tests by shifting to a safe-harbor plan, and is effective for plan years beginning after December 31, 2019.
- Penalty-Free Withdrawals For Child Birth or Adoption – If withdrawing for a qualified birth or adoption, the 10% early withdrawal penalty for distributions prior to age 59 ½ is waived (but still subject to tax). Up to $5,000 can be withdrawn during the 12 months following a child’s birth date or the date upon which the adoption is finalized. This is effective after December 31, 2019.
- In-Plan Annuities – Creates a safe harbor for plan sponsors, thereby limiting their potential liability, in selecting a guaranteed retirement income contract (group annuity) to the plan. This is effective December 20, 2019 if certain requirements are met. No such protection existed previously, and many wondered what would happen if a participant who selected an annuity left the plan. The SECURE Act also addressed this issue by allowing for portability to other 401(k) plans or IRAs without paying surrender charges or penalties. This is effective to plan years beginning after December 31, 2019.
- Annual Disclosure of Projected Income – Requires 401(k) statements to estimate monthly income projections based on the account balance and participant’s age if converted into an annuity. This gives participants a better understanding of how their account balance might meet their monthly income needs in retirement. The Labor Secretary is to prescribe assumptions that can be used in estimating monthly income projections no later than December 20, 2020.
- Increase in Penalty to File Form 5500 – The 5500 is an annual report, filed with the U.S. Department of Labor (DOL), that contains information about a 401(k) plan’s financial conditions, investments, and operations. There is a large increase in the IRS penalty for not filing Form 5500 on time, from $25 per day ($15,000 maximum) to $250 per day ($150,000 maximum). The DOL penalty for late filing Form 5500 is unchanged by the SECURE Act and remains at an annually adjusted penalty of $2,194 per day. Similarly, the penalty for not filing Form 8955-SSA was increased from $1 per day ($5,000 maximum) to $10 per day ($50,000 maximum). Finally, the penalty for failing to provide income tax withholding notices increased from $10 per occurrence ($5,000 maximum) to $100 for each occurrence ($50,000 maximum). This is applicable to returns, statements, and notifications required to be filed or provided after December 31, 2019.
- Extension for Adopting New Plans – The deadline to establish a new retirement plan was extended from year-end to when an employer’s tax return is due (including extensions). This allows employers more time to cover their employees with a profit-sharing contribution. This is effective for taxable years after December 31, 2019.