Are you SECURE Now?
by Ray Sagner on Feb 5, 2020
Salem Business Journal
SALEM, OREGON FEBRUARY 2020 VOL. 16, NO. 2
The SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed by Congress and signed into law by the President on December 20th. The SECURE Act is the largest change to corporate retirement plan laws since the Pension Protection act of 2006 and is designed to improve the country's retirement prospects.
Why the need to improve retirement prospects? Some pundits are alarmed about a looming retirement savings crisis, meaning folks are not saving enough if they are saving at all. A 2018 study found that 21% of Americans have no retirement savings at all and 33% of Baby Boomers, those that are close to retirement, have less than $25,000 saved. This new act is meant to address some of the hurdles and expense that businesses face in offering a retirement plan, as well as access and ease for employees. In this article, I will summarize some of the highlights of the SECURE Act.
Open Multiple Employer Plans (MEP’s) – This is a change that allows unrelated employers to create a MEP (Multiple Employer Plan). The effort of this is to lower the cost of operating a retirement plan as companies band together to leverage their assets.
Increase Small Business Tax Credits for New Retirement Plans – These tax credits are given to employers for deciding to begin a retirement plan program. Credits were already available before this law change, but the SECURE Act significantly increases their value. The tax credit value has increased to up to $5,000 per year for three years of a new retirement plan.
New Tax Credit for Auto Enroll – This is a small tax credit, $500/year for three years, for small employers who begin auto-enrolling participants. This is to encourage employers to use auto-enroll features, which has been shown to increase participation rates in plans.
Encourage Lifetime Income Considerations - These changes were put into place to help participants avoid the risk of outliving their money. Having more focus on lifetime income, instead of total balance, allows participants to better understand how prepared they are for retirement.
Lifetime Income Products Provider Selection Safe Harbor – This provision puts in place a safe harbor for selecting annuity-like products as available investments within the plan, if certain processes are followed.
Lifetime Income Disclosure on Participant Statements – This rule pushes retirement plan providers, like your recordkeeper, to focus on providing participants a monthly estimate of retirement income so they have a clear idea of how ready they are for retirement.
Raised Auto Enrollment Safe Harbor Cap – Currently if you use Auto-Enrollment Safe Harbor Provisions, there is a cap of 10% on the Auto-Increase portion. The Secure Act raises the cap to 15% of income.
Coverage for Part-Time Workers – Currently, 401(k) plans may exclude part-time employees from participating if they do not complete 1,000 hours in a plan year. This bill would require employers to cover employees who complete at least 500 hours per year for three consecutive years. These participants would be allowed into the plan for their own deferrals but would not be required to participate in employer contributions or discrimination testing.
Penalty Free Withdrawals (Birth or Adoption)– This would allow participants to withdraw up to $5,000 within a year of the adoption or birth of a child to cover associated expenses without a 10% penalty. Taxes would still be due on the withdrawn money.
Increase RMD (Required Minimum Distribution) Age – This affects Individual Retirement Accounts (IRAs) mostly, but the raise in age for Required Minimum Distributions (RMDs) affects retirement plans, as well. Going forward, RMDs won’t be required until age 72 -- previously the age was 70.5. Unchanged is the option to donate directly from you IRA to a charity and have it count as all or a portion of your RMD requirement without being taxed on the income.
Contributions Age Limits – The age limit for making contributions has been lifted, formerly capped at age 70.5. The only caveat is that it still needs to come from earned income.
Inherited IRA Distributions – This is one that has folks grumbling and how Congress expects to pay for the cost to the federal budget. The new distribution rule for non-spouse beneficiaries is to take the money over ten years with few exceptions. For large retirement accounts this may be a time to review converting your traditional IRA to a Roth.
This is not by any means a complete overview of all the changes in the SECURE Act. If you offer a retirement plan, or are considering offering one to employees, you should make an appointment with your provider and accountant to see how the new laws may affect you. As an individual, you should be covering how the changes may affect your retirement planning during the next update meeting with your Financial Advisor.
The purpose of this article is to inform our readers about financial planning/life issues. It is not intended, nor should it be used, as a substitute for specific legal, accounting, or financial advice. As advice in these disciplines may only be given in response to inquiries regarding specific situations from a trained professional.