February 18, 2020
Most of the recently passed Consolidated Appropriation Act of 2020 focuses on extenders, tax law changes and general federal budgeting. A piece of this Act that’s worth noting is the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 (the Act). This retirement bill has some major impact for individuals and employers as it relates to retirement provisions. Its inception comes after years of dealing with a very troubled retirement system in the US. This Act was created to encourage employers who have previously experienced expensive and hard-to-administer plans to start offering and promoting them to their employees again. The Act also offers more flexibility for individuals to save and utilize their plans in a way that benefits their specific situation.
How will the SECURE Act impact IRAs?
One of the most notable changes to those who have investments inside an IRA is that the start date for Required Minimum Distributions (RMDs) will now occur the year the owner turns 72 instead of 70 ½. This will impact anyone who wasn’t over 70 ½ by the end of 2019. Further, to compensate for Americans generally living longer, the Act removes the age limit to contribute to an IRA. Under the new legislation, any working individual earning income can keep contributing to their IRA.
In addition, if you inherited an IRA from an individual owner who passed away after December 31, 2019, you may be forced to withdraw all assets from the account within 10 years of the original owner’s death. There are some exceptions to this 10 year distribution limitation. If the IRA assets were left to a surviving spouse, a chronically ill or disabled individual, a minor child or someone less than 10 years younger than the deceased, the 10 year distribution limitation does not apply. If the original owner of the IRA passed away December 31, 2019 or earlier none of these new requirements will apply.
How will the SECURE Act impact my 401(k)?
One of the biggest changes to 401(k) plans is that employers will now be required to offer enrollment to certain part-time employees as well as full-time employees. The Act now requires plans to guarantee eligibility to any employee who works at least 500 hours in at least 3 consecutive years, and reaches age 21 by the end of the qualifying period.
How will the SECURE Act affect business owners?
Small businesses now account for the largest part of businesses as a whole. The SECURE Act has many provisions that will make it easier for small business to provide the same retirement coverage as large corporations. Prior to these changes, many business owners were unable to provide retirement plan options for their employees because it was too difficult to understand or too expensive. Open Multiple Employer Plans (MEPs) will now be created which allow multiple small businesses to pool their resources which will greatly assist with cost effectiveness and ease of administration.
The percentage of companies participating in automatically enrolling qualifying employees into a company 401(k) plan is on the rise. While the employee can always choose to opt out, this auto-enroll has dramatically boosted overall participation in retirement plans. One current plan type is called a “Qualified Automatic Contribution Arrangement” (QACA). For this plan type the automatic employee contribution is 3% of the employee’s pay for the first year, gradually increasing to 6% over the plan’s life, never exceeding 10% for any year. The Act changes the cut off of 10% to 15% with a caveat that it can’t be increased until the second year of the plan as to not have an abundance of employees opting out. A general business tax credit of $500 for employers with no more than 100 employees who received at least $5,000 compensation for the prior year is available for those employers participating in automatic enrollment.
The Act promises to make it an easier process for employers to create “safe harbor” retirement plans which are easier to administer and less expensive to create. It increases the tax credit to help fund the start-up costs of implementing a plan. For pension plan start-ups the tax credit is the greater of $500 or whichever amount is smaller between $250 multiplied by the number of employees or $5000.
How else will the SECURE Act benefit taxpayers?
New parents are now able to withdraw up to $5000 from their IRA, 401(k) or other retirement account at the birth or adoption of a child without having to pay the early withdraw penalty of 10%. For married couples, this means that each parent can withdraw $5000 from their separate retirement accounts. This option is available up to one year from the birth or adoption date. You may also recontribute the
funds at a later date and it will be treated as a rollover. The 10% penalty is NOT waved if you are adopting your spouse’s child, however.
Under the SECURE Act, 529 plan funds can now be used for fees, books, supplies and equipment for registered apprenticeship programs and can also be used for up to $10,000 of student loan repayment.
If you have any questions about how the SECURE Act will impact you or your business, please don’t hesitate to contact your Faw Casson advisor.