According to a 2018 study by Northwestern Mutual, 1 in 3 Americans have less than $5,000 saved for retirement. Moreover, 1 in 5 U.S. workers has no retirement savings at all. But late last year, Congress and the President enacted a law to attempt to remedy this retirement savings dearth in America.
In December of 2019, the President signed provisions of the bipartisan Setting Up Every Community Up for Retirement Enhancement (SECURE) Act into law. These provisions eliminate many potential obstacles to creating and participating in an employer-sponsored retirement plan. The SECURE Act is expansive and contains 29 distinct provisions.
In this article, we’ll provide you with a streamlined version of the most significant ways the SECURE Act will directly impact retirement plan sponsors and their employees. If you want even more information, download this PDF of a full breakdown of each of the SECURE Act’s 29 provisions here.
Key SECURE Act Impacts on Your Retirement Benefits Plan
Multiple SECURE Act provisions make it easier for employers, specifically small business owners, to provide resources for employees to prepare for retirement. Pieces of the SECURE Act also impact plan design and plan administration processes.
1. Tax Credits for Employers who Implement/Expand Retirement Plan Access
Employers with up to 100 employees may receive:
- Up to $5,000 in tax credit for setting up a retirement plan
- A credit of $500 per year for up to three years if they implement automatic enrollment features
These provisions are effective for the tax years beginning after December 31, 2019.
2. Provides Clarity and Guidance for Lifetime Income Options
The SECURE Act grants fiduciary relief for selecting a lifetime income provider. It requires defined contribution plan providers to include a lifetime income disclosure at least once during any 12-month period. This disclosure would illustrate the monthly payments the participant would receive if the total account balance were used to provided lifetime income streams.
3. Steeper Penalties for Employers Who File Retirement Plan Returns Late
Now, the penalty for failing to file a Form 5500 increases to $250 per day (but not to exceed $150,000). Failure to file a registration statement would incur a penalty of $10 per participant per day, not to exceed $50,000.
Failure to file a required notification of change is a penalty of $10 per day, not to exceed $10,000 for any failure. These new penalties apply to returns, statements, and notifications required to be filed, and notices required to be provided after December 31, 2019.
4. Increase in the Penalty for Failure to File
The penalty for the failure to file is increased to the lesser of $435 or 100% of the amount of the tax due. This increased penalty applies to returns due after December 31, 2019.
5. Simplification of Safe Harbor Requirements
The Act eliminates the annual notice requirements and allows later decisions to be a safe harbor for non-elective harbor plans. These requirements apply for plan years beginning after December 31, 2019.
6. Pooled Employer Plans
Small businesses will now be allowed to “pool” together to form larger, qualified retirement plans for their collective employees. This provision should allow smaller companies to afford to provide retirement plans for their employees and create potentially lower costs for both employees and employers due to the size and scope of plans.
Key SECURE Act Impacts on Employees and Participants
Several provisions in the SECURE Act create more significant opportunities for plan participants to better prepare for retirement and change how and when they can access their money.
1. Employers Can Increase Their Automatic Enrollment Cap
Retirement plans may now increase the safe harbor automatic escalation cap from 10 percent to 15 percent. This provision is effective for plan years beginning after December 31, 2019.
2. Part-Time Workers Are Now Eligible
Employers must open retirement plan eligibility to employees who work 500+ hours per year over three consecutive years. This change applies to plan years beginning after December 31, 2020. Twelve-month periods beginning before January 1, 2021, shall not be taken into account.
3. Participants May Take a Distribution to Cover the Costs of the Adoption/Birth of a Child
Retirement plans may now allow participants to take a penalty-free “hardship” distribution of up to $5,000 for the birth or adoption of a child. This provision is effective for distributions made after December 31, 2019.
4. Required Minimum Distributions Age Increased
For those who turn 70 ½ in 2020, the required starting date for minimum distribution is now age 72. Additionally, the age for in-service distributions in pension plan or governmental section 457(b) plan is now age 59 ½. Plus, Individual Retirement Account (IRA) contributions are no longer capped by age. The effective date for this provision is December 31, 2019, for individuals who attain 70 ½ after such date.
5. Lifetime Income Options Must be Portable
The Act creates options for portability if a plan-level decision eliminates the lifetime income option from the plan. This provision is effective for plan years beginning after December 31, 2019.
6. The Elimination of Stretch IRAs – With Some Exceptions
Stretch IRAs are now required to be depleted no later than ten years after the depth of the investor for all, except:
- Minor children (but applies when they reach the age of majority)
- Disable or chronically ill person
- Those not more than ten years younger than the decedent
7. Grad School Compensation
Student aid paid to graduate and postdoctoral students is no longer treated as “compensation” and cannot be used as the basis for IRA contributions. Theoretically, this provision will help graduate students start their retirement savings earlier. The rule is effective for tax years beginning after December 31, 2019.
8. No More Credit Card Loans
The SECURE Act is making your funds in retirement plans more difficult to access before you reach retirement age. Now, participants are prohibited from borrowing money from their plans through credit and debit cards. Ideally, this will help participants avoid debt and help them protect their retirement savings.
9. Expansion of 529 Plans
The SECURE Act expands IRC Section 529 qualified tuition program accounts to now cover costs associated with registered apprenticeships and qualified education loan repayments. Participants may now use up to $10,000 to pay for qualified education loan repayments. This provision applies to distributions made after December 31, 2018.
There’s no doubt that the average employee needs more help saving for retirement. But there is some doubt as to whether the SECURE Act will really accomplish this goal. So, if you have more questions about the SECURE Act, or any retirement benefits questions, contact one of The Olson Group’s retirement advisers, today!