Signed into law on Dec. 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act is designed to help thwart America’s growing retirement crisis. Here’s how the Act impacts employers, employees, and everyone else.
Impact on Employers
Multiple Employer Plans (MEPs)
MEPs allow unrelated employers to band together and jointly sponsor a 401(k) or similar defined contribution plan. The rationale is that through the MEP employers can save more in 401(k) administrative costs than if they were to offer the plan on their own. MEPs also make it easier for small employers to offer the same quality, affordable retirement plans as their larger counterparts.
However, to be able to join a MEP, small employers had to pass a strict “commonality of interest” test. Note that in a final rule, the U.S. Department of Labor simplifies the “commonality of interest” for Association Retirement Plans (ARPs) — which are a type of MEP. Under this rule, small employers only need to share a common industry or geographic location to be able to join an ARP.
The SECURE Act goes further by eliminating the “commonality of interest” requirement, thereby enabling unrelated small employers to jointly sponsor a single retirement plan no matter their industry or geographic location.
“One Bad Apple” Rule
Prior to the SECURE Act, if one employer in a MEP violated certain 401(k) plan rules, then all employers in that MEP could face consequences. The SECURE Act removes this “one bad apple” rule so that compliant employers in a MEP will not be penalized for the actions of a noncompliant member.
Tax Credits for Small Employers
Small businesses that establish a new retirement plan used to be eligible for a plan startup tax credit of up to $500 per year, for three years. The SECURE Act raises the maximum plan startup credit (for three years) to $5,000 per year.
The Act also creates a new tax credit of up to $500 (for three years) for small employers whose new retirement plan includes an automatic enrollment feature.
Regulatory Penalties
The SECURE Act drastically increases the penalties for failure to file plan returns — such as Form 5500, registration statement, and notifications of change.
Impact on Employees and Everyone Else
Long-Term, Part-Time Employees
Employers must permit long-term, part-time employees to participate in the company’s retirement plan so long as they work at least 500 hours per year for three consecutive years. Previously, employers could exclude part-time employees with less than 1,000 hours of service per year.
Automatic Savings Increase
Thanks to the SECURE Act, employers with a safe harbor 401(k) plan that allows automatic increases can raise participants’ contributions rate from the previous 10% to 15%. This means that unless employees opt out of the increase, their 401(k) contributions could increase every year, until the amount reaches 15% of their pay.
Lifetime Income Investments
The SECURE Act encourages lifetime income streams by permitting employers to offer annuity options and to make those investments portable. So, if a participant leaves their job, they can rollover their lifetime income investments to another qualified retirement plan.
Disclosure Statements for Lifetime Income
Employers must provide statements to defined contribution plan participants, showing what they would receive monthly if their total account balance were used to deliver lifetime income — such as through a qualified annuity.
Required Minimum Distribution (RMD) Age
Prior to the SECURE Act, participants had to start taking distributions from their retirement plan at age 70 and a half. The Act raises this age to 72.
RMDs for Beneficiaries of Deceased Account Holders
Under the SECURE Act, certain 401(k) and IRA beneficiaries must fully withdraw account balances by the 10th year following the account holder’s death.
Childbirth or Adoption Expenses
Parents can now take withdrawals of up to $5,000 from their retirement plan, on a penalty-free basis, to pay for expenses associated with the birth or adoption of a child.
529 Education Savings Plans
The SECURE Act expands the expenses that a 529 education savings plan may cover. Among these additions are costs associated with homeschooling and registered apprenticeships plus up to $10,000 to repay student loan debt.
Plan Loans through Credit Cards
Employers used to be able to let plan participants take 401(k) loans through credit card arrangements. This can, however, result in participants taking loans for small and routine purchases, which could diminish their retirement savings over time. For this reason, the SECURE Act forbids the distribution of 401(k) loans via credit cards or similar arrangements.
Additionally, the SECURE Act repeals these Affordable Care Act taxes:
- Cadillac Tax
- Medical Device Tax
- Health Insurance Providers Tax
This overview looks at some of the most impactful aspects of the SECURE Act. For a deeper understanding, consult with a financial advisor.
