The SECURE Act just became law. The SECURE Act is the largest change to corporate retirement plan laws since the Pension Protection act of 2006, so if you are a business owner, help operate your company’s retirement plan or a CPA there are a lot of changes to be aware of.
This article is focused on how the SECURE Act changes 401(k) and other similar defined contribution plans. If you are looking for how the SECURE Act affects your personal financial or estate plan, please see this article from my colleague Daniel Lee.
The change to retirement plans generally fits one of three themes, which is how this article will be organized. I’ll talk about the changes that affect corporate retirement plans, when those changes go into effect and any action you should think about taking. This article is a summary, please use the button at the bottom of this article to schedule a meeting with me if you wish to discuss how some of these changes affect your retirement plan.
Encourage Workplace Retirement Plans
These changes were put into place to encourage small businesses who don’t offer a retirement plan, to offer one for their employees.
- Open Multiple Employer Plans (MEP’s) – Plan years beginning after 12/31/2020
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. As always, be aware of the total cost of this plan and your fiduciary requirements before deciding to join a MEP or making a plan change.
- Increase Small Business Tax Credits for New Retirement Plans – Plan years after 12/31/2019
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. Please review this piece before you decide if a 401(k) is right for your business. Our team can help with this decision if you reach out to us for a discussion.
- New Tax Credit for Auto Enroll– Plan years after 12/31/2019
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 – Effective Immediately
This provision puts in place a safe harbor for selecting annuity like products as available investments within the plan, if certain processes are followed. This is a deeply complicated subject that is worth discussing with a 3(38) Investment Manager. Be aware of how any provider suggesting some of these investments are paid, as that can likely give you a clue to that person’s motivation.
- Lifetime Income Disclosure on Participant Statements – 12 Months after DOL Secretary issues regulations
It is incredibly hard for anyone to look at a plan statement with $500,000 balance for example and know if they are going to be okay in retirement. Most of us though, do know how much money we need monthly to live our lives. 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. If you don’t already see monthly estimates on your statements, your plan provider will likely begin including them in the next few years.
Encourage Participation & Preserving Income
- Raised Auto Enrollment Safe Harbor Cap – Plan years beginning after 12/31/2019
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. Please review if your Auto-Enroll & Auto-Increase program falls under the relevant Safe Harbor provisions. If they do, you may consider raising your cap higher than the current 10% maximum.
- Increase RMD (Required Minimum Distribution) Age – Plan years beginning after 12/31/2019
This affects IRAs mostly, but the raise in age for RMDs affects retirement plans as well. Going forward RMDs won’t be required until age 72, currently the age is 70.5. HR professionals, business owners and CPAs should be aware of this change.
- Coverage for Part-Time Workers – Plan years beginning after 12/31/2020; Service before 1/1/2021 does not need to be counted
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. This impact of this change is not completely clear, and this provision is one we will be studying closely over the coming months.
- Penalty Free Withdrawals (Birth or Adoption)– Plan years beginning after 12/31/2019
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. Be aware that this withdrawal option must be added to your plan provisions to be in effect. It is not automatically included in your plan as a withdrawal option.
- Safe Harbor Non-Elective Rules Changes – Plan years beginning after 12/31/2019
Notice requirements are removed for Safe Harbor Non-Elective Plans (Not Safe Harbor Match Plans). There are also changes allowing more time to elect Safe-Harbor Non-Elective plans, though those decisions should be reviewed in detail with your Advisor and Third-Party Administrator.
This is not a complete overview of all the changes in the SECURE Act. There are changes we haven’t covered here; we also won’t know the ramification of some these changes for some time. We will continue to review and analyze these changes and look forwarding to discussing with our clients. If you aren’t a client and want to discuss how these changes may affect you, please reach out to me and let me know if our team can help.
