Understanding the SECURE Act

LAST REVIEWED May 01 2020 9 MIN READ

By The Human Interest Team

There are many laws governing retirement plans to ensure they’re properly administered and effective in helping employees save for retirement. If you’re participating in a retirement plan, you may want to learn about the SECURE Act, which has far-reaching implications for both employers and employees. Find out what to expect now that the SECURE ACT is in effect. 

What Is the SECURE Act?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act passed the House of Representatives in July and the Senate on Dec. 19, 2019, and was signed into law by President Donald Trump on Dec. 20. Despite the House’s overwhelming support for the SECURE Act, Senate members didn’t pass the bill until it became part of the appropriations and tax-extender bills that were approved after Dec. 18, 2019. 

The SECURE Act consists of many significant provisions for improving access to tax-advantaged retirement accounts and preventing older citizens from outliving their assets. It includes a wide range of long-overdue reforms that make it easier for Americans to save for retirement. 

What Are the Highlights of the SECURE Act?

The passing of the SECURE Act, 2020 brings a lot of changes to retirement plans, including: 

New Age Requirement for Withdrawal

According to the SECURE Act, 401(k) and other defined-contribution plans, IRAs, and defined-benefit pension plans will allow participants to delay taking their required minimum distributions (RMDs) until they reach the age of 72, up from the previous age of 70 1/2. RMDs refer to the minimum amounts participants are required to withdraw from their retirement plans every year.

Elimination of Stretch IRA

With the SECURE Act, beneficiary IRA has changed in a number of ways. Upon the death of an account holder, non-spouse beneficiaries must take distributions within 10 years. Previously, non-spouse beneficiaries were allowed to “stretch” RMDs from an inherited IRA account over their lifetimes, so that they could let the money grow in a tax-free manner for decades. Following the implementation of the SECURE Act, a stretch IRA is no longer possible. This new rule also applies to inherited funds in 401(k) or other defined-contribution plans.

However, there are exceptions to the rule, including spouses who are disabled or not more than a decade younger than the account holder. Minor children who inherited IRAs are also exempt from the rule, but only until they’re no longer minors. Even with the SECURE Act, inherited IRA owners can rest easy. The new rule that eliminates stretch IRA only applies to beneficiaries of IRA account holders who pass away after the end of 2019.

Improved Safe Harbor 401(k) Plans

With the SECURE Act, safe harbor 401(k) plans will have simpler rules and notice requirements in relation to non-elective contributions. The amount of time for businesses to adopt new retirement plans will be extended from the end of the year to the deadline for filing company tax returns. As such, employers will have more time to cover their employees with profit-sharing contributions.

In addition, following the introduction of the SECURE Act, safe harbor plans with an automatic-enrollment are allowed to raise the cap on increasing payroll contributions from 10% to 15% of the paycheck of an employee. Employees can also opt-out of the step-up. The increase is typically made on an annual basis, either when the year begins or when annual raises are given out.

Inclusion of Part-Time Workers Into 401(k) Plans

Part-time workers will also benefit from the SECURE Act 401(k) plans. Sponsors are now required to include long-term part-time workers in their plans unless they’re offering collectively bargained plans. Employees who are 21 or older and have completed a minimum of 500 hours of service annually for three consecutive years are eligible for 401(k) plans. Nonetheless, according to the SECURE Act, safe harbor contributions aren’t a requirement for these employees. Previously, part-time employees who haven’t worked 1,000 hours within a 12-month period could be excluded.

Small Business Incentives

Following the passing of the SECURE Act, small business owners can get a bigger tax credit for starting a retirement plan. In some circumstances, the tax credit may be as much as $5,000. Only business owners with 100 or fewer employees over a duration of 3 years are eligible. According to the SECURE Act, 401(k), SEP, SIMPLE, and profit-sharing plans are the retirement plans that qualify for this tax credit. Also, small businesses that add auto-enrollment of new hires to their retirement plans are entitled to an additional $500 tax credit for three years.

To help businesses reduce their administrative costs, the SECURE Act will provide a consolidated Form 5500 for specific defined contribution plans with the same plan administrator. Nevertheless, it also imposes penalties on companies that fail to file Form 5500 or other retirement plan returns, required withholding notices, and required notifications of changes. 

Download this guide to learn about the tax credits and benefits that come with the SECURE Act.

Open Multiple Employer Plans (MEPs)

The SECURE Act makes it possible for small business owners to band together in “open” MEPs to reduce their costs and responsibilities. Previously, only “closed” MEPs were allowed. Employers could only participate in an MEP if they belonged to the same industry or trade association or share other common organizational relationships.

The Department of Labor had issued a final rule earlier to allow open MEPs. These MEPs were actually association retirement plans offered by local chambers of commerce or associations established for the purpose of administering them. With the SECURE Act, MEP administration can be managed by pooled plan providers such as financial services companies.

Less Risky In-Plan Annuities

In-plan annuities can provide plan participants with a lifetime income throughout their retirement. However, employers are worried they may be sued for breaching fiduciary duties if their annuity providers face problems in the future. Also, they may have a difficult time determining their responsibilities for overseeing and monitoring their providers on an ongoing basis. With the SECURE Act, the 401(k) plan “annuity conundrum” is addressed through the creation of a safe harbor that can be used when selecting a group annuity as an investment in a defined-contribution plan. New rules have been established for the selection of providers.

If you want to know more about the SECURE Act, 401(k) plans, or any other topic related to retirement planning, feel free to contact the helpful team at Human Interest.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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