SECURE Act: Summary of Key Provisions In The New Legislation
The SECURE Act (Setting Each Community Up for Retirement) recently passed, and the effects on employer-sponsored retirement plans as well as individual tax situations are the most significant since the Pension Protection Act of 2006. The following are some important takeaways that take effect in 2020 unless otherwise noted.
Allowing unrelated employers to adopt and be part of the same plan was previously only typical of related employers with common ownership. This may provide an attractive opportunity for smaller companies to share administrative fees, plan document fees, and—depending on the number of participants in the plan—possible savings on pension audit fees. This could conceivably be a more cost-effective route for those employers who would like to offer a plan but need the fees associated with the plan to be more affordable. Utilizing a multiple-employer plan will be available from 2021 onward.
Starting a new plan
There is a credit for small employers if and when they do start their plans. Starting in 2020, the flat dollar limit on the credit available is increased to the greater of:
- $500, or
- The lesser of (i) $250 multiplied by the number of non-highly compensated employees, or $5,000, the amount at which the credit is capped.
- The credit applies for 3 years
If the plan includes an automatic contribution arrangement, the law provides a credit of $500 per year for 3 years. These credits provide an incentive for employers who do not sponsor retirement plans.
Different treatment for part-time employees
There is now a significant change for part-time employees that grants more employees access to retirement plans; if an employee is at least 21 years old and has worked at least 3 consecutive 12 month periods for the employer and in those periods had at least 500 hours of service, they will now be able to elect to defer into the employer’s 401k plan.
Many rules regarding the inclusion of these employees in employer contributions, nondiscrimination testing, and coverage testing are now disregarded. Furthermore, the law allows an employer to ignore years of service prior to 2021 so the soonest these part-time employees have to be considered for purposes of 401k deferrals is 2024.
Safe Harbor plans
Safe Harbor plans will become easier to administer; they no longer require sharing the Safe Harbor notice for the 3% non-elective Safe Harbor contribution with participants, employers have extra time to amend Safe Harbor plans mid-year as well as an extended time to adopt a Safe Harbor plan.
This new deadline also allows an employer to enter the next year and wait to see how the prior year looks before adopting a new plan.
Additional time to plan
Employers are now able to a plan by the business tax filing due date (including extensions) and have the plan effective for the prior year—previously, the deadline was by the end of the year for which you wanted the plan to be effective. Note that this new rule only applies to employer contribution plans, and if you have a 401k feature, this feature must be adopted before any 401k deferrals take place. This new deadline also allows an employer to enter the next year and wait to see how the prior year looks before adopting a plan.
Penalties for not filing
There will be increased penalties for failure to file retirement plan information returns in a timely fashion—although these filings are information returns, the IRS, and maybe even the Department of Labor, assess significant penalties should a filing be delinquent.
The IRS penalty has been $25 per day capped at $15,000, but the $25 per day penalty has now been increased 10x to a minimum of $250 per day; not to exceed $150,000. Department of Labor penalties could also be assessed on top of the already significant IRS penalties.
The government offers a “reduced penalty” program in the unfortunate event a filing is missed or delinquent.
Plan distributions and contributions
The age at which the taxpayer is required to begin taking distributions has been revised upward from 70½ to 72.
The new legislation introduces a maximum allowed time period for drawing down an account to a zero balance 10 years following the death of the account owner and eliminates the lifetime distribution option. The effect will cause most beneficiaries to take distributions at a faster rate than they would under a “stretch IRA” with distributions paid over the beneficiary’s expected lifetime—though there are still exemptions for:
- Minor children
- Disabled individuals
- The chronically ill
- Those beneficiaries not more than ten years younger than the IRA owner
Additionally, taxpayers can make contributions to IRAs after 70½ if they still have earned income.
529 Plans can now be used for repaying student loan debt up to $10,000. Many times, taxpayers have funds left in the 529 plan after the student graduates and now the leftover 529 amounts can be used to pay that debt over the student's lifetime.
Distribution penalty exceptions
Another exception to the distribution penalty rules was added. There is now an exception for distributions taken related to the birth or adoption of a child called the “qualified birth or adoption” distribution. Up to $5,000 can be distributed and will not be assessed a penalty; however, taxes will still be due.
The Secure Act has introduced a significant number of changes to retirement plan rules, and it’s advised that you consult with us if you would like more information on the changes. Each employer and situation warrants a conversation in order for you to be guided and able to better take advantage of the new rules—we are here to help, and you can contact Christine Bentson, CPA, RPA, CEBS at firstname.lastname@example.org or (651) 407-5808.