How the SECURE Act Can Affect Your Retirement Plan

With around 10,000 Baby Boomers turning 65 every day, retirement reform has taken a front seat in the U.S. legislature. In late May 2019, the U.S. House passed (by a near-unanimous vote) the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which seeks to overhaul retirement planning the same way the Tax Cuts and Jobs Act of 2017 overhauled U.S. tax laws.

The SECURE Act’s changes can impact plan sponsors of all types and sizes. Learn more about what’s in this Act and how plan sponsors can (and should) prepare for its seemingly likely passage.

Plan Sponsors Should Prepare Ahead of Potential Changes

The SECURE Act has 29 major provisions. Here are a few proposed changes that could majorly affect plan sponsors:

• Removing the age limitation to contribute to a traditional IRA (currently, anyone over age 70.5 can contribute only to a Roth IRA, not a traditional);
• Allowing small employers to pool their resources to run a group 401(k) plan (adding to the options created by SIMPLE IRAs and SEP IRAs);
• Reducing liability for plan sponsors who offer annuities inside a 401(k) plan;
• Increasing the age for required minimum distributions (RMDs) from 70.5 to 72;
• Providing a $500 tax credit for small employers who encourage their employees to automatically enroll in a retirement plan;
• Eliminating the 10 percent penalty tax for early retirement withdrawals (but only if this withdrawal is used to pay for birth or adoption expenses);
• Requiring defined contribution plans to deliver an annual lifetime income disclosure to plan participants;
• Requiring beneficiaries of inherited IRA accounts to distribute the account within 10 years, instead of “stretching” the distribution period to minimize tax liability;
• Expanding part-time employees’ eligibility to participate in a 401(k) plan;
• Increasing the penalties for a plan sponsor’s failure to file form 5500 and other required notices; and
• Prohibiting qualified plans from allowing participants to take out 401(k) loans through credit or debit cards.

There are more provisions under the SECURE Act that are less likely to impact a broad number of employers. The full text of the SECURE Act approved by the House Committee on Ways and Means (and passed by the House) can be found online.

Key Changes Proposed Under the SECURE Act

The SECURE Act’s passage isn’t guaranteed, and some provisions may be tweaked by the Senate before the final version goes to the President for signature. Nevertheless, plan sponsors would benefit by familiarizing themselves with the Act’s main provisions and making some preliminary plans. Being caught unprepared if or when the Act takes effect could not only leave you scrambling, it could harm your employees’ retirement opportunities.

Part-Time Employee Eligibility

Under current law, employees who work less than 1,000 hours a year (or an average of under 20 hours per week) can be excluded from participating in its retirement plan. Under the SECURE Act, “long-term part-time employees” who work at least 500 hours per year for three years in a row will be able to contribute, as can employees who meet the 1,000-hour threshold. This rule would not exclude employees for reasons such as position or job-title, but it does not affect the ability to impose a waiting period for employer contributions or to impose an age-21 requirement.

If this provision remains in the SECURE Act, it won’t take effect until December 31, 2020. This long implementation period is meant to provide plan sponsors with plenty of time to revamp their retirement plan offerings and review the average number of hours worked by each of their employees to see how many may be newly eligible.

Safe Harbor for Annuities

Annuities play an important role in many retirement plans, providing a lifetime, guaranteed source of income during retirement. However, plan sponsors have long shied away from these investments because of the fiduciary obligations associated with providing an annuity to plan participants and selecting an annuity provider.

The SECURE Act will allow plan sponsors to meet their fiduciary requirements so long as they obtain certain written representations from the annuity provider. This safe harbor provision will be effective upon enactment, and can make annuities a far more attractive option for plan sponsors.

Automatic Enrollment Tax Credit

Studies have shown that retirement plan participation significantly increases when automatic enrollment is deployed. And under the SECURE Act, plan sponsors can receive a $500 tax credit per year for three years when the plan offers auto-enrollment for new hires. Additionally, the business tax credit for plan startup costs would increase from $500 to up to $5,000.

Plan sponsors should consider adding automatic enrollment to their plan, not only for legislation purposes, but to increase participation rates among their employees.

Qualified Birth or Adoption Distributions

A new addition to this bill is an exemption from the 10 percent penalty of early withdrawals from retirement accounts in the event of a qualified birth or adoption. This distribution would allow up to $5,000 and would need to occur within one year after child birth or the adoption final.

PlanPILOT Can Help

Plan sponsors should start working now to determine the practical impact of the SECURE Act, if passed. PlanPILOT can help. As an independent Registered Investment Advisor (RIA), we offer comprehensive retirement plan advisory services to a broad range of plan sponsors, including 403(b), 457, and 401(k) sponsors. We encourage you to contact us at (312) 973-4911 or info@planpilot.com so we can help your retirement plan administration team and plan participants achieve better outcomes.

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