On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law as part of a larger government spending package. The SECURE Act includes several provisions intended to make it easier for people to save for retirement, and also to make it easier for employers to adopt and administer retirement plans. Most of these changes are effective beginning January 1, 2020. The following is a summary of the most important changes:
- Delay in Required Beginning Date. The required beginning date for distributions from retirement plans and IRAs has been increased to age 72 from 70 ½ for anyone who had not attained age 70 ½ by December 31, 2019. There was no change in the rule that allows employees to delay the beginning date for retirement plan payments beyond age 72 until they actually retire. In another nod to longer life expectancies, the IRS recently published proposed regulations reducing the percentage an account holder must withdraw from their account each year after their beginning date.
- Expansion of IRA Eligibility. The rule prohibiting contributions to traditional IRAs by working persons after age 70 ½ has been repealed.
- New Limits on Stretch IRAs. The rules governing how fast IRA and retirement plan accounts must be distributed after the death of an account owner are extremely complex. To help pay for some of its other changes, the SECURE Act has tightened the rules to require that inherited IRAs and defined contribution plan accounts payable to natural persons must generally be paid over ten years after the death of the account owner, rather than over the life of the beneficiary. This limitation on “stretch IRAs” does not apply if the beneficiary is a surviving spouse, a minor child, or a beneficiary who is disabled or chronically ill or less than ten years younger than the account owner.
- Expanded Use of Annuities in Retirement Plans. The SECURE Act has provisions designed to encourage employers to offer annuity options in their plans, which are basically insurance contracts that provide guaranteed income payments to employees for life after they retire. Annuities can also provide death benefits, withdrawal rights, and variable payments based on the stock market. Employers have been reluctant to offer annuities in the past, because they are expensive and there is always a risk the insurance company will be unable to make the payments. The new law mitigates these risks by easing the fiduciary standards that apply when an employer selects an annuity provider. In a related change, defined contribution plans will now be required to give participants estimates of the monthly income they would receive if their account balances were invested in annuities.
- Coverage of Part-Time Employees. Section 401(k) plans will now be required to cover part-time employees who work more than 500 hours over three consecutive years. This only requires that the part-time employees be allowed to make pre-tax contributions from their salary or wages, and does not require that they receive matching or nonelective contributions.
- Withdrawals. A parent can now withdraw up to $5,000 from an IRA or 401(k) account to pay birth or adoption expenses, free of the normal 10-percent penalty on early withdrawals.
- Relaxation of Retirement Plan Rules. The SECURE Act includes several changes that will make it easier for employers to adopt and administer retirement plans. First, it will now be easier for small unrelated companies to band together and adopt a single “multiple employer plan.” Second, an employer wanting to adopt a new plan for the first time can wait to act until the due date for filing its tax return for the year of adoption, rather than the last day of the year of adoption, which was the prior rule. Third, the maximum tax credit for small employers who adopt a retirement plan has been increased to $250 per non-highly compensated employee up to $5,000, and there is a new credit for employers who add automatic contribution arrangements to their 401(k) plans. Fourth, temporary relief from the nondiscrimination rules for closed defined benefit plans has been codified and expanded. Finally, some of the technical rules that apply to 401(k) safe harbor plans have also been eased.
- Increase in Penalties. As another revenue raiser, the penalty for late filings of Form 5500 reports has been increased to $250 per day, subject to a maximum of $150,000, up from $25 per day and a maximum of $15,000.
In sum, the SECURE Act makes several changes in the rules governing 401(k) plans and IRAs. Most of these changes benefit savers and employers.
Please contact Charlie Berquist or Libby Davydov at the firm if you have any questions about this topic or other employee benefits matters.