On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which has a laudable goal of expanding opportunities to increase individual retirement savings. The new law enacts several changes to employer-sponsored retirement savings plans, which historically have helped individuals save more for retirement than traditional IRAs.
Advisors working with business owners who have or are considering an employer-based retirement plan should familiarize themselves with the four most prominent changes laid out in the SECURE Act:
- Offering lifetime income annuity options in retirement plans
- Changes to enrollment requirements, tax credits, and tax-filing deadlines
- Adoption of multiple employer plans (MEPs)
- Eligibility of part-time employees in 401(k)s
Enhancing Lifetime Income
Several provisions in the new law encourage employers to offer lifetime income annuity options in their retirement plans. The key change of the SECURE Act is an enhancement of the fiduciary “safe harbor” protections for employers when assessing financially secure life insurance companies that provide annuities in employers’ qualified plans.
Enrollment and Tax Changes
The Act’s elimination of some regulations surrounding non-elective contribution disclosure requirements now allows these requirements to be waived as long as the employer contributes at least 4% of the employee’s compensation to the plan.
Additionally, the SECURE Act allows an employer to automatically enroll an employee in its retirement plan at a higher cap—up to 10%, with an automatic escalation of contributions up to 15%.
As an incentive, the new law also increases the tax credit available to small businesses who set up a retirement plan, from $500 to up to $5000 (dependent on circumstances).
Finally, the Act extends the period businesses can adopt new retirement plans to the business tax filing due date (including extensions). This change allows employers additional time to cover employees with a profit-sharing contribution.
Multiple Employer Plans
The SECURE Act allows unrelated small businesses to come together in 201(k) multiple employer plans (MEPs), reducing the administrative burden and overall costs individual businesses would otherwise shoulder alone. The Act also insulates businesses in a MEP from penalties incurred if other MEP members violate fiduciary rules.
For plan years after December 31, 2020, the SECURE Act mandates that all 401(k)s allow part-time employees to make deferral contributions as long as the employee works at least 500 hours during three consecutive 12-month periods. However, such part-time employees may still be excluded from eligibility for matching or non-elective contributions.
If you have any questions regarding the implications of the SECURE Act’s provisions on personal retirement planning, please read our previous blog article, “Will the SECURE Act Affect Your Clients’ Financial Plans?” or contact our Advanced Planning team at firstname.lastname@example.org.