SECURE Act (Setting Every Community UP for Retirement Enhancement)
Numbers in Boxes administers retirement accounts for clients and in this role we complete regular compliance trainings. I recently attended a webinar given by Ron Ulrich, Sr. Director of ERISA Compliance and Consulting for ADP Retirement Services. Here are some key takeaways about the SECURE Act from the webinar:
The SECURE Act became law on 12/20/19. It was so close to the end of the year, that no one paid attention to it at the time because its provisions would go into place in 2020. So, the first time you can actually apply for any of these tax benefits is after FY 2020, which is rapidly approaching!
The Act has lots of pieces. For them to be relevant, you have to have a business with employees for whom the business provides a retirement plan (or be thinking about creating such a plan). Furthermore, the retirement plan must be one of the ones that offers tax benefits (such as pre-tax contributions): 401k / defined-contribution plans / defined-benefit pension plans / some IRAs. If you don’t have employees or don’t and won’t provide a retirement plan anytime soon, you don’t have to worry about the SECURE Act.
Piece 1: Credits for small businesses to create retirement plans for their employees and for those plans to automatically enroll the employees.
Does your business have fewer than 100 employees?
Did you (during 2020) create a new retirement plan for your employees (the tax benefits kind)? Or are you planning to create a retirement plan for your employees? Would tax credits help you do this?
If the answer to these questions is no, you can skip this part. Go to Piece 2.
Piece 1 provides tax incentives for businesses to create new plans and to automatically enroll their employees.
Small businesses (those with fewer than 100 employees) can get a credit for up to 50% of the start up and admin costs of creating a new plan during the first 3 years of the new plan. That amount is capped at $5,000 per year ($250 per Non Highly Compensated Employee).
If the plan is set up with a specific kind of Automatic Enrollment (Eligible Automatic Contribution Arrangement -- it has specific notice requirements), the small biz can get a $500 credit per year for 3 years.
Piece 2: Provides flexibility for safe harbor non-elective plan designs.
Do you offer a safe harbor non-elective plan? (One where the employer contributes to all eligible employees’ retirement plans at a specified level without requiring employee contributions)?
If your answer to this is no, you can skip this part. Go to Piece 3.
Piece 2 of the Act changes what notices need to be provided, the idea being to reduce administrative burdens.
Also, you can now change your nonelective contribution up to 30 days before the end of the plan year to make it 3% (or 4% to the end of the next/following year).
Piece 2 also provides some relief in the area of non-discrimination testing. (If you offer 401k/defined contribution plan/defined-benefit pension plan/some IRAs, you must do non-discrimination testing that ensures that your plan isn’t unfairly benefitting Highly Compensated Employees (HCEs) at the expense of Non-Highly Compensated Employees). The SECURE Act offers new flexibility by allowing you to test your plan for non-discrimination during the year and/or after the year and, if you fail, you are permitted to take action after the fact to remedy it (such as refunds to HCEs or bumping up to the 4% safe harbor). That said, there’s not quite enough info on how exactly to implement this yet.
Piece 3: Allows new birth/adoption withdrawals.
Do you have employees that want to withdraw money from their retirement plans for a birth or adoption?
If the answer to this is no, you can skip this part. Go to Piece 4.
Getting money out of a qualified retirement plan without penalties can only be done in very limited circumstances. Piece 3 of the Act creates a scenario where you can take up to $5,000 out of your qualified retirement plan to financially support a new birth/adoption in your family (starting as of 1/1/2020). You have to take the funds within a year of the birth/adoption. It’s still taxable, but there is no early withdrawal penalty (which would otherwise be 10%). Then you can put that money back into a qualified plan or IRA. The Act also stipulates that whoever is administering the retirement plan doesn’t have to collect proof/documentation (like a birth certificate etc). It can be self-certified by a plan participant.
Piece 4: Required Minimum Distribution (RMD) age increased.
Do you have current or retired employees on your retirement plan that turned 70 ½ on or after 1/1/2020?
If the answer to this is no, you can skip this part. Go to Piece 5.
Piece 4 increases the RMD from 70 ½ to 72. If you turn 70 ½ before 1/1/2020 then you have to follow the old rules. But if you turn 70 ½ after 1/1/2020 you can wait until you’re 72 to start taking money out of the plan. After this rule was enacted, covid happened, and the government changed course. When the stock market plummeted in March 2020, they decided that it didn’t make sense to make people start taking minimum distributions even if they were 70 ½ or 72 or whatever. With the CARES Act, if anyone HAD taken required minimum distributions during 2020, they were allowed to put them back into their retirement accounts until August, and 2020 no longer has any minimum distributions.
Piece 5: Expands coverage to long-term, part time workers.
Do you have employees who are long-term, part timers?
Do you offer a retirement plan to your employees (401k/defined-contribution plan/defined-benefit pension plan/IRA)?
If the answer to this is no, you can skip this part. Go to Piece 6.
Part time workers have generally not been eligible for retirement benefits. Now, with the SECURE Act, employers who offer retirement plans must offer them to some part time workers (those who work at least 500 hours in 3 consecutive years starting 1/1/2021). These qualified part-time workers must be offered the ability to participate in a plan-- at least the ability to contribute money from their own salary. You don’t have to offer them other employer matches, but they do get to do pretax contributions of their own. (These folks will not be included in non-discrimination testing). 1/1/2021 is when you have to start tracking hours for eligibility beginning 1/1/2024. So get ready to start tracking your part-time employees’ hours to make sure you are offering the retirement plan to all who are required to have the ability to participate!
Piece 6: Lifetime income disclosure.
This Piece gives people who save for retirement more and better information on how long the retirement savings will last. Now employers must provide a statement that shows what future monthly payouts will be, based on how much a person has saved to date. Employers have to show 2 different scenarios: (1) what it would look like as an annuity for the one person whose retirement account it is or (2) what it would look like as a qualified 100% joint and survivor annuity. This info has to be on benefits statements on or before 9/18/2021.
Piece 7: Increased penalties on Form 5500.
To pay for the new benefits described above, the penalty for filing form 5500 late is increasing x10 from $25 to $250 per day. The new max penalty is also 10x what it used to be. These new rates started on 12/31/19. If you happen to be late now, there is an alternative program where you can decrease the late penalty to $10/day via the Delinquent Filer Voluntary Compliance Program (DFVCP).
I hope you enjoyed reading these key takeaways about the SECURE Act. Of course there’s a lot more to know about it, but I hope this at least gives you some idea of whether and what parts need to be on your radar. If you have any questions about how the SECURE Act may apply to you, I hope you’ll reach out!
