The SECURE Act: What You Should Know

The SECURE Act (Setting Every Community Up for Retirement Enhancement) was passed on December 20, 2019 with many of its provisions going into effect January 1, 2020.

This act impacts several areas of retirement plans, including:

  • Individuals preparing for retirement
  • Participants in an employer sponsored plan
  • Parties responsible for the oversight of employer-sponsored Defined
    Contribution (DC) retirement plans – 401(k), 403(b), and most 457(b) plans

What you need to know as a plan administrator or fiduciary to a DC plan right now:

  • Raises the RMD age to 72. The Required Minimum Distribution (RMD) age goes from age 70 ½ to age 72. If you won’t reach 70 ½ by the end of 2019, it gives you the flexibility to take your RMD later.
  • In-service distributions from defined-benefit plans and government 457(b) plans can be taken as early as age 59 ½, instead of age 62 for pensions or 70 ½ for governmental 457(b).
  • Provides for new In-Service Distribution Choices (optional Plan provisions), including:
    • Birth or adoption of a child, up to $5,000 can be withdrawn from an IRA or DC plan for related costs. The withdrawal is taxable, but penalty-free (an unusual departure from other hardship distribution rules), and the participant is allowed to pay this amount back to their account.
    • Disaster Tax Relief is available to those affected by presidentially declared disasters that occurred between 1/1/2018 – 2/18/2020. Affected individuals may take a penalty free plan distribution of up to $100,000 per disaster. It may be be paid back to a qualified plan within three years. All taxes owed on the distribution can be spread evenly over three years.
    • The Loan Limit for a qualified disaster increased from $50,000 to $100,000 (via the Taxpayer Certainty and Disaster Relief Act of 2019) and repayments can be delayed for up to one year.
  • Raises Default Savings Cap on Auto Enroll Safe Harbor Plans which allows automatic-enrollment safe harbor plans to increase the cap on raising payroll contributions from 10% to 15% of an employee’s paycheck.
  • Increases Start-up Tax Credit for those establishing a new plan. New formula is a minimum tax credit of $500 and a maximum credit of the lesser of $250 credit per covered non-highly compensated individual or $5,000.
  • Automatic Contribution Tax Credit, up to $500 for start-up plans and existing plans that convert to include an eligible automatic contribution arrangement.

Important changes going into effect later, with a much delayed impact

  • Part-Time Employee Participation. Employers will now be required to include long-term part-time workers as participants in DC plans except in the case of collectively bargained plans. Eligible employees are defined as having completed at least 500 hours of service each year for three consecutive years and are age 21 or older. Employers do not have to count hours worked prior to year 2021, therefore no part-time employee will be required to be eligible until 2024.
  • Multiple-Employer Plans. Unrelated small employers will be able to band together in “open” 401(k) multiple-employer plans (MEPs)—also referred to as pooled employer plans (PEPs)—potentially reducing the costs and administrative duties each employer would otherwise bear alone.Currently, only “closed” MEPs are allowed, where participating employers must share common organizational relationships such as part of same PEO or trade group.
  • Fiduciary Relief for Offering In-Plan Annuities. Annuities can give participants lifetime income during retirement, but common concerns to offering this option have been:
    • Portability of the annuity
    • Understanding competitiveness and appropriateness of the annuity (fees & features)
    • Potential fiduciary suits for breach of duties if annuity provider selected faces problems years from now, along with documented, ongoing monitoring and oversight of the provider.To address the 401(k) plan “annuity conundrum,” the SECURE Act creates a safe harbor that employers can use when choosing a group annuity to include as an investment within a DC plan. The SECURE Act also increases the portability of annuity investments by letting employees who take another job or retire, move their annuity to another 401(k) plan or to an IRA without surrender charges and fees.
  • Annual Disclosure of Projected Income. Plans will be required to provide participant statements which annually disclose an estimate of the monthly payments participants would receive if their total account balance were used to purchase an annuity for the participant and/or the participant’s surviving spouse. Final rules and implementation are to be determined.

A few other changes for DC Plan Administrators to note

  • Penalties Increase Significantly. Failing to file timely Form 5500’s can be assessed up to $250 per day, not to exceed $150,000; late Form 8955-SSA filings can be assessed up to $10 per day, not to exceed $10,000; and failing to provide income tax withholding notices can be assessed a penalty of up to $100 for each failure, not to exceed $50,000.
  • Prohibits the distribution of plan loans through savings plan credit cardsso that funds are not easily available for routine or small purchases.
  • Simplified Safe Harbor Rules. For plans that make the Non-Elective Safe Harbor Contribution, legislation eliminates the safe harbor notice requirement. The bill also permits amendments to non-elective status at any time before the 30th day before the close of the plan year.

Important individual retirement planning changes

  • The ability to stretch inherited IRAs and DC Plan accounts has been reduced. This is a measure to help pay for the act and accelerate tax revenue. In short, a non-spousal beneficiary could stretch distributions from an inherited IRA or DC account over very long periods of time (expected lifetime, which could span decades), thus keeping a large portion invested and potential tax implications to a controlled minimum.Going forward, the account must be fully distributed in 10 years. This is expected to cause larger amounts to come out at potentially higher marginal tax rates. Exceptions to the 10 years exist with surviving spouses, minor children until they reach age of majority, and other specific circumstances.
  • The ability to contribute to a Traditional IRA after age 70 ½ is added. The ability to contribute to Roth IRA after 70 ½ remains in place, subject to all other existing rules and limitations.
  • Up to $10,000 of a 529 account can be used to pay the 529 beneficiary’s student loans. This gives more flexibility over how and when the 529 money is used. It could also represent state tax savings to funnel money through a qualified 529 to pay off current student loans.

Final Commentary

The SECURE Act is important and significant legislation. It passed on a bi-partisan basis by a wide margin, and is a large step toward strengthening our retirement system. It builds off the proven success of DC plans to help employees accumulate for retirement.

While the SECURE Act came about with little reaction time, it does include a remedial amendment period. Sponsors of non-government plans have until December 31, 2022 to amend if a calendar plan and government plans until end of 2024 if a calendar plan.

At M3 Financial, we engage and partner with you to navigate the options and potential implications of all industry regulations.

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ADDITIONAL INFORMATION:

Access this SECURE Act Provisions and Effective Dates chart created by the National Association of Plan Advisors (NAPA) for additional details and a timeline of implementation.

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Investment advisory services offered through M3 Financial, a registered investment advisor and a separate entity from M3 Insurance.

The content of this document is for Informational purposes only and should not be construed as legal, tax or investment advice. Please consult your professional council for any specific advice.

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