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SECURE Act's Effect on Retirement Plans

Here’s a review of the changes that affect small employers and some large ones.

Most of the provisions of the new Setting Every Community Up For Retirement Enhancement Act (SECURE) went into effect Jan. 1, 2020. Part of a federal government spending package, SECURE is considered the broadest piece of retirement legislation passed in 13 years. The new law provides more incentives for individuals to save for retirement and for employers to offer retirement plans.

The Effect on Employers

The following changes affect small employers and some large employers:

Part-time workers gain access to 401(k) plans: Formerly, only full-time employees were allowed to participate in 401(k) retirement savings plans. SECURE allows long-term, part-time workers to participate in 401(k) plans if they have worked more than 1,000 hours in one year, or 500 hours a year for three consecutive years.

Small business gets tax credit for starting retirement plans: Employers with up to 100 employees can receive a minimum tax credit of $500 and maximum credit of $5,000 for starting a retirement plan. The credit is good for the three-year period beginning after Dec. 31, 2019, and applies to SEP, SIMPLE, 401(k) and profit sharing types of plans. An additional credit of up to $500 is available for retirement plans that include automatic enrollment.

Easier to form multiple employer plans: Beginning in 2021, employers from different industries can open a retirement plan by using an open multiple employer plan (MEP). This allows a group of small employers to pool their buying power in order to obtain low-cost, high-quality retirement plans. SECURE also eliminates the Internal Revenue Service’s (IRS) “one bad apple” rule, which penalizes all employers participating in an MEP if one employer fails to satisfy the MEP tax qualification rules.

Easier to offer annuities: Annuities are insurance policies that convert retirement savings into income. While pension plans commonly use annuities, they have not been as popular as 401(k)s. With SECURE, some of the fiduciary requirements used to vet companies and products before they can be included in a plan have been removed. This makes it easier for employers to let employees convert their savings into guaranteed lifetime income through annuities. The new rules also protect employers from being sued if the plan’s insurer doesn’t make the annuity payments.

Raises the cap for auto enrollment: Employers who auto enroll employees into retirement plans now can gradually withhold as much as 15 percent of an employee’s salary — up from 10 percent.

The Effect on Individuals

The following changes affect individuals who have employer-sponsored plans or Individual Retirement Accounts (IRAs):

Stretch IRAs eliminated: It’s no longer legal to have a “Stretch” IRA. Previously, if you named anyone other than your spouse as the beneficiary of your IRA, that beneficiary could choose to let the money in the IRA grow tax-deferred and pass the remaining amount to his or her children. The new legislation requires non-spouse beneficiaries to withdraw all the money in the IRA within 10 years of the IRA holder’s death. Exceptions to the rule include assets left to a surviving spouse; a minor child; a disabled or chronically ill beneficiary; and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.

Required Minimum Distribution (RMD) age changed: Previously, individuals were required to take distributions from their IRAs or 401(k)s at age 70½. Under the new law, individuals who are not 70½ at the end of 2019 can now wait until age 72 to begin taking distributions. This allows investors additional time to allow their retirement accounts to grow without being depleted by distributions and taxes. If you turned age 70½ in 2019 and have already begun taking your RMDs, experts recommend you continue to take your RMDs. A tax advisor can tell you if the IRS provides further guidance regarding 2020 distributions.

Longer time to make IRA contributions: Individuals can now contribute to an IRA after age 70½, the same as they can with 401(k)s and Roth IRAs — as long as they are still working. This change doesn’t apply for tax year 2019. It will be effective for tax year 2020 contributions and individuals can make their tax year 2020 contribution until April 15, 2021.

More time for Roth Conversions: A Roth IRA, unlike a traditional IRA, allows tax-free withdrawals as long as the individual meets certain requirements. Plus, there are no RMDs. The goal of a Roth conversion is to convert taxable money in an IRA into a Roth IRA at lower tax rates today than are expected in the future. While individuals can do Roth conversions after they start RMDs, the process is harder. Therefore, individuals now have an additional two years to make Roth IRA conversions without having to worry about the impact of required distributions.

Some early withdrawals allowed: SECURE allows investors to make an early withdrawal of up to $5,000 from a retirement account without penalty in the event of the birth of a child or an adoption. Formerly there was a 10 percent penalty for early withdrawals.

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