The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the first major piece of retirement legislation in a decade.
The Act includes almost 30 provisions intended to expand and preserve retirement savings, simplify plan administration and penalize failures to comply.
Here is a brief overview of key provisions:
New automatic enrollment default maximums
To encourage higher participation and contribution rates, the act created a new safe harbor for automatic enrollment. During the first year, default deferrals for automatically enrolled participants can be no higher than 10%. After the first year, the maximum increases to 15%.
Automatic enrollment is one of the issues that contributes to a higher incidence of missing participants and uncashed checks. As a result, it’s a sound practice for plans that have automatic enrollment to consider adopting automatic rollovers.
Automatic rollovers allow plan sponsors to preserve participants’ retirement savings and tax advantages by rolling accounts with small balances that have been left behind into safe harbor IRAs.
Recently, as Department of Labor audits have focused on uncashed checks and missing participant management, some plan sponsors have modified their plan’s automatic rollover provisions so that all accounts with balances less than $5,000 can be rolled over into safe harbor IRAs.
A big nudge for small employers
The incentives for smaller employers to introduce retirement plans have never been better. The SECURE Act increased the start-up cost tax credit so eligible employers receive up to $5,000 for three years.
Additional credits (up to $500 for three years) are available to smaller employers (100 employees or less) when a new plan includes an automatic enrollment feature, or an existing plan adds one.
If the cost of a defined contribution plan is too expensive even with tax credits, or still too administratively complex, there are other alternatives for small businesses, including IRA-based plans, like SIMPLE and SEP IRAs. The least expensive option for employers may be payroll deducted IRAs.
New rules for IRAs
Increasing longevity can make it more challenging for participants to meet retirement goals, so the SECURE Act made changes that will help employees increase and preserve savings in tax-advantaged IRA accounts.
First, the age for required minimum distributions increased from age 70 ½ to age 72 for individuals born on or after July 1, 1949.
Second, it eliminated the age restriction for IRA contributions, so Americans can contribute to IRAs throughout their lifetimes so long as they have earned income.
Third, a popular legacy planning tool has been changed. Under the Act, most designated IRA beneficiaries, who inherit in 2020 or later, will be required to distribute all assets from inherited IRAs within 10 years.
There are a few exceptions, including spousal, disabled, chronically ill and some minor child beneficiaries. In many cases, estate planning strategies with ‘stretch’ IRAs will need to be reconsidered.
Lower barriers for multiple employer plans (MEPs)
The SECURE Act allows multiple employer plans (MEPs) to include two or more unrelated employers, as well as eliminating the “One Bad Apple” rule. This may create economies of scale that make workplace plans more palatable to more employers.
Eligibility for part-time employees
Part-time employees are now eligible to participate in workplace plans. Any employee who has worked at least 500 hours a year for at least three consecutive years and has reached age 21 by the end of the three-year period is eligible to participate.
A safe harbor for lifetime income options
There is now a fiduciary safe harbor for ERISA fiduciaries that would like to include lifetime income investment options, such as annuities, in defined contribution plans. In addition, the Act makes lifetime income options portable. Participants who select these options will be able to roll over annuity contracts from one plan to another, or from one plan to an IRA.
New lifetime income disclosure requirement
As soon as the Department of Labor sets assumptions for estimates and creates a model disclosure, plan sponsors will be required to provide participants with lifetime income disclosures. The communications will show the amount of monthly income that participants’ accounts may provide if invested in annuities that offer lifetime income.
No more 401k plan credit card loans
As of December 20, 2019, plan sponsors can no longer make loans from 401k accounts via credit card or any similar arrangements.
Many provisions in the SECURE Act took effect on January 1, 2020. In some cases, plan sponsors, advisors and consultants will need to modify plan documents to remain in compliance with current law.
It’s essential to review the new rules and evaluate how they may change your plans as soon as possible.
Terry Dunne is senior vice president and managing director of Retirement Services at Millennium Trust Company, LLC. Mr. Dunne has over 40 years of extensive consulting experience in the financial services industry. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.