SECURE Act Brings Change to Retirement Plans

The SECURE (Setting Every Community Up for Retirement Enhancement) Act became law on December 20, 2019 as a part of the Further Consolidated Appropriations Act. The Act made several reforms to retirement planning, including Individual Retirement Accounts (IRAs), 401(k) plans, plan administration, and employer funding.

• The SECURE Act will make it easier for small business owners to set up “safe harbor” 401(k) retirement plans. The Act increases the cap under which an employer can automatically enroll workers in the retirement plan from 10% of wages to 15% percent unless the employee elects otherwise. This can be an effective way to increase participation in the plan. The Act creates a maximum tax credit for small businesses establishing certain retirement plans of $500 for startup costs for the first three years of the plan as part of the General Business Credit. (The credit is non-refundable, making it of very little use to tax-exempt employers.)
• Certain part-time employees must now be permitted to participate in 401(k) plans. Businesses must allow part-time employees who have worked three consecutive years with at least 500 hours of service to enroll. Previously, employees needed to have completed 1,000 hours of service during a twelve-month period.
• Age limits for traditional IRAs have also been modified. The age limit of 70½ to contribute to an IRA has been eliminated. In addition, the age at which traditional IRA owners have had to begin receiving required minimum distributions has been increased. Previously, distributions were required to begin at age 70½, but now may begin at 72. The beneficiary of an inherited IRA, however, must draw the balance down over 10 years, rather than over the remainder of the beneficiary’s life. 
• Certain benefit plans will now be able to file a Consolidated Form 5500. The Act requires the IRS and Department of Labor to update the Form 5500 so that similar deferred compensation plans can file as a consolidated group for plan years beginning in 2022.  Plans that will be eligible for consolidated filing must have the same trustee, named fiduciary, administrator, plan year, and investment options for participants and beneficiaries. This change will reduce administrative costs, making it easier for smaller employers to sponsor a retirement plan and improve retirement savings.
• The SECURE Act also significantly increased compliance-related penalties for retirement plans. Penalties increased by at least a factor of 10, with Failure to File Form 5500 penalties now capping out at $150,000, up from a maximum of $15,000.

The SECURE Act creates some important opportunities but also some new challenges, both for plan participants and plan sponsors. If you have any questions about the SECURE Act and its impact on your organization, please contact us.