Given our current reality, it is understandable that a landmark piece of legislation that was adopted shortly before all the upheaval occurred may have been overlooked.
The Secure Act became law on December 20, 2019. It was designed to make employer-sponsored retirement plans easier to administrate and less expensive to implement. As with all legislation, there are both carrots and sticks included. What follows is a summary of some of the key provisions of the Secure Act.
Small Employer Automatic Enrollment Credit: To qualify for this credit, an employer must offer a 401(k) plan or SIMPLE IRA that includes automatic enrollment. The credit is $500 per year for a three-year period. This is available for both existing plans that add the provision or new plans that include them in the setup process.
Small Employer Pension Plan Startup Costs Credit: To qualify for this credit, an employer must set up a brand new 401(k) or SIMPLE IRA plan. New plans must cover at least one nonhighly compensated employee who is also not an owner of the business. The maximum amount of the credit you can potentially qualify for is $5,000 per year for a three-year period.
Safe Harbor 401(k) Plans and Timing of Plan Amendments and Adoptions: The Secure Act very generally permits employers to add a safe harbor feature to their existing 401(k) plans during the year; such additions are permitted very late in the year and even after the end of the year if the employer contributes at least 4% the of employees’ pay instead of the regular 3%. It also allows employers to adopt a plan for a taxable year as long as the plan is adopted by the due date for the employer’s tax return for that year, including extensions.
Long-Term, Part-Time Employees: Employers are required to include long-term, part-time workers as participants in defined-contribution plans except in the case of collectively bargained plans. Employees who have completed at least 500 hours of service for three consecutive years and are 21 years old or older are eligible to participate in the plan. (Previously they could be excluded if they worked less than 1,000 hours in a 12-month eligibility period.) However, these participants can be excluded from employer contributions, nondiscrimination and top-heavy requirements.
Increased Required Minimum Distribution Date: Required Minimum Distributions (RMD) now begin at age 72, increased from 70½. The CARES Act further changed the rules for RMDs in the year 2020, stating that RMDs may be waived without penalty in the year 2020.
Post 70½ IRA Contributions: The prohibition on making deductible contributions to a traditional IRA after age 70½ is repealed.
Stretch RMD: The Secure Act imposes a 10-year distribution limit for most nonspouse beneficiaries to spend down inherited IRAs and defined-contribution plans. Prior to passage of the Secure Act, withdrawals from inherited accounts could be stretched over the life expectancy of the beneficiaries in order to mitigate taxes.