The Setting Every Community Up for Retirement Act, known as the SECURE Act, is a federal law that aims to expand and improve Americans’ ability to save for retirement and ensure they have adequate savings to last through the end of their lives. The law, which passed in late 2019, makes several changes to the existing retirement system in the U.S. with impacts to both retirees and workers saving for retirement as well as businesses that offer savings vehicles such as 401(k)s.
Encouraging More to Save
Congress passed the new law last year in response to ongoing issues within the retirement system — mainly that Americans are not saving enough. The U.S. Bureau of Labor Statistics has reported that only 55% of workers participate in workplace retirement plans — and they’re still woefully behind in having enough saved. According to Bankrate, the average 401(k) balance was $103,700 in the first quarter of 2019.
Changes in the law, while not a cure-all, are aimed at encouraging employers who previously have not offered them to do so, as well as open up retirement program participation to more workers. For example, starting in 2021, part-time workers who work 500 hours will be able to participate in 401(k)s and other retirement plans. That is down from a previous 1,000-hour threshold.
Making Things Easier for Businesses
In pursuit of its goal to improve the U.S. retirement system, The SECURE Act creates a number of changes that impact business owners:
- New tax credit for automatic enrollment: The law creates a new $500 tax credit for businesses that create a 401(k) or SIMPLE IRA retirement plan with automatic enrollment.
- Changes to startup tax credit: The law changes an existing tax credit intended to encourage small businesses to start a retirement plan. The credit increased from $500 to up to $5,000 depending on certain circumstances.
- ‘Safe harbor’ plan changes: The SECURE Act makes a significant change to ‘safe harbor’ 401(k) plans intended to bolster workers’ retirement savings. Employers now can increase workers’ automatic contributions from 10% of wages to 15%. Employees can opt out at any time.
- Simplified rules and requirements: The law simplifies rules and notice requirements for businesses related to qualified nonelective contributions in safe harbor 401(k) plans.
- Extended period to adopt new plans: The SECURE Act extends the period for companies to adopt new retirement plans beyond the end of the year to the due date for filing the company tax return. This gives employers additional time to cover employees with profit-sharing contributions.
- Expanded multi-employer plans: Small businesses that can’t afford retirement plans alone can now pool together with other companies to create pooled employer plans.
- Significant penalties for failing to file plan forms: Beginning with all forms required to be filed after Dec. 31, 2019, The penalty for the failure to file a Form 5500 increases substantially to $250 per day, not to exceed $150,000. Also, the penalty for failure to file Form 8955-SSA rises to $10 per participant per day, not to exceed $50,000.
Workers See More Flexibility
As it pertains to workers, the SECURE Act makes several significant changes to how they save for retirement as well as offering some additional flexibility in how they can use and access their savings.
- New required minimum distribution age: Since people are living longer, the law bumps the age for when people are required to take a minimum distribution from their retirement plans to 72. That is up from 70½.
- Death of the ‘stretch’ IRA: People who inherit an IRA from a non-spouse no longer will be allowed to stretch out distributions over their lifetime. Instead, they must distribute 100% of the holdings over no more than 10 years.
- No more age cap for IRA contributions: Previously, individuals could not contribute to an IRA beyond age 70½. The SECURE Act eliminates that cap, allowing older individuals who still work and earn income to contribute.
- Lower age for in-service withdrawals: The new law lowers the age for many in-service withdrawals from plans that allow them to 59½ from 62.
- 529 plans: Individuals can now use up to $10,000 from 529 plans to pay for student loans. Other new 529 provisions allow use of funds for things like apprenticeships.
- Birth and adoption: The new law allows penalty-free withdrawals from 401(k) accounts of up to $5,000 to help defray costs of having or adopting a child.
Additional Impact Likely
As with most financial questions, no two individuals are exactly alike. The SECURE Act is a detailed and complex new law that may impact business owners and workers in other ways not outlined above. It may be best for individuals to seek out additional resources or assistance in assessing how the new law impacts them.