The “Setting Every Community Up for Retirement Enhancement Act of 2019,” better known as the SECURE Act, has passed the House and Senate and is expected to be signed into law by the President to be effective January 1, 2020.
The SECURE Act has many provisions that have a major impact on companies sponsoring or thinking about sponsoring retirement plans, the plan’s participants and individuals who own or who might inherit IRAs or other retirement accounts. Here are some of the key highlights of the Act:
FOR COMPANIES SPONSORING OR THINKING ABOUT SPONSORING A RETIREMENT PLAN AND PARTICIPANTS IN THESE PLANS
- The Act expands the availability of Multiple Employer Plans (“MEPs”), allowing unrelated employers to join together in a single plan structure with a “pooled plan provider.” This will allow small businesses to leverage the economies of scale of a large retirement plan in order to reduce administrative costs. Ancora has already started our own MEP and we are well ahead of the new law. Please see this article on Ancora’s website for more information.
- The Act enhances the existing tax credits available to certain businesses to help cover up to 50% of the costs associated with starting a retirement plan. The maximum amount of this credit has been increased to $5,000 from the previous maximum level of $500.
The Act creates an additional tax credit of $500 for companies who start a new 401(k) plan or SIMPLE IRA plan that includes automatic enrollment. - The Act will expand the availability of lifetime income (annuity) options in 401(k) plans by providing increased fiduciary protection for employers who select insurance companies to offer these products. These lifetime income options will also be required to be portable to allow them to be rolled over to an IRA or another qualified retirement plan.
- The Act requires that participant statements for 401(k) plans include an estimate of the monthly amount that the participant could receive as a single or joint life annuity based on the participant’s current account balance. The Department of Labor will be issuing a model notice for service providers to adapt for use.
- The Act allows employers to allow part-time employees, who work between 500 and 1,000 hours per year, to make contributions to a 401(k) plan. These employees could still be excluded from discrimination testing and the employer would not be required to make employer contributions for them, if they so choose.
- The Act allows plan sponsors to adopt automatic annual escalation provisions that cap the amount at 15% of compensation, an increase from the current cap of 10% of compensation.
- The Act gives plan sponsors greater flexibility to choose non-elective safe harbor status during, or even after, a plan year.
The Act allows penalty-free withdrawals by participants for childbirth or adoption expenses from a 401(k) plan up to $5,000.
FOR IRA OWNERS AND BENEFICIARIES
- The Act pushes back the age at which IRA owners must start taking required minimum distributions (RMD) from the current age of 70-1/2 to age 72. This provision is effective for anyone who has not turned age 70-1/2 prior to the end of 2019. The provision also applies to 5% owners of companies who have account balances in the company’s 401(k) plan. (Active employees who work past age 70-1/2 who are not 5% owners are still exempt from the RMD rules.)
- The Act allows individuals who are still working to contribute to an IRA past age 70-1/2. Previously, contributions could not be made to an IRA after that age.
- The Act dramatically changes the distribution rules for inherited IRAs. Under the new rules, with some exceptions, the entire account would have to be distributed within 10 years after the death of the owner. Distributions can be spread out over the 10-year period or can be taken in a lump sum in any year, as long as the entire account is distributed within the required time period. This new requirement would not apply to (i) spouses, who continue to have the same rights as under current law, (ii) non-spouse beneficiaries who are less than 10 years younger than the owner or chronically ill or disabled individuals, who can continue to use the old life expectancy rules, and (iii) minors, who can continue to use the old rules until they reach the age of majority in their state, at which time the 10-year withdrawal period will start. These rules also apply to beneficiaries who inherit an account from a 401(k) plan or another qualified retirement plan.
Many of these changes will have significant and long-lasting implications for both our Retirement Plan and Family Wealth clients. We are evaluating these consequences and will provide more detailed analysis in future Ancora newsletters.
As always, Ancora is happy to answer any questions you may have. Please reach out to your relationship manager or the Retirement Plans team for more information.