If you offer a 401(k), have part-time employees, or would benefit from a multiple-employer retirement plan, listen up: new rules have gone into effect that can change your benefits.
The SECURE Act
As part of an appropriations bill signed on Dec. 20, 2019, the Setting Every Community Up for Retirement Act (SECURE Act) includes many changes for retirement plans.
The law includes several updates aimed at better reflecting retiree demographics and supporting small businesses in their retirement plan options.
We’ll walk you through the relevant details here.
401(k) changes
The Act’s changes include updates for those employing part-time staff and more tax credits for employers.
- Part-time employees who work either 1,000 hours throughout the year or have three consecutive years with 500 hours of service each are now eligible to participate in employer-sponsored retirement plans.
- Businesses who begin a SIMPLE IRA or 401(k) plan, provided that it offers auto-enrollment, can now claim a tax credit of $500.
- Higher tax credits are now available for small businesses with up to 100 employees who are offering new retirement plans. Employers can receive a tax credit of the greater of (1) $500 or (2) the lesser of (a) $250 per non-highly compensated employees eligible to participate or (b) $5,000. This credit will be applicable for three years after starting a new plan. Previously, the tax credit was capped at $500 and based on start-up costs.
- Auto-enrollment in safe harbor retirement plans now have an updated cap. Previously, companies could auto-enroll and increase annually an employee’s contribution until reaching a cap of ten percent of the employee’s salary. The cap has been raised to 15 percent.
- Someone who has a baby or adopts a child is now able to withdraw up to $5,000 without penalty from their retirement plan.
- Small businesses can now more easily join multiple-employer groups with fewer challenges. Previously, businesses had to have something in common, such as be in the same industry, but that has been waived. The Act also removed what’s known as the “bad apple rule,” which provided that the actions of one participating employer could disqualify the entire plan. No such disqualifying practice will exist – though it doesn’t go into effect until 2021.
- Lifetime annuities can now be part of retirement plans, with safe harbor regulations to protect plan sponsors as they’re selecting annuity providers.
- The regulations have removed “credit card loans” against retirement plans. Any loan made through a credit card or similar arrangement will be treated as a distribution subject to taxation.
Individual Retirement Account changes
The law also affects individuals nearing retirement or inheriting retirement funds in a few ways.
- The required minimum distribution age has been increased from 70 ½ to 72 years of age. Those who have not yet reached 70 ½ may be able to roll over their account balances for either an employer-sponsored retirement plan or IRA if they receive otherwise eligible distributions this year.
- Those inheriting IRAs, other than spouses and a few other specific exeptions, now have only a 10-year time period to receive the full funds in the inherited IRA. Previously, they could receive distributions throughout their lifetime.
Wading through these new retirement plan regulations will take some finesse, making sure plans are updated, your individual financial strategy is clear, and you’re taking advantage of tax breaks but not getting caught in an unexpected place because of the changes.
