By now you have likely heard about the SECURE Act recently passed by Congress. The Setting Every Community Up for Retirement Enhancement (SECURE) Act will increase access to workplace retirement plans and expand retirement savings, but what provisions and reforms do you need to know about?

Below we've outlined some of the provisions that affect retirement plans, IRAs and 529 plans.

Plan Design

• Multiple Employer Plans (MEPs)
  Two or more unrelated employers will be allowed to create and participate in a pooled employer plan, the MEP. It is considered a single plan under the Internal Revenue Code and ERISA.

Safe Harbor 401(k)s

• Simplification of Safe Harbor 401(k) Rules
  Safe harbor 401(k) plans that provide for a 3%-of-pay nonelective contribution will not have to provide an annual notice to participants prior to the beginning of each plan year.  Employers may now adopt or change to a 3% nonelective safe harbor plan up to 30 days before the close of the plan year.  If the employer wishes to change to a nonelective safe harbor plan after that date, it may do so up until the end of the following plan year provided it gives a 4%-of-pay contribution rather than 3%.

• Automatic Enrollment Safe Harbor Maximum
  Affecting 401(k) plans and some 403(b) plans, this provision raises the cap for the automatic-enrollment, salary-deferral safe harbor from 10% to 15% of eligible compensation after the participant's initial year.

Expanding Coverage

• Certain Part-Time Employees Required to Be Included
  Currently, employees who never complete 1,000 hours of service in a 12-month period do not have to be covered in a 401(k) plan.  The SECURE Act provides that any employee completing at least 500 hours of service in three consecutive years must be given the opportunity to make salary deferrals.  These part-time employees do not have to receive employer contributions, nor do they need to be included in top-heavy or nondiscrimination testing.

Plan Establishment

• Later Deadline for Adopting a Plan
  

  Currently, a plan must be established by the last day of a plan year in order to be effective in that plan year.  Under the SECURE Act, a plan may be established up until the due date of the employer’s tax return and be treated as effective in the prior plan year.

• Increased Tax Credits for Plan Startups and Automatic Enrollments
  The tax credit for startup costs for small employers who establish pension plans has been increased to as much as $5,000, up from a $500 cap.  In addition, if an employer sponsors a 401(k) or SIMPLE IRA that includes automatic enrollment, there is an additional tax credit available of up to $500 per year for three years.

Distributions and Withdrawals

• Required Minimum Distributions - Starting Age
  The age that a participant in a retirement plan or an IRA owner must begin taking required minimum distributions has now increased from 70½ to 72. This is valid for individuals who reach age 70½ after December 31, 2019. This affects 401(a), 401(k) and 403(b) plans. It also affects 457(b) governmental plans and IRAs. 

• Required Minimum Distributions - Beneficiary Distribution Periods
  For IRAs, 401(a) defined contribution plans, 457(b) government plans, 401(k) and 403(b) plans, certain beneficiaries are now required to receive their inherited IRA or plan assets within 10 years. Surviving spouses, minor children*, disabled beneficiaries, chronically ill beneficiaries and beneficiaries not more than 10 years younger than the employee may continue to stretch distributions over their lifetime. 
  *Minor children are subject to the 10-year limit after they reach age 18.

Investment Options

• Lifetime Income Disclosures
  Participants' defined contribution benefit statements must include, annually, a lifetime income disclosure describing the monthly payments the participant would receive if the participant's total account balance in the plan were annuitized. The Department of Labor must issue a safe harbor model disclosure within one year after the legislation passes. This provision affects all defined contribution plans subject to ERISA.

IRAs and 529 Plans

• Traditional IRA Contributions
  Individuals of any age may make contributions, other than rollover contributions, to traditional IRAs.

• Qualified Charitable Distributions from IRAs
  This provision reduces the amount of qualified charitable distributions from IRAs that can be excluded from income, based on post-70½ IRA distributions.
  

• 529 Plan Distributions
  This provision allows tax-free distributions of up to $10,000 to repay student loans and to pay for certain apprenticeship programs.
  

• Increased Penalties for Late Notices and Returns
  Among other increases, the penalty for filing a late Form 5500 has increased 10-fold.  The penalty is now $250 per day up to a maximum of $150,000.  Note that it is very rare for an employer to have to pay that much.  There is an amnesty program under which an employer may pay a small sanction.  It is also possible to request an outright waiver of the penalties.  Still, the increase in maximum penalties should put employers on notice that they must be diligent in meeting the applicable deadlines.

While some of these provisions took effect on January 1, 2020, some do not take effect until a later date. 

ACG Wealth Management will continue to pursue clarity with ongoing legislative policy and provide more information as it becomes available.