SECURE Act and Retirement

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The new SECURE Act, what it means for your retirement

By: Dave Reyes, CPA

On December 20, 2019, the President signed into law the SECURE Act – Setting Every Community Up for Retirement Enhancement Act.  This new law had strong bi-partisan support and focuses on retirement savings.  Many of the provisions of the SECURE Act go into effect in 2020, but others will go into effect after this year.  Most experts agree that the changes under the SECURE Act are the most sweeping changes to the retirement plan landscape in well over a decade.  The purpose of this new law is to provide individuals with more opportunities to save for retirement.  Here is a brief summary of some of the more significant changes.

Changes impacting individuals:

  • Individuals who are still working can now contribute to a traditional IRA even after they’ve reached age 70 ½. Prior law prohibited contributions once an individual reached 70 1/2.
  • The age to begin taking required minimum distributions has been raised from age 70 ½ to 72. This change applies to individuals who attain age 70 ½ after December 31, 2019.
  • One of the more significant changes is to “stretch IRA’s”. The stretch IRA rules applied when the beneficiary of the IRA was an individual other than the IRA owner’s spouse, for example a child or grandchild. In the past, a non-spouse beneficiary had the option to stretch distributions over their life expectancy, which in many cases could be 30 years or more. However, under the SECURE Act, required payouts will no longer be permitted over an extended time frame.  With a few exceptions, distributions to beneficiaries will be required to be made over a period not to exceed 10 years.
  • The 10% early withdrawal penalty, applicable to distributions prior to age 59 ½, will not apply to distributions of up to $5,000 which are used for the birth or adoption of a child.

Changes impacting employers’ qualified retirement plans:

  • Auto-enrollment safe-harbor 401(k) plans will be allowed to increase the cap on employee contributions from 10% to 15%.
  • Employers who implement an auto-enrollment 401(k) plan will qualify for a new tax credit of $500 per year.
  • Safe-harbor 401(k) plans will now have less notification requirements than in past years. This will make it easier for employers to administer safe-harbor 401(k) plans.
  • Small employers who implement a new retirement plan will now receive a larger tax credit. Previously, this credit was up to $500 per year for the first 3 years of a new plan.  This credit has increased to as much as $5,000 per year for the first 3 years.
  • Long-term part-time employees will be allowed to contribute to their employers’ 401(k) plan. Employees who normally work fewer than 1,000 hours a year, but more than 500 hours, and have worked for at least 3 consecutive years, will be allowed to contribute to their employers’ 401(k) plan.
  • In order to allow for more employees to have access to an employer sponsored retirement plan, employers will be allowed to join a “Pooled Employer Plan”. The technical term for this type of arrangement is a Multiple Employer Plan or “MEP”. Beginning in 2021, a pooled plan provider will be allowed to establish a plan which any employer could join. This pooled arrangement would be considered one large single retirement plan and would allow smaller employers to take advantage of economies of scale normally available only to large employers. This provision is one of the biggest changes under this new law and could significantly change the retirement plan landscape for smaller and midsize companies going forward.
  • The IRS has significantly increased the late filing penalties on Form 5500. Penalties charged by the IRS will increase from $25/day (up to a maximum of $15,000) to $250/day (up to a maximum of $150,000).  Keep in mind these penalties are in addition to any Department of Labor penalties.  This increase in penalties would indicate the government’s intent to crack down on employers who fail to properly file information returns for their employee benefit plans.  Employers who sponsor any type of employee benefit plan should review their plans and assess whether they are properly complying with the Form 5500 filing requirements.

As mentioned earlier, the SECURE Act is the most significant piece of retirement legislation to be passed in over a decade.  These changes impact both individuals and company sponsored retirement plans. This article briefly summarizes some of the more important changes.  More detailed information about the SECURE Act will be provided in upcoming editions of the Benefits Buzz.  In the meantime, if you have any questions on this law and how it might impact you, contact Dave Reyes at 216-344-5233 or at dreyes@maloneynovotny.com

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