Demystify SECURE ACT – Employee Retirement Plans & Age RestrictionBy Lee Allphin, Employer Advantage Founder and Chairman of the Board
Passed at the end of 2019, The SECURE Act (Setting Every Community Up for Retirement Enhancement) was designed to help ensure retirement security for the nation. But, as is often the case with new legislation, many employers are feeling very insecure about the Act’s complexities.
Imagine you are playing football on a field that is the standard 53 1/3 yards wide. In the middle of the game, the rules suddenly change: the field is now only 30 yards wide. Confusion and panic set in as everyone realizes their tried and true playbooks no longer make sense. This is exactly how many employers are feeling regarding the signing of the SECURE Act. These new retirement rules, while beneficial in many ways, are kicking off a disruptive 2020 for employers who will have to revise their original business plans.
Some businesses are still unaware that the SECURE Act was a landmark piece of legislation that addresses retirement readiness for Americans. It was passed December 20, 2019 as part of the appropriations bill to fund the federal government through September 30, 2020. The SECURE Act includes provisions to expand and preserve retirement savings, improve administration of the retirement system and generate more revenue for the federal government. Most provisions took effect January 1, 2020.
This law impacts businesses as well as individuals preparing for retirement, including those participating in company-sponsored retirement plans. Here are the main provisions and some new rules:
- Required minimum distribution age has been raised from 70 ½ to age 72. The change in the required start date is applicable only to those participants that reach age 70 ½ in year 2020 or later.
- Penalty-free withdrawals from IRA’s, 401(k)s and other retirement accounts prior to age 59 ½ for childbirth and adoption. Withdrawals up to $5,000 without 10% penalty.
- 529 Education Savings Plans can now be used for student loan repayment and the cost of apprenticeship programs up to $10,000.
- The age restriction was removed for IRA contributions as long as the taxpayer (or spouse if filing jointly) has taxable compensation.
- Kiddie tax – The SECURE Act repeals the Tax Cuts and Jobs Act provision that taxes unearned income received by children at rates applicable to estates and trusts. This income would instead be taxed according to the child’s parent’s rates.
- The Act will require 401(k) plans to include part-time employees as eligible participants that work at least 500 hours per year for at least three consecutive years. Employees must be 21 and the period begins January of 2021, therefore 2024 is the first year they are eligible.
- Beneficiaries of an inherited retirement account must withdraw all assets within 10 years. There is no required minimum distribution amount each year.
- Credit for small employer pension plan startup costs are now limited to the greater of (1) $500 or (2) the lesser of (a) $250 for each eligible non-highly compensated employee or (b) $5,000. The credit applies for up to three years.
- The SECURE Act created a new $500-per-year credit, up to three years, for eligible employers with plans that include automatic enrollment. The credit applies to the startup costs of new 401(k) plans, new SIMPLE IRA plans and existing plans converted to the automatic enrollment design.
“This is reproduced with permission from Employeradvantage”.