Congress is worried that Americans aren’t saving enough for retirement, so in late 2019, the SECURE Act was signed as part of H.R.1865 – Further Consolidated Appropriations Act. This act brought changes intended to provide retirement benefits to more people and make it easier for small businesses to provide those benefits to their employees.
Listed below are some of the more notable changes that could affect the way you offer retirement plans to your employees:
Required Minimum Distributions (RMDs)
Starting with individuals younger than 70 ½ at the end of 2019, the age at which RMDs must be made has been raised to 72. This is mainly in response to an increase in average age of retirement, which has been steadily growing over time. RMDs can hurt those who would like to continue to work past the full retirement age, but do not yet need to begin withdrawing from their retirement account.
Pooled Employer Plans
Some small businesses opt not to provide 401(k) plans to their employees, typically because of the high administrative duties and costs associated with operating these accounts. However, participating in a Pooled Employer Plan allows multiple businesses to spread the costs among themselves, thereby reducing their individual costs. These pooled plans can make providing 401(k) plans seem more appealing to employers with fewer resources, but there were still limitations that reduced the effectiveness of these plans.
For example, before the SECURE Act, only employers within a similar industry or within a trade association could pool their plans. This reduced the effectiveness of these plans. But since the SECURE Act was signed, employers can now participate in Pooled Employer Plans that contain more diverse organizations. This change should result in reduced costs for those organizations who take advantage of these new, larger pools.
Part-Time Worker Eligibility
With the SECURE Act, part-time employees who have worked three consecutive years of 500 or more hours will become eligible for participation in employer sponsored retirement plans – with the same benefits as those part-time workers with 1000 hours or more in a year. But it’s important to note that this change excludes plans that are the result of collective bargaining.
Prior to this piece of legislation, retirees who did not need to take their required minimum distributions could pass that account on to a younger non-spouse beneficiary. This allowed the IRA to continue to grow in a tax-sheltered state while spreading out the time needed to take RMDs over the life span of the younger beneficiary.
The SECURE Act has significantly changed this process, and now, a full payout must be made within 10 years of the original account holder’s passing.
Small Business Tax Credit
Changes to the retirement system can be costly for small businesses to administer. In acknowledgement of that, the SECURE Act will provide a tax credit of $500-$5000, during the first 3 years, to employers who set up new retirement plans. This credit is an to attempt to reduce the burden related to startup costs. The amount of that credit is based on the number of “non-highly compensated employees” eligible to participate in the plan.
In addition to this tax break, another standard credit of $500 will be provided to these employers who implement automatic enrollment in the retirement plan. Small Business owners that make changes to their retirement benefits in the coming years should be aware of these tax breaks.
Birth / Adoption Withdrawal for Employees
Within one year of the birth or adoption of a child, a one-time withdrawal of up to $5000 per parent can be made without the issuance of an early withdrawal penalty. If the distribution is paid back within one year of withdrawal it is not a taxable event.
529 Accounts and Student Loan Repayments
529 accounts, which are tax-advantaged accounts meant for saving for education payments, can now be used to pay for up to $10,000 in student loan payments per year. These benefits apply to both the direct beneficiary and their siblings. This means parents can now re-assign funds to their other children without penalty if there are funds remaining in a 529 account.
While the items highlighted above do not encompass the entirety of legislation, these are some important changes that have been made to the retirement system. Many of these changes are especially important if you are a small business owner who has been discouraged from providing benefits due to high administrative or startup costs.
Compliance with the SECURE Act
If you don’t already offer retirement benefits, now may be a good time to consider it. If you are already providing a plan to your employees, your plan and documents may need to be amended to incorporate SECURE Act changes. If you’d like assistance in selecting and providing a plan for your employees, or if you are looking for help with updating your current plan, contact a member of the Meld Financial Team.