The SECURE Act - What's It Mean For Me?
There have been a lot of articles and news spots about the recent passage and signing of the SECURE Act concerning retirement legislation changes which was contained in the giant appropriations bill just signed by President Trump. It is a very large piece of legislation containing 30 major provisions, which are designed in theory to increase overall retirement plan participation by making it easier for small and medium-sized businesses to provide a successful retirement plan. It is also a bill that will have wide-ranging and long term effects on virtually everyone, so awareness of changes already in effect and those coming in the future is warranted.
Given the size and scope of the bill, let’s discuss just a few of them and what each may mean to different groups of people. For those who wish to see a full digest of key provisions and effective dates, you can access it here as provided by the National Association of Plan Advisors (NAPA).
If you are a small/medium-sized business without a retirement plan, key provisions for you might be:
- Provision of Multiple Employer Plans (MEP’s)/ Pooled Employer Plans - this allows two or more unrelated employers to band together to form a single retirement plan presumably allowing for greater economies of scale and therefore less plan expense and less administrative burden for each participating employer. It also eliminates the “one bad apple” provision which has been a big impediment to MEP formation historically.
- Increased tax credits for employers for creating a new retirement plan. The maximum tax credit allowed for plan startup costs is increased from $500 to $5000, plus an additional $500 if an automatic enrollment feature is included.
If you are already a plan sponsor/trustee, key provisions for your awareness might be:
- The Act eliminates the notice provision for nonelective safe harbor plans (not for matching safe harbor plans), and it allows plans to elect into the 3% nonelective safe harbor anytime before 30 days from the close of the plan year.
- Requires eligibility in plans for long-term, part-time workers defined as employees that complete at least 500 hours of service annually for three consecutive years. This is a decrease in the annual hours worked limit from 1000 to 500. For certain businesses, this can mean greater participation but also possibly greater plan administration.
- Several specific provisions to incentivize employers to offer annuities, aka lifetime income products, in their investment options. One is a fiduciary safe harbor for the plan sponsor for the selection of a lifetime income provider. Another is for tax-advantaged portability of annuities between plans to help avoid onerous surrender charges and penalties. The provisions also require disclosure showing the monthly payouts to the participant if their balance is used to fund the annuity at least annually.
- Annuities may turn out to be the most important part of the new law, but also the most complicated. Annuities can offer valuable protection against outliving your savings but they can be very complex and difficult for consumers to compare their inherent multiple variables. This can make it harder for retiring employees to ensure they purchase an annuity that fits their needs at the best possible cost.
If you are a participant and/or an IRA holder with a significant balance, key provisions for your awareness might be:
- The elimination of the “Stretch IRA”. For most beneficiaries (other than spouses and a few other exceptions), the totality of the retirement assets must now be taken within 10 years of the date of death of the owner of the retirement account. That means, whether the account is payable to a trust or to a specific beneficiary, the total account must be distributed no later than December 31 of the year that contains the tenth anniversary of the owner’s death. The drain-in-10 rule can result in a large tax bill for a beneficiary, especially if that person is in their 40s or 50s, which is typically the peak earning years.
- IRA holders should determine if a full or partial Roth conversion may make sense in their specific situation.
- The Act extends the current required minimum distribution requirements to age 72; This change is effective for participants who turn 70½ after December 31, 2019.
If you are a young participant and/or an IRA holder with a smaller balance, key provisions for your awareness might be:
- For younger investors: $10,000 of 529 plans can be used to pay off student debt.
- Penalty-free (but of course, not tax-free) retirement plan withdrawals for a birth or adoption. One can take out $5,000 from 401(k) plans without penalty to help with the costs related to a child’s birth or adoption.
The SECURE Act will have many effects, both short- and long-term, which will affect both plan sponsors, participants, and IRA holders. Its intended purpose is both to encourage small and mid-size employers to offer more and better retirement plans which promote additional retirement savings and enhance retiree financial security. It also includes several provisions that will impact current plan administration and others which are designed to raise revenue.
Because of the breadth of its scope, it is incumbent on all who are affected to be aware of what impact there might be on their particular situation.
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