By Nick Strain, CFP®, CPWA®, AIF®, Senior Wealth Advisor at Halbert Hargrove
Increased financial incentives, along with new safe harbor rules, are among the SECURE Act’s most significant benefits for business owners.
Increased financial incentives – along with new safe harbor rules – are among the SECURE Act’s most significant benefits for business owners.
President Trump officially signed the SECURE Act into law at the end of 2019. SECURE – which stands for “Setting Every Community Up for Retirement Enhancement” – creates numerous provisions aimed at strengthening retirement security for working Americans.
The bill’s changes to a wide range of rules regarding employer-sponsored retirement plans will impact both businesses and employees. In virtually all instances, these changes are advantageous to all. In this article, I focus on the key provisions impacting business owners.
A strong boost in financial incentives to encourage plan adoption and auto enrollment
There’s a lot of highly justified concern over the retirement funding shortfalls so many Americans face. One of the most positive aspects of SECURE is the incentives it offers to business owners to launch a tax-advantaged retirement plan for their employees. If your company doesn’t yet offer a retirement benefit to your employees, this is a great inducement to get started.
Under SECURE, if you have less than 100 employees, you’re eligible for a tax credit of up to $5,000 to offset the costs of starting a SEP or SIMPLE IRA, a 401(k) or a profit-sharing plan.
This credit is available for a three-year period beginning January 1, 2020, and can be applied to up to 50% of qualified-plan startup costs.
In addition, employers with less than 100 employees are eligible for a $500 tax credit if they adopt automatic enrollment in their qualified plan, SEP or SIMPLE IRA. The same three-year window applies here.
More good news for retirement security: The SECURE Act also increases the maximum permitted qualified automatic contribution arrangement rate for employees from the previous 10% to 15% in any year – except for the worker’s first year of participation.
SECURE makes multiple employer plans more attractive for small businesses
Before the SECURE Act’s passage, many companies avoided participating in multiple-employer plans (MEPs) due to the hazards of the so-called “one bad apple rule”: Under IRS rules, if just one employer didn’t meet plan requirements, the plan would be disqualified for all those involved. Believe it or not, this ruling had been on the books for more than 40 years.
Additionally, under the SECURE Act, employers no longer have to share “a common characteristic,” such as being in the same industry, to share an MEP. As employers pool together, they should enjoy economies of scale: Access to more features at more affordable prices.
More options for offering retirement plans to part-time workers
The SECURE enables more part-time employees to be eligible for employer-sponsored retirement plans. Previously, employers did not have to invite workers who work less than 1,000 hours every year to contribute to their own 401(k). Now, the act drops the threshold for eligibility down to either one full year with 1,000 hours worked, or three consecutive years of at least 500 hours.
For these part-time employees, business owners are not required to provide a matching contribution.
New protections for 401(k) plans offering annuities
The SECURE Act offers much-needed annuity-related liability protections for business owners. This should open the door for more employers to offer annuities as investment options within 401(k) plans. Should an annuity product underwriter later become insolvent, plan sponsors are protected from legal liabilities, so long as certain due diligence requirements have been met in vetting the product. In other words, careful fiduciary analysis is still essential when offering annuity products.
As well, this liability protection does not extend to mismanagement issues like offering excessively expensive or inappropriate products to employees.
These annuities are now portable, too. So, for example, departing employees can rollover the 401(k) annuity to another employer’s 401(k) or IRA and avoid surrender charges and fees.
Helping your employees better understand where they stand: Lifetime income disclosures on 401(k) statements
As we all know, retirement security is not simply about saving for retirement – it’s about saving enough. The SECURE Act requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to plan participants. The point is to help employees gain a better understanding of what their monthly income might look like when they stop working. These statements will show how much money a plan holder could get each month upon retirement if their total 401(k) account balance was used to purchase an annuity. These estimated monthly payment amounts will be for illustrative purposes only.
The new disclosure statements aren’t required until one year after the IRS issues interim final rules and creates a model disclosure statement or releases assumptions that plan administrators can use to convert account balances into annuity equivalents, whichever is latest.
This new ruling could serve as a wake-up call for employees who mistakenly believe that making token contributions will get them through retirement. As well, it may encourage more utilization of annuities in 401(k)s. Time, as always, will tell.
A quick review of SECURE’s benefits for individual plan holders
This legislation can potentially benefit you as an individual as well. Here are some of the most compelling new rules:
- It increases the required minimum distribution (RMD) age. You can now delay taking your RMD from your retirement plan until age 72. Income tax must be paid on the distribution unless the funds are repaid.
- There are no age restrictions for making contributions to traditional IRAs. If you’re still earning income into your 70s and beyond, the former age 70 1/2 restriction for making contributions no longer applies (although RMDs will apply when you reach 72).
- SECURE permits penalty-free withdrawals of $5,000 from retirement accounts, including IRAs and 401(k)s, to defray the costs of having or adopting a child. This money can be returned to the retirement account at a later date. These amounts are treated as a rollover and not included in taxable income.
Beneficial changes to 529 plans
For those saving for their children’s education, the types of tax-free distributions from 529 plans have been expanded. These include up to $10,000 of lifetime student loan repayment. This is penalty-fee for the plan’s beneficiary, plus an additional $10,000 for each sibling. 529 eligibility now also includes paying for the costs of apprenticeship programs.
One major downside to the SECURE Act for savvy estate planners
All of the above is the good news about SECURE’s new provisions. There is one piece of “bad news” – one ruling that could roil your estate planning – if you’d been planning to bequeath your qualified plan to your kids. Prior to SECURE, a bequeathed IRA or 401(k) was aptly called a “stretch”: A beneficiary could count on tax-free growth of the assets in the inherited IRA for potentially many decades. Now, under the SECURE Act, most non-spouse beneficiaries of inherited retirement plans are required to liquidate the inherited assets within a 10-year payout period completely.
In addition to spouses, exceptions to this 10-year limitation include chronically ill or disabled heirs, minor children, or those within 10 years of age of the owner of the plan.
SECURE’s promise of “retirement enhancement”
Taken together, the act’s provisions hone in on many of the supports needed in helping workers save for retirement and maintain financial health. I’m encouraged at the incentives offered to business owners, as well as the fact that plan holders will be able to learn more about their saving practices and, hopefully, get motivated to save more for their futures. Other smartly crafted rules offer practical solutions to common financial challenges. Here’s hoping that these new rules will move the needle for many Americans.
For more information or questions, please contact Halbert Hargrove at hhteam@halberthargrove.com
