The SECURE Act’s Potential Impact on Retirement Savings & Plans
What You Need to Know
The House of Representatives passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in May 2019. This major piece of legislation is expected to make it through the Senate during the current term. If the bill, which has more than 20 sections, passes the Senate and is signed by the president, its impact could lead to shifts in retirement savings and planning.
“The bill’s reach is broad, with some sections only affecting a small portion of the population, while others affecting all workers and retirees,” says Partner and CPA Brian Bortz. “Not only does the act encourage individuals to save for retirement but offers key provisions for businesses that offer retirement plans.”
On the personal side, if the SECURE Act passes into law, you can expect:
– More part-time workers to have the opportunity to participate in a 401(k) plan.
– The chance to contribute to traditional IRAs for as long as desired.
– The minimum distribution age for retirement accounts to shift from 70 1/2 to 72 years old.
– Penalty-free withdrawals to be allowed for special circumstances.
– A requirement to withdraw from inherited retirement accounts within 10 years.
But what about this act’s potential impact to your business? Brian says, “Just like the Tax Cuts and Jobs Act back in 2017, the SECURE Act has new rules governing retirement plans, including 401(k) plans that affect not only plan holders, but businesses sponsoring plans.”
Increased tax credit for businesses starting a plan
The SECURE Act proposes beefing up the current Retirement Plans Startup Costs Tax Credit. Currently, qualifying businesses can receive a credit for up to 50% of startup costs, up to $500 a year for three years (for a total of $1,500).
The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000.
Since the credit still applies for three years, your small business could receive a total tax credit of up to $15,000 to offset expenses needed to set up, administer, and educate employees about the plan.[Ask a CPA: What you need to know before setting up a small business 401(k) plan]
Additional tax credit for automatic enrollment
To encourage administrators to add an automatic enrollment feature to the plan, the SECURE Act creates a new tax credit of up to $500 per year to employers to defray startup costs for new 401(k) and SIMPLE IRA plans that include automatic enrollment.
This tax credit for automatic enrollment is in addition to the plan start-up credit, available for three years as well, and can be claimed by employers converting an existing plan to one with automatic enrollment.
Improved bargaining power for groups of small businesses
The SECURE Act would also allow small businesses to band together with a multiple employer plan (MEP), giving them more bargaining power with costs and provisions in addition to reducing administrative burden. Currently, employers are allowed to form such arrangements–but only if they share a common economic or representational interest, such as members within a professional association. This would expand options for small and medium business owners.
Enrollment and tax changes
To enhance long-term financial security in retirement, the SECURE Act includes several provisions designed to encourage employers to offer lifetime income annuities as options within retirement plans. One such Safe Harbor would boost the current cap on compensation that could be subject to automatic enrollment into a retirement plan as well as automatic escalation of those contributions to 15 percent from the current 10 percent.
The bill would also eliminate disclosure requirements for non-elective contributions, that is, money that an employer contributes to a retirement plan regardless of whether an employee contributes. The non-elective contribution must be at least 4 percent of compensation for the disclosure requirement to be waived.
The regulatory reforms contained in the SECURE Act could potentially go a long way towards making it simpler, easier and less costly for more businesses to sponsor retirement plans for their employees. That’s an incredibly important development given that the U.S. Bureau of Labor Statistics reports that 49 percent of American workers do not currently have access to an employer-sponsored retirement savings plan.
“The bill has been hot lined through the Senate, increasing the chances the SECURE Act will pass,” says Brian. “If so, we’re going to see some impactful changes in how investors and businesses should approach retirement and tax planning. For those nearing retirement, it’s important to make sure your plan accommodates the changes in this bill.”
For more detail on how this act could impact your personal and business contributions or disbursements, contact your CWA financial planner, or contact a member of our team here.