Last week, President Trump passed an act that will transform Americans’ ability to save for retirement. Passed by the U.S. House of Representatives in July and then by the Senate this December, the Setting Every Community Up for Retirement Enhancement (SECURE) Act is designed to help small businesses offer retirement plans.
For companies without retirement plans, this bill will not only make plans more accessible and affordable but will also bridge the huge savings gap by encouraging more Americans to contribute. For companies that already offer a retirement plan, there are some noteworthy provisions that will affect plan administration by offering employees enhanced support.
To save you time, here are some of the key takeaways from the SECURE Act:
1. Tax incentives for small business owners to offer a 401(k)
Businesses offering a first-time plan will receive up to $5,000 in tax credit. There’s also an additional $500 tax credit for plans that include automatic enrollment. Both credits aim to help businesses offset any upfront costs that may have prevented a company from getting started.
2. Increasing fees for late or missing Form 5500s
While there have always been hefty penalties for the mishandling of 5500s, the fee has increased significantly from a maximum of $50,000 to $150,000. This is not just an important note for sponsors but also for the named Plan Administrator who may be ultimately responsible for timely filing the Form 5500. With these new penalties, staying compliant is more important than ever before. Click here to learn how Namely’s Comply Database can help you avoid these costly fees.
3. Allowing for open Multiple Employer Plans (“MEPs”)
An MEP gives companies the ability to offer pooled plans, typically at discounted pricing, as long as certain criteria are met. In the SECURE Act, companies no longer need a commonality in order to join a MEP (now referred to as an “Open” MEP). That being said, it’s important to be aware of certain restrictions of MEPs, including the standardization of investment options, fiduciary oversight of service providers, plan features like matches, and distributed liabilities. While a MEP could be the right option, it’s worth comparing whether a MEP-like experience—in which one creates their own pooled offering without the confines of a MEP—could make even more sense.
4. Access to annuities in retirement plans
More relaxed rules around lifetime income products means more varied offerings for participants. There is also a Safe Harbor for annuities which protects the sponsor from liability. However, there is still a lot to figure out here given the complexity of annuities. While this provision went into effect January 1, 2020, we anticipate it taking longer to get off the ground.
5. 403(b) plan changes
The SECURE Act includes a provision that allows sponsors to distribute assets from a 403(b)(7) custodial account. It also gives ministers and employees of tax-exempt plans the ability to participant in 403(b)(9) church plans.
6. Provisions to better support employees
There are a number of provisions intended to support today’s modernized work environment, specifically the multitude of life distractions that can prevent people from saving. Here are a few examples of the SECURE Act’s provisions that will better support employees:
Portability of lifetime income options: If a plan terminates, employees can now preserve the tax-qualified status of a collective investment trust, annuity, or mutual fund by rolling them over into an IRA.
Protection for parental leave/part-timers: Employees who work 500 or more hours during any consecutive three-year period can participate in their retirement plan, thus eliminating a previous penalization for those taking a leave or working flexible hours. This provision won’t be effective until 2021.
Extended RMD age: The age at which employees must begin withdrawing from their retirement plan has been changed from 70 ½ to 72.
Change to 529 college savings plans: 529 plans can now be used for apprenticeships and other non-college/university activities.
Of course, there is much more to the SECURE Act, but by better understanding the imminent changes affecting retirement plans, your team can be fully prepared. It’s important for plan sponsors to think about the implications—good and bad—for their employees and their bottom line and to make informed decisions that will ultimately serve them both well.
At the end of the day, staying compliant with these new provisions is crucial to the SECURE Act’s success. As we enter 2020, we’ll see the mark this new bill makes on retirement plans.
Namely offers a 360-integration with Vestwell—a digital retirement platform that brings big plan attributes to the small business market—making it even easier for businesses to help their employees save. Click here to learn more, or learn more here about how Namely’s modern HR platform can help you stay up to date with all compliance changes.