Part of the federal budget bill signed into law in December included the SECURE Act, which, in addition to modifying some of the timing and structure for IRA accounts for individual taxpayers, includes some modifications to Employee Benefit Plans.
SECURE Act and Changes to 401(k)s
401(k)s for Part-Time Employees – Prior to the act, most part-time workers were not able to save for retirement based on the typical minimum hour – employees who haven’t worked at least 1,000 hours during the year typically were not allowed to participate in their employer’s 401(k) plan. Starting in 2021, the new retirement law guarantees 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years. The part-timer must also be 21 years old by the end of the three-year period. However, the new rule doesn’t apply to collectively bargained employees.
Penalty-Free Withdrawals for Birth or Adoption of Child – If you have a 401(k), IRA or other retirement account, the new retirement law lets you withdraw up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. (You’ll still owe income tax on the distribution, though, unless you repay the funds.) Married couples can withdraw $5,000 from each of their own accounts, penalty-free. Participants will have one year from the date the child is born or the adoption is finalized to withdraw the funds from their retirement account without paying the 10% penalty. The participant can also put the money back into his or her retirement account at a later date. Recontributed amounts are treated as a rollover and not included in taxable income
Annuity Information and Options Expanded –Currently 401(k) plan statements provide an account balance, which doesn’t provide insight into the participant’s monthly distributions upon retirement. To help participants gain a better understanding of what their monthly retirement income might be, the SECURE Act requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to plan participants to show potential monthly distributions if the participant’s total 401(k) account balance were used to purchase an annuity. (The estimated monthly payment amounts will be for illustrative purposes only.)
Auto-Enrollment Enhanced – More companies are automatically enrolling eligible employees into their 401(k) plans. While employees can always opt out of the plan, most don’t. Automatic enrollment boosts overall participation in employer-sponsored plans and encourages workers to start saving for retirement as soon as they are eligible. The employer sets a default contribution rate for employees participating in an auto-enrollment 401(k) plan. The employee can, however, choose to contribute at a different rate. The SECURE Act pushes the 10% cap on QACA automatic contributions up to 15%.
Age Limit for IRA Contributions Raised – The age to take required minimum distributions (RMDs) is also going up from age 70½ to 72.
Assistance for Small Businesses Offering Retirement Plans
Although most large employers offer retirement plans for their employees, that’s not often the case for smaller companies. The SECURE Act has three provisions designed to help more small businesses offer employees.
-The new law increases the tax credit available for 50% of a small business’s retirement plan start-up costs, up to $5000. Prior to the SECURE Act, the credit was limited to $500 per year.
-A new $500 tax credit was created for a small business’ start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is available for three years and is in addition to the existing credit described above.
-The SECURE Act makes it easier for small businesses to join together to provide retirement plans for their employees. Starting in 2021, the new law allows completely unrelated employers to participate in a multiple-employer plan and have a “pooled plan provider” administer it. This provision allows unrelated small businesses to leverage economies of scale not otherwise available to them, which typically results in lower administrative costs.
These are only highlights; if you’d like a deeper dive, please contact Meresa Morgan, head of our Employee Benefit Plan audit practice, for additional information and implications for your company’s plan.To read how the SECURE Act can affect your personal taxes, click here. For business taxes, click here.