The SECURE Act: What individuals and business owners need to know

Business owners, especially smaller employers, now have more incentives and options to offer retirement savings plan.  Individuals have additional opportunities to grow their retirement savings.  Signed in to law by the President on December 20, 2019, The SECURE Act (‘Setting Every Community Up for Retirement Enhancement”) brings the most significant pension reform in more than a decade.  The goal of the legislation is to promote retirement savings and affects both individual investors in retirement accounts and employers who sponsor retirement plans.

What does The SECURE Act mean for you?  We’ve covered a few of the notable changes below.

For individuals:

• Good news for those who want to keep working into their seventies:

• • Stall on withdrawals! You can now wait an additional 18 months until age 72 before you have to take your Required Minimum Distribution out of your IRA.  (Note: If you reached age 70 ½ prior to 2020, you have to remain on the old rules).  Employer plans already allow you to postpone your required withdrawals until after you retire, unless you are a business owner.
  • Keep saving! You can contribute to an IRA beyond age 70 ½ as long as you have earned income.

• If you plan to leave money to your adult children from your retirement accounts, The SECURE Act erases any expectation of money lasting across their lifetime. Inherited IRAs – informally known as Stretch IRAs because you could stretch the withdrawals over a beneficiary’s lifetime — must now be distributed within 10 years, unless you are the surviving spouse.  A few other exceptions are beneficiaries who are:
• • minor children of the account owner (until they reach the ‘age of majority,’ age 18 in California),
  • chronically ill or have special needs, or
  • within 10 years of age of the IRA owner.
• Existing inherited IRAs will not have any changes to their distribution rules; the new rules go into effect for the IRAs of those who pass away after December 31, 2019.

The following may not apply to you, but in case you are a business owner or about to start a business…

For retirement plan sponsors and business owners:

• Smaller employers who could not afford to offer robust retirement plans may now find it easier and more cost effective to add a plan to their employee benefits. Thanks to the addition of tax credits for starting a new plan and the removal of a few impediments to joining Multiple Employer Plans (MEP), smaller employers can now benefit from economies of scale. They no longer need to have a commonality, such as geography or industry, to join a MEP. With the elimination of the ‘one bad apple’ rule, even if one employer violates the rules, the other employers in the plan are no long bundled into the same violation.
• If you are a “gig” worker or your company employs “gig economy” workers, your employer-sponsored retirement plan will be required to cover long-term, part-time workers beginning in 2021. Employees must be 21 or older and work at least 500 hours per year for three years to become eligible for the plan under this provision.  Plan sponsors will need to add this measure to their compliance testing and their budgets.
• Profitable smaller business can now find tax relief into the subsequent tax year. In a little-publicized provision that will be welcome news to small business owners and CPAs, employers may receive a retroactive tax deduction for adopting a retirement plan up to the tax filing due date.  Here’s how it works:

• • When a small business owner gets her tax bill in mid-2021 for the 2020 tax year and discovers that her banner year of profit results in a substantial tax bill, the business owner may set up a new qualified retirement plan with employer contributions (such as a profit-sharing or cash balance plan) retroactive to January 1, 2020. She may fund the contribution and take a tax deduction for the 2020 tax year, as long as the plan is adopted and contribution funded by September 15, 2021.
  • The bottom line:  you still have options to save on taxes after the tax year ends.
• Employees continue to benefit when you enroll them automatically into your company’s retirement plan. This helps employees overcome the inertia of getting started with retirement savings and they are more likely to continue to participate. Now, auto-enrollment is even more of a win for companies:
  • Small businesses are eligible for a separate tax credit (above and beyond the credit for starting a new plan) for using an automatic enrollment provision.  The auto enrollment credit is based on when the enrollment option is added, not when the plan is created, so businesses that have already adopted a 401(k) plan can still get the benefit of the credit by adding an auto-enrollment option in 2020 or beyond.
  • Employers can now escalate the default savings rate (the percent of pay directed to the 401k) as high as 15% after the first full year in which the employee’s compensation is automatically deferred into the plan. Employees will default into higher savings unless they proactively opt-out.
• Offering annuities in 401k’s is less risky for the plan sponsor now. As part of the continued emphasis to add lifetime income options (annuities) in retirement plans, the SECURE Act creates a new Section 404(e) of ERISA to provide fiduciary protection for the selection of an annuity provider.

The new rules create several planning considerations and opportunities for individuals and businesses.