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The SECURE Act: A Welcome Reform

03/03/2020 Kerri Walz

Transforming the Retirement Plan Landscape

In December of 2019, President Trump signed a bill approving the largest retirement savings reform the United States has seen in over 15 years. With the intention of making retirement plans more accessible to the masses, the Setting Every Community Up for Retirement (SECURE) Act provides an incentive-based program for small businesses who adopt retirement plans. When it comes to providing employee benefits – retirement plans in particular – small businesses have always been at a disadvantage due in large part to costs and compliance requirements.   

Recognizing Small Businesses and Part-Time Employees
With the Senate’s approval of the SECURE Act, small business owners who adopt a plan can receive a tax credit of up to $5,000 (previously $500) with an additional $500 credit for plans that include automatic enrollment. Businesses converting from an existing plan to an automatic enrollment plan are also eligible for the incentive. Another key revision is an increased cap – from 10% to 15% of pay – for auto enrollment contributions in employer-sponsored retirement plans. As an optional benefit, the plan sponsor must elect this increased limit.

But the news isn’t only good for business owners as eligible part-time employees are now afforded the opportunity to make elective deferrals to a 401(k) plan under less stringent requirements. Beginning in 2024, part-time employees aged 21 years and older will be eligible to enroll as long as they document at least 500 hours of service each year for three straight years. It is important to note, employers must be prepared to record this data beginning January 1, 2021.

The SECURE Act also permits an employer to add a safe harbor feature to its existing 401(k) plan, once the year has started, if they contribute at least 4% of employees’ compensation instead of the standard 3%. This could be a beneficial move to help an employer correct failed ADP/ACP or top-heavy tests by moving to a safe harbor plan and making a 4% non-elective contribution to participants.

Enhanced Benefits for Retirees and Withdrawals from Retirement Plans
The passage of the SECURE Act provides an avenue for individuals to prolong their contributions. Those who choose to work beyond retirement age can maintain contributions to their retirement savings via an IRA. Additionally, the age at which a Required Minimum Deduction (RMD) goes into effect has been extended from age 70 ½ to age 72, citing an increase in the average lifespan of US citizens. Another benefit allows penalty-free withdrawals of up to $5,000 to be taken from retirement accounts to cover childbirth and adoption expenses within 12 months of the event.

Increasing Penalties
It is important to note that this Act did increase the penalties significantly for failure to file the Form 5500 to $250 per day, not to exceed $150,000. In addition, the penalty for failure to file Form 8955-SSA increased to $10 per participant per day, not to exceed $50,000.

The above items are just a few highlights of the SECURE Act. With the abundance of provisions in the Act, our team is working to obtain additional guidance, which we will provide in a timely manner. All regulatory changes require updates to existing compliance practices. VonLehman’s Employee Benefit Plan specialists collaborate with your internal team to establish necessary procedures and best practices that ensure full compliance. Contact us at kwalz@vlcpa.com or 800.887.0437 to find out what the SECURE Act means for your business and retirement options.

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