A major piece of legislation signed into law just this past December brings with it the potential for immediate and substantial positive changes for retirement plan sponsors and participants. The SECURE Act—Setting Every Community Up for Retirement Enhancement—has multiple provisions, many of which went into effect on January 1, 2020. While the financial world will be unpacking the full implications of the Act for some time, employers and employees are eager to learn how the SECURE Act impacts corporate retirement plans now.
We’ve chosen a few of the significant provisions of the Act to walk you through now and will revisit the topic for further explanation as the year, and the Act’s effect on corporate retirement plan sponsors and participants, unfolds.
Age threshold for minimum required distributions
Until this year, retirement plan participants had to begin withdrawing minimum required distributions at 70 ½. This was an unwelcome requirement for many, as the distributions are taxable. Under the SECURE Act, participants who turn 70 ½ in 2020 or later now have the option to wait until age 72 to begin minimum required distributions. This provision permits participants to leave their money untouched for longer and allows the opportunity for an extra year and a half of tax-deferral.
Tax credits increased
The SECURE Act also increases incentives for business owners who did not previously offer the option of a retirement plan to begin doing so. Under the Act companies may be eligible for up to $5,000 in tax credits if they establish a new retirement plan. The cost of setting up a new plan can often range from $2,500 to $5,000, thus the tax credit provided by the Act has the potential to effectively remove the financial hurdle to plan establishment. Beyond the tax credit for setting up a new plan, the Act further incentivizes automatic enrollment features, with small businesses eligible for an additional $500 tax credit if they incorporate this feature into their plan offerings.
Establishment deadlines extended
Before the SECURE Act was passed, businesses had until the end of the calendar year to establish and adopt retirement plans. This presented a challenge to many corporations, as the accounting for the year is often not finalized by December 31. An end of calendar year deadline often meant that business owners had to make decisions about plan funding before they had a complete picture of what funds were available. The SECURE Act allows businesses to establish and adopt a plan as late as the tax filing deadline, including extensions, when they have a more accurate appraisal of the resources available to fund a plan.
Safe harbor provisions added
Plan sponsors wishing to include annuities as investment options in their retirement plan offerings can now do so without fear of liability, provided they meet certain requirements. Under the SECURE Act, safe harbor provisions render plan sponsors exempt from penalties and liability in the event that the provider of the annuity goes bankrupt—provided the plan sponsor has taken all of the necessary steps to properly vet the annuity before including it in their plan offerings.
Eligibility rules relaxed
The SECURE Act makes it possible for companies to permit long term part-time employees to participate in corporate retirement plans, opening up retirement savings options to a wider employee population. In addition to being a draw for new hires, the relaxed eligibility rules foster greater participation in an organization’s savings culture, potentially leading to a more financially educated and engaged workforce.
While these five provisions are among the most significant, the SECURE Act brings the potential for even more positive opportunities for plan sponsors and participants. To learn more about how the SECURE Act could impact your corporate retirement plan, reach out to N1 Advisors today.