SECURE Act Paves Way for Better Access to Retirement Plans

In December of last year (2019), the SECURE Act was signed into law providing the American workforce and employers with the most significant piece of retirement-related legislation since 2016.

We introduced some of the impacts of this bill upon investors at or near retirement age in this article which appeared in our launch of On Course. And our sister company, RPS Retirement Plan Advisors, discussed the bill’s impact on 401(k) plan sponsors and the potential for offering lifetime annuity options within such plans.

The SECURE Act has lofty goals of increasing access to workplace retirement plans for millions of workers, and the provisions reach farther than near term retirement strategies and lifetime annuity programs. With that in mind, here are some of the other noteworthy provisions that may affect workers and business owners.

Open Multiple Employer Plans (MEPs)

Generally speaking, this provision allows unrelated employers to pool together into a single retirement plan with one Form 5500 — an annual report filed with the Department of Labor that provides the DOL and IRS with details about a 401(k) plan’s financial conditions, operations, and compliance. Previously, for employers to utilize this pooled structure, there had to be commonalities or some kind of relationship between the employers, like a PEO (Professional Employer Organization) or an Association that they belonged to.

The thinking here is that smaller employers who have previously resisted setting up a plan on their own due to compliance or cost issues will now have an easier path forward. This provision will go into effect for plan years after 12/31/2020.

Safe Harbor for Annuity Selection/Lifetime Income Disclosures

For most Americans, 401(k) plans will be the primary source of income during retirement. So, being able to turn a portion of that account balance into a lifetime income stream will be a necessary option. As discussed in more depth by the RPS article mentioned above, plan sponsors were previously concerned that they could be held liable if their choice of annuity provider was not able to meet their obligations; effectively opening up the plan sponsor to potential legal action.

This Safe Harbor provision of the SECURE Act, however, specifically protects employers from future liability due to, among other things, carrier insolvencies. Thus, access to these income solutions should increase going forward.

Additionally, there will be a requirement that retirement plans provide a statement at least annually with a disclosure that translates account balances into a future income amount.

Tax Credit

For small companies concerned about the cost of starting a retirement plan, the SECURE Act provides a tax credit of up to $5,000 for businesses with fewer than 100 employees who start a retirement plan beginning in the year 2020. This credit is available for up to 3 years after the start of the plan. If the plan elects Auto Enrollment, there is an additional $500 tax credit available.

Part-Time Employees

Part-time employees have historically been ineligible for a company retirement plan due to the low hours worked. However, beginning in 2021, part-time employees who work at least 500 hours annually for 3 years will be eligible to join their employer’s plan. They could still be excluded from safe harbor contributions as well as non-discrimination testing.

Other Considerations

There are a few other provisions that will have an impact on companies offering retirement plans and their participants. These include:

  • Distributions of up to $5,000 for birth or adoption expenses will be exempt from 10% penalty
  • Auto-escalation cap increased from 10% to 15%
  • Simplification of notice requirements for non-elective safe harbor contributions
  • Extended the time period for companies to adopt a plan to their tax-filing deadline

Overall, the SECURE Act should eliminate some of the roadblocks that have kept employers from starting company-sponsored retirement plans. And, the more access people have to this valuable benefit, the better.