Last month the Secure Act was signed into law and includes some significant changes to retirement plans. While clarification of the rules, especially regarding exemptions, are likely to be communicated as the year goes on, below is a summary of what we know thus far and how it may impact our clients. The first three are likely to impact the most people.
- Delay the start of Required Minimum Distributions (RMDs). Currently, plan participants and IRA owners must begin taking distributions at age 70½. Beginning this year, the SECURE Act delays RMDs until age 72. For people who turned 70½ prior to 2020, this will have no impact and will need to continue taking RMDs. Those turning 70½ this year will not have to begin RMD. This provision recognizes that life expectancy has increased since RMD rules were created in 1986.
- Repeal of Age Limitations for IRA Contributions. The legislation recognizes that more Americans are living longer and working past normal retirement age. As a result, the SECURE Act permits those over age 70½ with earned income to contribute to a traditional IRA. Previously, those 70½ and older who were still working could only contribute to their employer plan or to a Roth IRA, but not to a traditional IRA.
- Eliminate “Stretch” IRAs. This requires beneficiaries withdraw all assets of an inherited account within 10 years and pay the resulting tax liability. There are no required minimum distributions within those 10 years, but the entire balance must be distributed after the 10th year. In the past, beneficiaries of these accounts could typically spread the distributions over their own life expectancy. This change can be problematic for some beneficiaries, especially if they are in their 40s and 50s and at the peak of their earning years. The 10-year rule does not apply to some beneficiaries, such as surviving spouses, disabled individuals, minors, and those who are not more than 10 years younger than the account owner. The 10-year rule does not apply to people who inherited an IRA prior to 2020.
- Penalty Free Distribution From a Retirement Plan up to $5,000 in the Event of a Qualified Birth or Adoption. The withdrawal can be taken at any time within the first 12 months from the child’s date of birth or from the date the legal adoption is finalized.
- Expansion of Plan Eligibility to Long-Term Part-Time Employees. This expands employee coverage to those that have worked at least 500 hours per year for the past three consecutive years. Previously, an employee needed to work at least 1,000 hours.
- Annuities and Lifetime Income Options in Retirement Plans. This encourages employers to offer guaranteed lifetime income options in their retirement plans. The legislation simplifies some of the compliance and fiduciary rules by offering a safe harbor provision for annuities. It also requires the plan sponsor to provide plan participants with an annual disclosure that estimates the monthly payment an employee will receive at retirement.
- Increased Tax Credits for Small Businesses. Small businesses can receive a tax credit for retirement plan start-up costs up to $5,000. An additional tax credit of $500 a year for three years will be available if the plan offers automatic enrollment. Eligible employees will be automatically enrolled in the plan and will have to affirmatively elect out if they do not want to participate. Automatic enrollment increases both plan participation and savings rates among employees.
- Expansion of Multiple-Employer Plans. This permits unrelated small businesses to share the administrative and financial burden of establishing and maintaining a retirement plan. It also shields employers from the breach of another’s administrative and fiduciary duties.