SECURE Act 2020

Retirement savings plan participants are affected by the SECURE Act retirement bill in several key ways:

SECURE Act RMD changes allow two more years to save and compound interest.

Prior to 2020, individuals with 401(k) plans or IRAs had to take distributions no later than April 1st of the year they turned 70.5. New SECURE Act RMD rules allow plan participants to wait until they’re age 72 to take mandatory withdrawals from their retirement savings accounts. If a plan participant turned 70.5 in 2019, they’re stuck abiding by the old rule, but for anyone who has not yet reached this milestone, there are a few more years of nest egg growth if they want it.

Please note: Generally, individuals who work beyond their specified age do not have to take their RMD until they terminate employment. Participants who are more than 5% owners of the business, however, must take distributions at the specified age regardless of whether they remain employed or not.

The plan owner must calculate the correct distribution based on the IRS Life Expectancy tables for a single or joint account. More can be taken out if desired, but not less. The money can be taken out in a lump sum, monthly, or quarterly throughout the year. If the owner fails to take out the full amount of the RMD, the amount not withdrawn is still taxed at 50%. This penalty can be waived if the owner can make the case that it was a reasonable error and demonstrate that proper steps are being taken to correct the oversight.

Some beneficiaries must take inherited distributions within 10 years.

Plan beneficiaries must receive the whole distribution within 10 years of the account owner’s passing, with a few exceptions. A surviving spouse, minor child under 18 years old, disabled/chronically ill heir, or an individual who is not more than 10 years younger than the decedent can follow the traditional rule – taking minimum distributions based on the IRS life expectancy table. Account holders will need to plan their estates carefully, as taking these distributions could push their beneficiaries into a potentially higher tax bracket.

Parents have a new option for covering a new child or their child’s college expenses.

Parents can withdraw up to $5,000 from a 401(k), penalty-free, within a year of a child’s birth or adoption. They may also withdraw up to $10,000 from 529 plans to repay student loans or apprenticeship tuition. This money can be repaid later as a rollover contribution from another qualified plan if desired.

Plan participants aren’t the only ones impacted. Here is a SECURE Act summary for small business owners:

Part-time employees and gig workers may need to be included in the 401(k) plan.

All part-time employees working at least 500 hours a year for three years of their employment are now eligible for a workplace retirement plan that offers one. There are no employer match or contribution requirements, and the law includes special guidelines to avoid nondiscrimination test failure.

New tax credits exist for small business owners who start a company retirement plan.

Small business owners interested in starting a new 401(k) program can claim a tax credit worth $250 per eligible non-highly-compensated employee – a minimum credit of $500 to a maximum of $5,000 – to help cover the cost of setting up the plan. This credit extends to employers with up to 100 employees. If the plan includes auto-enrollment, an additional $500/year credit can be applied. These credits can be applied for the first three years of a new plan.

Multiple Employer Plans are easier to join.

The new law makes it easier for small businesses to band together to offer defined contribution retirement plans called MEPs. Even if one of the other employers fails to satisfy the tax qualification rules, the others will not necessarily be punished. In the past, “one bad apple” could spoil the tax advantage for the whole bunch.

Safe Harbor provisions are easier to add.

Prior to the SECURE Act, employers had to abide by certain deadlines to add Safe Harbor protection from nondiscrimination testing rules. With a matching contribution, employers need to give 30 to 90 days’ notice before the start of the plan year. The SECURE Act adds flexibility. Now employers do not need to give notice for certain changes to employer matching formulas, and can amend their plans as late as the last day of the following year, if they agree to make a 4% or greater contribution.

This SECURE Act summary only includes a handful of the 29 provisions passed. It can be difficult to keep up with the changing times and ensure your plan is in 100% compliance with the law, and taking full advantage of all the benefits extended your way. Contact us to learn more about small business retirement plans. As a 401(k) plan provider and administrator, Ubiquity offers direct assistance to small business employers and plan participants alike.