- The SECURE Act creates a fiduciary safe harbor for employers to expand employee retirement plan eligibility.
- The act creates dual eligibility for part-time employees to participate in retirement plans.
- The law is paid for through strategic offsets in the congressional budget.
- This article is for business owners interested in expanding retirement plan eligibility for their employees.
The Setting Every Community Up for Retirement Enhancement Act of 2019, or the SECURE Act, was signed into law in 2019. The measure’s primary goal was to expand access to employee retirement benefits and savings plans to reduce the number of retired Americans who slide into poverty once they are living on a fixed income. The SECURE Act was part of a broader legislative effort to implement reforms to laws around employee retirement plans that have been on the books since 2006.
This guide offers an overview of the SECURE Act and what you need to know about its impact on your business.
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How the SECURE Act expands employee retirement access
Key provisions in the SECURE Act meaningfully expand employee retirement plan access and fiduciary protections for small businesses that extend those plans to their employees.
The SECURE Act was designed to spur greater participation in small business benefits and help more Americans save for retirement. The act opened up eligibility for part-time workers to participate in 401(k) plans and also let Americans contribute to retirement accounts later in life.
The SECURE Act offers the following provisions that improve employee eligibility for certain retirement benefits:
- It allows employers to automatically escalate employee contributions from 10% to 15%.
- It implements rules that help long-term part-time workers participate in 401(k) plans by requiring employers that provide the benefit to have “a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service.”
- It gives a larger tax credit to small businesses that set up retirement plans for employees, making the process more affordable.
- It provides retirement-plan holders an easier way to transfer lifetime income to another employer-sponsored retirement plan or IRA.
- It lets individuals contribute to a traditional IRA beyond the current cutoff of 70.5 years old. Under the SECURE Act, they can continue to contribute until they are 72 years old.
- It helps people with taxable, non-tuition fellowship and stipend payments to save for retirement based on that income.
- It blocks qualified employer plans from making loans through credit cards, ensuring that “plan loans are not used for routine or small purchases, thereby preserving retirement savings.”
- It gives employers a fiduciary safe harbor when selecting a lifetime income provider. Under those protections, employers have a set of guidelines that, if followed, can shield them from liability.
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How the SECURE Act impacts small businesses
The changes in the SECURE Act have significant impacts on small businesses. The act is designed to help Americans contribute to private retirement accounts, and to do so for longer.
Here are some of the SECURE Act’s impacts on small businesses:
- It helps employers raise participation rates in 401(k) plans by opening eligibility to part-time workers.
- It gives small businesses a way to increase participant contributions by escalating contributions from 10% to 15%.
- It spurs small businesses to start offering retirement benefits or expand their retirement plan offerings by providing bigger tax credits to companies that offer benefits.
- It helps employers meet safe harbor thresholds, allowing business owners to maximize contributions to their own accounts.
- It makes retirement plan assets less accessible to pay routine small business expenses.
- It grants employers increased protection to shield them from liability.
These provisions make it easier for employers to recruit employees, especially part-time workers. The act gives employers more tools to encourage employee plan participation and increase the assets held in retirement accounts. That, in turn, makes it easier for businesses to receive personalized service and access better wealth-management solutions.
Further Consolidated Appropriations Act of 2020
Since the passage of the SECURE Act, the world has continued to change. 2020 saw not only the sweep of COVID-19 around the globe (and ensuring economic crises) and the changing of presidential administrations following a tumultuous election, but also more legislation that affects small businesses.
One item of special note is the Further Consolidated Appropriations Act (FCAA) of 2020. The FCAA was passed in December 2019 to fund the federal government through the 2020 fiscal year. Among other things, the act provided an estimated $426 billion in tax cuts for individuals and businesses through a number of changes to the U.S. tax code.
These are some changes the FCAA made:
- Removing the age limit for IRA contributions
- Adding childbirth as an exemption for early retirement plan withdrawal penalties
- Increasing the age for required minimum distributions from retirement plans from 70.5 to 72
Of course, many of these changes pale in comparison to the global effects of the COVID-19 pandemic, widespread shutdowns, global supply chain issues, and rising costs of living. Still, these are sweeping changes that significantly impact Americans’ ability to save and prepare for retirement.
Dock Treece contributed to the writing and reporting in this article.