- Months after its initial passage in the House Ways and Means Committee back in April, President Donald Trump signed the SECURE Act into law on Dec. 20, 2019.
- Having taken effect on Jan. 1, 2020, the SECURE Act has an immediate impact on retirement plans, including raising the minimum distribution and contribution ages.
- The law is considered by many to be friendly to small businesses and part-time workers.
Just before Democrats and Republicans in the Senate packed it up for their long holiday break on Dec. 19, 2019, legislators passed a massive spending package. The following day, President Donald Trump signed it into law, preventing a government shutdown akin to the one that occurred during the same time in 2018.
In a political climate where the two major parties in Congress battle on nearly every issue they face, the "Setting Every Community Up for Retirement Enhancement Act of 2019," or the SECURE Act, has been a rare instance of bipartisanship on its road to Trump's desk. After passing the House of Representatives' Ways and Means Committee back in April, it received a commanding 417-3 vote of approval in the overall House before making its way to the Senate, where it passed as part of the Further Consolidated Appropriations Act with a vote of 71-23.
While that would be newsworthy by itself, the bill also has a legislation package that not only received significant bipartisan support in the House, but would have a major impact on Americans' retirement plans at the start of 2020.
Touted as a major step in making retirement benefits more attainable for American workers, the SECURE Act has brought about some big changes to 401(k) and IRA retirement plans with the start of the new year.
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What the SECURE Act means for small businesses
When it was initially introduced, the SECURE Act was touted by legislators as a potential boon for small businesses, with House Majority Leader Steny Hoyer (D-Maryland) stating at the time that the bill would "help American workers and their families save for a secure retirement."
One of the main ways this new law attempts to prove Hoyer right is the larger tax credit for small businesses that set up retirement plans for their employees and invest in their future retirement. The credit is designed "for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan at work (minimum credit of $500 and maximum credit of $5,000)," according to Fidelity.
This tax credit is only available to small businesses with up to 100 employees over a three-year period. It started on Dec. 31, 2019, and applies to multiple benefit plans, including SEP, SIMPLE, 401(k) and profit-sharing initiatives. An additional credit of up to $500 is available to companies that offer automatic enrollment for a 401(k) or SIMPLE IRA.
The SECURE Act also makes it easier for small businesses to sponsor employee retirement plans by removing previous restrictions on multiple employer plans (open MEPs), which let SMBs enter a plan with other businesses. The employers under the new multiple employer plan do not have to be related to one another, and it eliminates an IRS rule that all MEP participants face consequences if one employer falls out of compliance.
Along with those provisions, the SECURE Act will give employers a "fiduciary safe harbor" for selecting a lifetime-income provider. The new law increases the cap on the withholding amount when employers automatically enroll workers in these safe harbor retirement plans from 10% to 15%. This is beneficial for employees, because as long as they continue to contribute to their retirement savings, the amount withheld for retirement could go up each year until it reaches 15%.
How the SECURE Act benefits American workers
As it made its way through the legislative process, the SECURE Act was constantly stressed by lawmakers as an important step in the right direction for workers. With its signing into law, the SECURE Act is the first major piece of retirement legislation to become law in 14 years. Here are some of the major points you must know about the SECURE Act if you are paying into a retirement fund.
1. You now must be 72 to withdraw from some retirement accounts.
Whether you have a 401(k), a Roth or traditional IRA, or even student loan debt, the SECURE Act will have an impact on your life and your retirement. Perhaps the most important of the law's approved changes is that you now must be 72 years old – rather than 70.5 – to start withdrawing money from your retirement accounts. The SECURE Act worked as a repeal of the old law, replacing it with the current law. Moneys allocated to traditional IRAs and 401(k)s, as well as plans like 403(b) and 457(b), are also affected by this change.
According to Kiplinger, if you were born before July 1, 1949, or were already receiving funds because you were over the previous minimum age, you'll still be able to take your required minimum distributions (RMDs), though the former group will have to do so before April 1, 2020. The only age group that will have to wait longer is those born on or after July 1, 1949, who will have to wait until their 72nd birthdays.
2. You have more time to contribute to your retirement plans.
Since individuals will have to wait longer to receive their retirement money, the SECURE Act lengthened the time people have to contribute to qualified retirement plans. Starting with the 2020 tax year, individuals can keep putting money into their traditional IRA as long as they are earning an income. The important thing to note is that you still can't contribute to your traditional IRA if you were over 70.5 years old in 2019.
3. Long-term, part-time workers can participate in an employer's 401(k).
The bill allows long-term, part-time workers to participate in 401(k) plans by requiring employers to offer the option through "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."
Previously, if you worked fewer than 1,000 hours in one year or 500 hours over three consecutive years as a part-time employee, you were excluded from company 401(k) plans. Under the SECURE Act, that's no longer the case, as long as the retirement plan isn't part of a collective bargaining agreement.
4. Withdrawals can be used to offset child costs and student loans.
In some specific cases, funds from a retirement plan can be used to pay off certain life-altering costs, such as student debt and childbirth or adoption fees.
Under the new law, participants in a defined contribution plan like an IRA or a 401(k) can take out up to $5,000 for a "qualified birth or adoption distribution." While a 10% early withdrawal fee was usually added to such a transaction in the past, the SECURE Act has removed that penalty. Furthermore, the funds can be paid back as a rollover contribution to an eligible contribution plan or IRA.
As for student loan repayments, families can now use an existing 529 account balance to help pay down that debt. According to the SECURE Act, a family can use up to $10,000 from their 529 account to help cover student debt costs after the student graduates. That $10,000 is the maximum that can be divvied out in a student's lifetime. Funds from a 529 plan can also be used to pay for certain apprenticeship programs.
5. Inherited retirement accounts must be claimed within 10 years.
When an account owner passes away, according to the SECURE Act, any distributions to a beneficiary other than the individual's spouse must be doled out within a decade.
Previously, the rules allowed a non-spouse IRA beneficiary to extend the amount of time an account would pay out to last over the course of their own lifetime. That's no longer the case: The SECURE Act eliminates the potential for an IRA account to continue to increase on a tax-free basis long after the original account owner has died. The new law still has exceptions in place for spouses, disabled individuals and people no more than 10 years younger than the account owner. Minors are also an exception to the rule, though they will only remain the beneficiary until they turn 18 years old.
People who already have an inherited stretch IRA will still operate under the old rules; only beneficiaries of someone who died after Dec. 31, 2019, will be subject to the new provisions.
6. Section 529 funding no longer applies to home schooling.
When the bill was originally introduced, there were two provisions that expanded Section 529 accounts – also known as qualified tuition plans – to cover the costs associated with home school and supplies for K-12 students. While Republicans in Congress favored the measure, numerous teachers' unions and lobbyists did not. As a result, the language was removed, and Republicans were upset at its exclusion. Kevin Brady (R-Texas), the top-ranking Republican on the Ways and Means Committee, said its removal could "lower bipartisan support for the package we reached in good faith."
Senators like Ted Cruz (R-Texas) wanted to keep the provision in, saying that its removal would "discriminate against home-schoolers" with lower financial capabilities. As a result, the SECURE Act was held up in Congress. Other Republicans, like Chuck Grassley (R-Iowa), would have liked to keep the old 529 rules intact but decided to support the bill without the provision in the Senate, as it was considered a "poison pill" in the House of Representatives.