At a Glance
- December 20, 2019, the President signed The Setting Every Community Up for Retirement (SECURE) Act into law.
- The SECURE Act becomes effective January 1, 2020; however some provisions have different effective dates.
- Changes under the Secure Act include:
- For plan years beginning after Dec. 31, 2020, long term part-time employees will be eligible to participate in 401(k) plans;
- For tax years beginning after Dec. 31, 2019, the credit limit for pension plan start costs incurred by small employers is increased;
- For tax years beginning after Dec. 31, 2019, a credit will be available for small employers who implement plans with automatic enrollment; and
- For distributions made after Dec. 31, 2019, parents can now make penalty-free withdrawals up to $5000 each to defray birth and adoption costs.
The Setting Every Community Up for Retirement Act
The Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act, was signed into law on December 20, 2019. Since former President George W. Bush signed the Pension Protection Act of 2006 into law, the SECURE Act is one of the most significant changes to retirement policy addressing employer and employee retirement planning issues, taxation, and plan administration. Due to the broad sweeping nature of this legislation, this alert will spotlight four key changes affecting employers and employees.
Long Term Part-Time Employees are Eligible to Participate in 401(K) Plans
The SECURE Act provides long-term part-time employees the ability to participate in 401(k) plans. Prior to the SECURE Act, employers could exclude part-time employees (employees who work less than 1,000 hours per year) from defined contribution plans. Under the SECURE Act, employers maintaining a 401(k) plan are required 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 each year requirement. This provision is effective for plan years beginning after December 31, 2020; however, for purposes of meeting the employee satisfying the 3-year/500 hour requirement, years of service beginning before January 1, 2021 are not taken into account.
Increased Credit Limits for Small Employer Pension Plan Start-Up Costs
The SECURE Act raises the credit available for plan start-up costs making it more affordable for small businesses to establish retirement plans. The credit limit increase results from the new law changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.
Small Employer Automatic Enrollment Credit
The SECURE Act suggests that automatic plan enrollment increases overall participation and employee retirement savings. The Act creates a new tax credit of up to $500 per year for employers to cover startup costs for new 401(k) plans and SIMPLE IRAs that include automatic enrollment. The new credit is in addition to the plan start-up credit allowed under the present law and will be available for three years. The credit also applies to employers converting an existing retirement plan to a plan with automatic enrollment.
The SECURE Act helps parents by allowing for penalty-free withdrawals from individual retirement accounts for birth or adoption expenses. Each parent may withdraw up to $5,000, providing a total benefit of $10,000 per couple. Each retirement account must be solely owned and in the name of the individual parent.
There are many provisions to the Secure Act, most of which address retirement planning policy. While this article has highlighted some key changes that will affect employers and employees, we suggest always consulting your retirement plan administrator or qualified financial services professional for advice.
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This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.
Date Posted: January 29, 2020