Understanding the SECURE Act

The SECURE Act (Setting Every Community Up for Retirement Enhancement) represents the most comprehensive update to retirement planning in over a decade, aiming to expand opportunities for retirement savings and simplify plan management. Many provisions took effect in 2020, impacting both new and existing retirement plans.

Key SECURE Act Provisions for Small Businesses

To encourage new 401(k) plans, the deadline for establishing a plan is extended to the tax return filing date, including extensions. Additionally, small businesses with up to 100 employees are eligible for expanded tax credits:

• Startup Costs: Up to $5,000 per year for the first three years, with a potential $15,000 in credits over three years.
• Automatic Enrollment: An additional $500 tax credit is available for adding automatic enrollment, applicable for three years.

401(k) Safe Harbor Changes

The SECURE Act introduces flexibility to nonelective safe harbor 401(k) plans, eliminating the annual notice requirement and allowing additional contributions:

• A 3% nonelective contribution can be added up to 30 days before year-end.
• A 4% nonelective contribution can be added after this deadline if amendments are made by the end of the following year.

Changes to Distribution Rules

The Act increases the Required Minimum Distribution (RMD) age from 70½ to 72, beginning in 2020, and introduces penalty-free distributions for up to $5,000 for expenses related to birth or adoption, with an option to repay these amounts to the retirement account.

Inclusion of Part-Time Employees

Long-term, part-time employees (21 or older with 500 hours per year for three consecutive years) must be eligible for defined contribution plans, although they may be excluded from safe harbor contributions and certain testing requirements.

New Lifetime Income Disclosures

Annual benefit statements will now require a lifetime income estimate, showing expected monthly payments in retirement based on current balances, encouraging realistic financial planning. This provision takes effect in 2021.

Increased Penalties for Late Filings

Penalties for late Form 5500 filings have risen to $250 per day (capped at $150,000), while Form 8955-SSA penalties increased to $10 per participant per day (capped at $50,000). Timely filings remain crucial to avoid these costs.

Questions? Contact us to discuss your specific plan needs and how to implement SECURE Act provisions effectively.