The SECURE Act is the first major retirement-related legislative development in the US since the Pension Protection Act in 2006. Today’s article explains how it can potentially affect retirement plans across the country.
In this article:
- What Is the SECURE Act?
- 4 Ways the SECURE Act Will Affect Americans’ Access to Retirement Plans
- How the SECURE Act May Impact Retirement Contributions
- How Will the SECURE Act Affect Distributions?
- Status of the SECURE Act
The SECURE Act’s Effects on American Retirement
What Is the SECURE Act?
The SECURE Act, or the “Setting Every Community Up for Retirement Enhancement Act,” was passed by Congress on May 23, 2019. It’s an act that proposes to change several important laws governing retirement and savings.
The Senate’s version of the SECURE Act is called the Retirement Enhancement Securities Act (RESA). Some of RESA’s provisions may be included in the SECURE Act.
4 Ways the SECURE Act Will Affect Americans’ Access to Retirement Plans
1. Better Part-Time Employee Access to Retirement Plans
The Act reduces the required number of working hours for business owners to sign up part-time workers for 401(k) plans. The Act brought the requirements for part-time individuals to get a retirement plan down to:
- A total of 1,000 working hours for an entire year; or
- A minimum of 500 working hours annually for the last 3 years
By bringing down the required minimum annual working hours to qualify for 401(k) plans, more working Americans can access 401(k)s.
2. More Small Business Employees Can Access Retirement Plans
Under the Congress-approved bill, running a multi-employer retirement plan will become easier and less costly. In turn, this can encourage more small businesses to jointly put up and offer 401(k) plans to their employees.
By banding together, small businesses will take on less fiduciary liabilities and lower costs to provide their employees with retirement plans, unlike under current retirement laws. This is because current SEP and SIMPLE IRAs weren’t enough to help small businesses provide retirement plans to their employees.
The SECURE Act can also help provide more retirement plan opportunities to more small business employees through safe harbor plans. In particular, the Act increases the maximum cap for automatically enrolling their workers in safe harbor retirement plans from only 10% to 15% of a worker’s salary.
3. Tax Credit for Automatic Enrollment of Employees in Retirement Plans
Under the Act, small business owners can get a $500 tax credit for automatically enrolling their employees in retirement plans. The owners can use this tax credit to compensate for some of the retirement plan-related operating costs and potentially reduce their tax rate.
This can encourage small business owners to enroll their employees automatically, which can help more Americans qualify for retirement plans.
4. More Employer Plans with Increased Retirement Annuity Options
Currently, a lot of employer plans or plan fiduciaries, such as 401(k)s, don’t offer annuities due to fears of incurring annuity provider-related liabilities. The SECURE Act aims to ease those fears by minimizing such liabilities on qualified retirement plans.
By reducing possible annuity-related fiduciary liabilities, the SECURE Act aims to encourage more plan fiduciaries to offer annuity plans, giving retirement planners more opportunities to get into such an investment. This can give more retirement plan options to millions of Americans.
How the SECURE Act May Impact Retirement Contributions
5. Age Limitations for Traditional IRA Contributions Will Be Abolished
If the current version of the SECURE Act passes, it will repeal the age limit of 70 ½ years old for contributing to a Traditional IRA. This limit under the current law keeps retirees who want to continue building up their Traditional IRAs well into retirement from doing so.
How Will the SECURE Act Affect Distributions?
1. Delayed Required Minimum Distributions
Under today’s retirement laws, almost all retired individuals need to begin withdrawing minimum amounts from their retirement accounts when they turn 70 ½. Congress’ SECURE Act proposes that the age be pushed back to 72 while the Senate’s RESA wants to push it back further to 75 years old.
This particular provision gets mixed reactions.
On one hand, some criticize this as being applicable only to those who don’t need retirement income, such as rich individuals. To ease these concerns, another provision in the Act exempts accounts with less than $100,000 from required distributions.
On the other hand, some think this provision actually makes perfect sense, regardless of a retiree’s status. It’s because people have longer life spans these days, and delaying RMDs can help increase the lifespan of retirement accounts, too.
2. Faster Distribution of Inherited Retirement Accounts
Today’s retirement laws allow beneficiaries of inherited retirement accounts to maximize their distributions across their life expectancies. The current version of the SECURE Act will shorten the distribution period to a maximum of 10 years only.
This particular provision can have a very profound impact on estate taxes. As a result, investors may need to revise their estate plans if the Senate ratifies the current version of the Act.
3. Removal of Penalties for Child-Birth and Adoption-Related Distributions
Currently, early retirement account withdrawals incur a penalty tax of 10% from the IRS. Included among such early withdrawals are those used to pay for childbirth or child adoption expenses.
But under Section 113 of the proposed Act, retirement account owners can withdraw up to $5,000 from their plans to pay for childbirth and adoption expenses without penalties. However, they should do so within 12 months after finalizing the adoption or birthing the child.
4. Use of 529 Plans for Qualified Student Loan Repayments
The proposed SECURE Act gives parents who have excess funds in their 529 accounts the option of using them to pay off their children’s student loans and give them a fresh start in their post-university lives. And, they can do this without incurring penalties from the IRS.
Status of the SECURE Act
The primary option for speedy ratification of the Act in the Senate is unanimous consent among senators. However, the Act didn’t achieve this because of two senators who didn’t give their consent.
- Senator Ted Cruz reportedly didn’t give his consent because the final House-approved version of the Act removed a provision allowing people to use 529 college savings accounts to pay for homeschooling expenses.
- Senator Pat Toomey had also reportedly withheld his consent for reasons that remain unclear.
Unless the Act gets unanimous consent in the Senate, it will have to go through the usual tedious and time-consuming procedure of bipartisan floor deliberations. Because of this, the SECURE Act will most likely fail to become a full-fledged law this 2019.
Granted that the SECURE Act passes the Senate, it can help a lot of Americans start preparing for retirement via formal, tax-advantaged retirement plans. However, failure to get unanimous consent in the Senate may mean it may take a while for the Act to actually benefit millions of working Americans.
Will the SECURE Act affect your retirement? Let us know why or why not in the comments section below.