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Employee benefit plans have recently undergone the largest retirement plan legislation in over a decade. The SECURE Act of 2019 became law on December 20, 2019, and includes various provisions, most of which are to be effective for plan years beginning after December 31, 2019. The following areas are some of the significant items affected under the SECURE Act:
Required Minimum Distributions (RMD)
The age of required minimum distributions has increased from 70.5 to 72 years of age. Employers still have the option to set an earlier RMD age. However, keep in mind, if the participant turned 70.5 years of age during 2019, RMDs will still be required to avoid any penalties.
In the past, beneficiaries who inherited an account(s) from someone other than a spouse were, in some cases, allowed to withdrawal RMDs for the span of their lives. This has since changed under the SECURE Act and it is now required that all assets of the inherited account be withdrawn within 10 years.
Employee Eligibility and Auto-Enrollment Contribution Cap
Eligibility must be made available to any employee who worked at least 500 hours per year in the preceding 12-month period. This is a decrease from the previous 1,000-hour requirement. Further, long-term part-time individuals will now be eligible to participate in the plan after meeting the set hour requirements. Should the plan auto-enroll their employees once meeting eligibility requirements, the cap under a safe harbor plan for auto-enrolled contributions has increased from 10% to 15%.
There have been a number of penalty-free withdrawal options for participants prior to the implementation of the SECURE Act, including first-time homebuyers, medical and education expenses. Under the new legislation, participants will now also be eligible to withdraw up to $5,000 penalty-free to put towards the costs of having or adopting a child.
Tax Credits and Multiple Employer Plans for Small Business
The new legislation has increased the tax credit for small employer pension plan startup costs (maximum of $500 per year if the employer creates a 401(k) or SIMPLE IRA plan with autoenrollment). The bill also increases access to multiple employer plans. Under the bill, employers are no longer required to have a “common characteristic” such as being in the same industry.
Age Limitation on IRA Contributions
Prior to the SECURE Act, after age 70.5, an individual could no longer contribute to a traditional IRA. However, contributions could be made to a ROTH IRA. The age limitation relating to traditional IRA account holders has been removed.
Under the SECURE Act, defined contribution plans will be required to deliver a lifetime income disclosure to participants at least once every 12 months. This disclosure will show how much the balance in the account could generate for every participant.
For companies that offer retirement plans to their employees, the SECURE Act went into effect for plan years beginning after December 31, 2019. Should you have any questions or would like to learn more, please reach out to Mike Kozlowski, Mary Stucke, or Ben Forquer.