by Matthew R. Baker, CPA, Partner
The Setting Every Community Up For Retirement Enhancement Act of 2019 (The SECURE Act) was signed into law on December 20, 2019, setting off a series of changes for retirement plans around the country. This legislation ushered in the most significant changes impacting retirement plans/planning in more than a decade. On October 27, 2020 the Securing a Strong Retirement Act of 2020 was introduced in the House of Representatives. Although this new legislation has been introduced, as of December 9, 2020 it has not passed. If it does proceed and become law, we would like to provide some insight into some of the particular provisions for your consideration.
Automatic enrollment safe harbor cap: The SECURE Act of 2020 aims to further encourage increased employee participation and would require an automatic enrollment feature for new plans. The requirement would be an initial automatic enrollment at a minimum of 3% of compensation and an automatic escalation increase of at least 1% annually until it reaches 10% of compensation. This legislation would allow for employees to opt out of coverage, would grandfather the eligibility provisions of existing plans, and would allow for exceptions from the automatic enrollment for small business with 10 or fewer employees, new businesses with less than 3 years of existence, church plans, and governmental plans.
Credit for small employer pension start-up costs: The start-up credit for small business (employers with less than 50 employee) would be expanded from 50% of administrative costs to 100% of administrative costs, up to an annual cap of $5,000. The start-up credit would be available for the first 3 years of plan administrative costs.
In addition, a new credit would be available for such qualifying plans equal to an applicable percentage of employer contributions up to $1,000 per employee during the first 2 years of the new plan. (100% during the 1st two years of the plan, 75% in year 3, 50% in year 4, 25% in year 5 and zero for years thereafter) The full credit would be available to employers with 50 or fewer employees and phased out gradually for employers with 50 to 100 employees.
Required minimum distributions (RMD): Historically participants have been required to begin taking distributions once they reached age 70 ½. This was changed to age 72 by the SECURE Act of 2019 and is being proposed to be changed to age 75 under the SECURE Act of 2020. The SECURE Act of 2020 also introduces an exemption from RMD’s if the balances in all of an individual’s retirement plans on December 31 of the year before the individual reaches the age of 75 is $100,000 or less.
What happens if you fail to take a RMD? Under existing rules, there is a penalty of 50% of the RMD assessed when you file your tax return. The SECURE Act of 2020 looks to reduce the penalty to 25% with a further reduction to 10% if the failure is corrected timely.
Other pertinent considerations of the SECURE Act of 2020:
- Inflation indexing of the IRA catch-up limit beginning in 2022
- Providing for an increased catch-up contribution for individuals exceeding age 60.
- Allow for treatment of student loan payments as elective deferrals for purposes of matching contributions.
- Provide a grace period of 9 ½ months after the end of the plan year in which administrative failures were made for them to be corrected. This would apply to all employers who adopt a plan with automatic enrollment and automatic escalation
- One-year reduction in period of service requirement for long-term, part-term employees.
- Provide retirement plan fiduciaries flexibility with respect to recovery of plan benefit overpayments
- Soften ERISA and Internal Revenue Code plan administrative notice requirements related to unenrolled employees
- Expand charitable distribution tax benefits to distributions from qualified plans
The above commentary regarding the provisions of the Securing a Strong Retirement Act of 2020 is not all inclusive. We would be happy to discuss the proposed legislation in more detail. Please contact your Maillie representative for more information.