The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, was signed into law at the end of December to help more Americans prepare and plan for greater financial security during their retirement years. Here are some highlights of the main provisions impact on retirement plans:

Tax Credit Increased: The maximum tax credit for employers who establish new retirement plans is now $5,000, up from $500, which is available for three years beginning with tax years after 2019.

Age Limit Raised for Required Minimum Distributions (RMDs): Taxpayers will now have an additional 1½ years until they must begin taking RMDs from their tax-deferred retirement accounts, such as 401(k)s and traditional individual retirement accounts (IRAs). Participants are able to wait until age 72 to take their RMDs.

Age Cap on IRA Contributions Eliminated: Individuals who are still working and earning income after age 70½ may continue to save money in a tax-deferred IRA.

Inherited IRA Distributions Mandated: Previously, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments out over your single life expectancy. Now for any IRAs inherited from original owners who have passed away on or after Jan. 1, 2020, the new law requires most beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder. Exceptions to the 10-year rule include assets left to a surviving spouse, minor child, or a disabled beneficiary.

IRS Filing Penalties Surge: Employers to this point have been penalized up to $25 a day for a maximum penalty of $15,000 per plan year for plans that filed their Form 5500 late or had materially incomplete returns. The SECURE Act raised this penalty significantly, increasing it to $250 a day, up to a maximum penalty of $150,000 per plan year.

Part-Time Retirement Plan Access: Beginning in 2021, part-time employees who have worked at least 500 hours per year over the past three years will be eligible to participate in 401(k) plans sponsored by their employers, provided they are at least 21-years-old at the end of the three-year period. Previously, participation in these plans was limited to full-time employees who worked more than 1,000 hours each year.

Auto-Enrollment Cap Boosted: Many employers automatically enroll eligible employees into their 401(k) plans. To do this they must set a default contribution rate, which to this point could not exceed 10% of the employee’s annual wages, capping first-year contributions at 3%. The SECURE Act pushes this cap up to 6% in the first year and as much as 15% beginning in the employee’s second year of employment.

Plan Adoption Time Extension: Employers will have additional time to adopt a retirement plan. Beginning in tax years after 2019, the legislation allows a plan to be adopted as late as the tax filing deadline, including extensions, for the taxable year rather than by the last day of that taxable year.

Penalty-Free Withdrawals for Birth or Adoption of Child: Participants in employer-sponsored 401(k) plans and IRAs now have up to one year following the birth of a child or adoption of a child younger than 18 years old to take $5,000 per spouse from their individual plans without incurring a 10% early-withdrawal penalty. The amount withdrawn will be subject to income tax, but any recontributed amounts will be treated as rollovers rather than taxable income.

Multiple Employer Plan Revision: The Act revises requirements for multiple employer pension plans and pooled plans by eliminating the so-called “one bad apple” rule and by making it easier for unrelated employers to join a single plan. If one employer in a multiple employer retirement plan fails, the entire plan is not subject to failing any longer. The changes to multiple employer plan requirements will now allow employers who are not in a common industry to form “pooled” retirement plans beginning in plan years after Dec. 31, 2020. This is especially helpful to small businesses wanting to provide retirement plans to employees with a cost savings.

Relaxed Non-Elective Safe Harbor Requirements: The safe harbor notice is eliminated for nonelective 401(k) safe harbor plans. A plan may now be amended to become a nonelective 401(k) safe harbor plan for a plan year at any time prior to the 30th day before the end of the plan year, if the plan provides for a nonelective contribution of at least 4% and the amendment is made by the last day for distributing excess contributions. This provision applies to plan years beginning after Dec. 31, 2019.

The SECURE Act brings many provisions that will require additional guidance from the Department of Labor, Internal Revenue Service and other agencies. Collaborating with our affiliate firm Doeren Mayhew, DM Payroll Solutions can help provide clarity on the specific operations of these rules. Contact us with any questions.

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