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While retirement may be a foreign concept for many, especially those in the peak of their career, it’s essential to have a consistent savings approach. Also, it’s necessary to have access to a retirement plan such as a 401(k), 403(b) or another option. Most have come to expect their employer to provide access to a plan with matching and other savings features. According to a Charles Schwab 401(k) Participant Study, 87% of survey participants consider a 401(k) a must-have job benefit. This contrasts when compared to a report published by the American Association of Retired Persons (AARP), which found that 25% of those employed in the private sector do not have access to a retirement plan. To encourage companies to offer plans and also employees to participate, the President recently signed the Securing Every Community Up for Retirement Enhancement (SECURE) Act into law. The changes affect plan participation rules and provide additional incentives for small businesses to offer a retirement plan. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key changes below.
Key Changes for Plan Participants
- Changes to Participant Statements – The Act requires participants statements to include more information about what they can expect to receive at retirement. The statements are now required to provide a disclosure showing the monthly payments a participant would receive if the account balance were translated into monthly payments. This change educates participants on what level of income they should expect to receive in retirement.
- Required Minimum Distributions (RMDs) – The Act also changed the age at which participants in a 401(k) or Individual Retirement Account (IRA) had to start withdrawing RMDs. Under prior regulations, participants that reached age 70 ½ were required to take these distributions, but the age has changed to 72 years old. It’s important to note those who turned age 70 ½ in 2019 are still required to take RMDs; otherwise, they will face a penalty.
- IRA Contributions – The Act also changes the maximum age at which an individual can make contributions to an IRA. Under prior regulations, individuals 70 ½ or older were prohibited from making contributions. However, the change allows them to continue saving, which is especially useful for those electing to work during retirement.
- Elimination of Stretch IRAs – Under prior regulations, those who inherited an IRA from a spouse were often permitted to take RMDs over the span of their life. This was a useful tool for those who inherited these plans in their 40s and 50s. However, the Act changed the rules requiring beneficiaries to distribute the entire account balance within ten years. While no RMDs are required, the account balance must be distributed by the end of the tenth year. This can have implications for those required to take the distribution because of the additional tax burden it may create.
Key Changes for Plan Sponsors
- Employer Tax Credit – There is an additional tax credit small businesses can receive if they start a 401(k) or SIMPLE IRA with an automatic enrollment feature. The tax credit is a maximum of $500 per year and is an additional incentive on top of existing incentives for offering a retirement plan.
- Multiple Employer Plans (MEPs) – To encourage wider participation by small businesses in MEPs, the Act changed the “bad apple rule.” This rule states that if one employer failed to meet plan requirements, the plan would fail for all others participating. Under the new regulations, employers no longer need to share a “common characteristic” such as being in the same industry or profession. This change is designed to help small companies offer greater access to benefits and features previously unavailable.
- 401(k) Plan Eligibility – To ensure that more employees have access to a 401(k) plan, the Act changed eligibility rules to expand part-time employee participation. The change permits those with three years of consecutive service with at least 500 hours to participate. Under prior regulations, employers were only required to offer plan participation to those with 1,000 hours of service in a single year.
- 401(k) Plan Annuities – To create additional retirement investment options, the Act has changed how annuities are offered in 401k plans. Under prior regulations, the employer held the fiduciary responsibility, and therefore risk, regarding these investments. However, the Act has shifted this responsibility to insurance companies to ensure they are offering plans appropriate investment options.
- Changes to Nondiscrimination Rules – The Act modifies nondiscrimination rules for closed plans allowing existing participants to accrue benefits for a longer period of time. The change is designed to protect the benefits for longer service participants as they near retirement.
- Failure to File Penalties – The Act also changes the penalties for failure to file retirement plan returns. The Form 5500 penalty has been modified to $105 per day, not to exceed $50,000. Failure to file a registration statement will mean a $2 penalty, per participant, per day, not to exceed $10,000. Finally, failure to file a required notification will mean a penalty of $2 per day, per participant, not to exceed $5,000 for any failure. These increases are designed to encourage plan sponsors to make required filings.
The various changes to 401(k) and other retirement plans are designed to encourage broader participation and may require employers to make changes to plan operations. If you have questions about the SECURE Act and how it will impact you or need assistance with a 401(k) or another plan audit, JLK Rosenberger can help. For additional information, please call us at 949-860-9890 or click here to contact us. We look forward to speaking with you soon.