SECURE Act – What Do I Need to Know?

The SECURE Act slipped through approval in late December 2019. There was not a whole lot of buzz around this bill or what its potential implications are. SECURE stands for The Setting Every Community Up for Retirement Enhancement Act. This bill is the first major retirement legislation since the Pension Protection Act in 2006.

There are some great advantages for small business owners in the act. For one, it will make setting up a safe harbor retirement plan easier and less expensive. Small business owners will now have until October of the following year to set up a plan for the prior year. This allows business owners to receive solid tax advice on what the tax benefit could be for them and permits ample time to be able to get the plan up and going.

Employers can also get a maximum tax credit of $500/year to set up a plan with automatic enrollment. Not only is this a bonus to employers, but it is also beneficial to their employees. Most individuals take the path of least resistance and if they are automatically enrolled, the likely outcome is that more people will save for retirement then if they had to take the time to actually set up the account.

There is also an increase to start up plans for the tax credit. For the first three years of the plan the credit is $250/eligible employee, subject to a minimum of $500 and a maximum of $5,000. Previously, there was a maximum of $500.

The other positive change is participants of plans can take penalty free distributions up to $5,000 to cover the birth or adoption of a child. There is also an option to not repay the distribution, but be aware it does increase taxable income.

On the downside, the penalties are substantially increased for late filing of the Form 5500. It is increased to $250/day up to a maximum of $150,000 per late filing.

The revised act also changed the Required Minimum Distribution (RMD) age from 70 ½ to 72. This will be a positive change for many people who do not need to start their RMD until a later age. For beneficiaries of an inherited IRA, the account MUST be fully distributed within ten years following death with certain exceptions for spouses, children, and disabled beneficiaries.

Overall, the updated act will hopefully start increasing retirement plans for employees, while providing a tax benefit to employers as well. Of note, all of these provisions begin with the 2020 tax year, not 2019.