Over the last several years there has been a significant amount of time, energy, and attention given to the regulatory environment in the financial services industry. From the DOL Rule to the pending SEC ruling that is expected later this year, the industry has been navigating a progressive period of time. Through all the discussion that has circulated over the last few years, the SECURE Act was proposed to the powers that be in Washington D.C., and signed into law on December 20, 2019.
The Act is the most transformative piece of legislation for retirement planning in years. As a result, the SECURE Act should be on the minds of all plan sponsors and participants across the country. In this article, I’m going to clarify some of the key aspects of the SECURE Act, and how it impacts retirement investors. It is important to understand that there are many changes to the retirement plan landscape as a result of the SECURE Act. Th e following are only a few pieces of the puzzle. If you have questions about the SECURE Act, you should not hesitate to reach out to your financial advisor or plan sponsor.
401(k) Eligibility Requirements
The SECURE Act has changed the treatment of part-time employees as it pertains to 401(k) eligibility. Previously, parttime employees were required to work 1,000 hours annually to qualify for 401(k) eligibility. The 1,000-hour mark is the metric the IRS uses to identify what they deem to be “full-time” employees.
Beginning in 2021, the SECURE Act will require Plan Sponsors to include part-time employees who have worked 500 hours in three consecutive 12-month periods for 401(k) eligibility. An important clarifying point regarding this provision is that this is for salary deferral only, meaning any employer match does not apply to these employees.
Required Minimum Distribution Changes
The SECURE Act has changed the applicable Required Minimum Distribution (RMD) age for qualified accounts. In the past, qualified account owners were required to begin taking distributions by the April following the year they turn 70½. Due to medical advancements, and the fact that humans are living longer lives, the SECURE Act increased the RMD age to 72. This is something that has long been discussed in the retirement planning space. Additionally, investors can continue to defer money to qualified accounts as long as they have earned income.
No More Stretch on Post-death RMD’s
Prior to the SECURE Act, qualified plans allowed account beneficiaries to take withdrawals over the beneficiary’s life expectancy, otherwise known as “stretching.” The SECURE Act has significantly changed this plan provision. Under the Act, a designated beneficiary has 10 years to withdraw plan assets. There are some exceptions to this rule. The 10-year rule does not include what the Act defines as “eligible designated beneficiaries.” These beneficiaries are surviving spouses, minor children, disabled persons, chronically ill persons, or any person no more than 10 years younger than the deceased account owner. This is a change that is more complicated than most other changes as a result of the SECURE Act.
Annuities in Defined Contribution Plans
The SECURE Act also provides the ability for plan sponsors to include annuities inside retirement plans. The Act will require plan statements to show estimated monthly income for every participant should they choose to purchase various kinds of annuities.
The Act also provides plan sponsors and fiduciaries a new safe harbor that shields them from liability should the annuity providers included in investment lineups be unable to provide promised benefits in the future. It is important to note that this piece of the SECURE Act is still being developed by annuity providers, and it remains to be seen exactly how the income annuities included in retirement plans will be designed.
In conclusion, the SECURE Act has a significant impact on the retirement planning process, and for all retirement investors, plan sponsors, and financial advisors. It is important for every investor planning for retirement to understand the impact of the SECURE Act on their investments and potential future investments.
As always, your financial advisor works for you. Remember to never hesitate to reach out with questions.
Article Written By David Wentz and Vance Wentz
DAVID WENTZ is CEO of Tax Favored Benefits, Overland Park, Kansas. Wentz is a graduate of the University of Kansas School of Law with a Juris Doctor degree. Wentz frequently speaks at various professional and business seminars about pensions, profit-sharing, 401(k) plans, tax favored benefits, and investment programs. Western Equipment Dealers Association endorses Tax Favored Benefits as a 401(k) provider. No compensation is received. More information is available at www.taxfavoredbenefits.com.
