Some of the act’s key provisions have already kicked in.
If you’re still not sure how the Setting Every Community Up for Retirement Enhancement Act of 2019 has already changed your credit union’s retirement plans, you’re forgiven. The law passed rather unexpectedly late in 2019 and parts of it went into effect almost immediately. But there’s still time to catch up and make sure your plan participants understand some new options the act gives them.
The SECURE Act affects defined contribution and defined benefit plans, individual retirement accounts, and 529 savings plans. Here are brief summaries of four key changes that 401(k) sponsors should know about.
1. Eligibility for long-term, part-time employees
Effective date: plan years beginning after Dec. 31, 2020 (but it’s a bit complicated)
Previously, plan sponsors could require at least 1,000 hours of work during a plan year for employees to be eligible to contribute to a 401(k) plan. The SECURE Act now requires that employees who have worked 500 hours in each of three consecutive plan years be eligible.
However, the act doesn’t require employers to include these long-term, part-time employees in matching or other employer contributions—that’s still subject to the 1,000-hour requirement. Also, this change doesn’t affect collectively bargained plans.
The effective date is a bit misleading. This provision is written such that, in a calendar year plan, a part-time employee who has at least 500 hours of service in 2021, 2022, and 2023 will be able to participate as early as Jan. 1, 2024.
2. No-Penalty Withdrawals for Births/Adoptions
Effective date: Distributions made after Dec. 31, 2019
Plan distributions up to $5,000 that are used for expenses related to a “qualified birth or adoption” are penalty-free for distributions within a year of the birth or adoption. If both parents participate in your plan, both are eligible for up to $5,000. Typically, in-service distributions are subject to a 10% excise tax for participants under 59.5. These distributions generally will still be taxed as income.
3. Required Minimum Distribution Age Raised from 70.5 to 72
Effective date: Distributions made after Dec. 31, 2019, for people who turn 70.5 after that date
Prior to the SECURE Act, 401(k) participants (and pension plan participants, for that matter) generally were required to take required minimum distributions by April 1 of the year following the year they reached age 70.5. Or, if they’re still working for you and participating in your 401(k) plan after age 70.5, the RMD is required by the April 1 of the year after their employment was terminated.
The SECURE Act changes did not affect participants who were required to start their RMDs prior to Jan. 1, 2020.
According to the SECURE Act, plan participants who turn 70.5 on or after Jan. 1, 2020 are covered by the new rules and will not be required to take RMDs until April 1 of the year after they turn 72.
NOTE: The Coronavirus Aid, Relief and Economic Security (or “CARES”) Act suspended 2020 RMDs for defined contribution plans. Be sure to check with your plan provider to find out how this may affect your plan(s).
4. Automatic enrollment safe harbor cap increases
Effective date: Plan years beginning after Dec. 31, 2019
Under previous rules, if you have an auto-enrollment safe harbor 401(k) plan, the highest default contribution rate for participants was 10%. Now, under the SECURE Act, that cap only applies for the participant’s first deemed election year. After that year, the default cap may be increased to 15%.
As always, your plan provider should be able to answer any questions you have about the act now.
Sharon Severson is a retirement plan services consultant for CUESolutions Platinum provider CUNA Mutual Group.