Retirement plans for part-time employees, greater opportunities to save for retirement, and increased tax credits- just some of the proposed reforms in a new bill that promises big retirement plan reform for small business owners and their employees.
The Setting Every Community up For Retirement Enhancement Act of 2019 (The SECURE Act) proposes some much-needed change to retirement plan regulations in order to provide individuals with expanded opportunities to save for retirement. It also seeks to encourage employers to provide retirement plans for its workers by easing administrative burdens and providing incentives to small businesses. Despite the strong bipartisan support for this landmark retirement legislation, the bill has a long way to go. The House and Senate versions of the bill differ on a number of provisions, which will undoubtedly lead to more debate over tax policies. For now, the bill remains stalled in the Senate. But if the bill becomes law, here are a few things we could see if it passes:
Highlights aimed at expanding and preserving retirement savings:
- Increasing the auto-enrollment safe harbor cap from 10 to 15-percent of employee pay.
- Simplification of Safe Harbor 401(k) rules.
- Make it more affordable for small businesses to set up retirement plans by increasing the credit limitation for small employer pension plan start-up costs.
- To increase employee participation and higher savings, the SECURE creates a small employer automatic enrollment tax credit of up to $500 per year.
- Change compensation rules to include certain taxable non-tuition fellowship stipend payments as compensation. This will allow students to begin saving for retirement.
- Allow individuals to save beyond the current traditional retirement age by repealing the prohibition on contributions to a traditional IRA by an individual who has attained age 70½.
- Prohibit qualified employer plans from making loans through credit cards and other similar arrangements to ensure loans are not used for routing or small purchases.
- Allow long-term part-time workers to participant in 401(k) plans and allow employers to elect to exclude this class of workers from testing under the nondiscrimination, coverage and top-heavy rules.
- Provide penalty-free withdrawals from retirement plans for individuals in case of birth or adoption.
- Increase the age for beginning required mandatory distributions from 70½ to 72.
Highlights of administrative improvements:
- Plans adopted by filing due date for year may be treated as in effect as of close of year. This provides additional time to establish a plan giving flexibility for employers that are considered adopting a plan and the opportunity for employees to received contributions for that earlier year.
- Combine annual reports for a group of plans under certain circumstances to consolidate reporting and reduce administrative costs
- Modification of Nondiscrimination rules to protect older, longer service participation
Highlights of other benefits and revenue:
- Reinstate benefits for volunteer firefighter and emergency medical responders
- Expansion of Section 529 Plans to cover costs associated with registered apprenticeships, homeschooling, private elementary, secondary and religious schools
- Modifications to required minimum distribution rules
- Increase in Penalties for failure-to-file retirement and other taxes in an attempt to improve overall tax administration.
Again, the bill remains patiently in the hands of the Senate. Regardless of the outcome, employers should begin the conversations with their plan sponsors and financial advisors to discuss plan changes. Employers should be using this time to become familiar with the proposed changes and educate their employees on the new benefits and what may or may not be available to them.