The SECURE Act is Changing the Retirement Landscape

The SECURE Act improves access to tax-advantaged retirement accounts, allows people to save more, and encourages employers to provide retirement plans.

Heart-shaped bandaid

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) into law. An extensive piece of bipartisan legislation, the SECURE Act improves access to tax-advantaged retirement accounts, allows people to save more, and encourages employers to provide retirement plans.

What Does the SECURE Act Mean to You and Your Employees?

As an employer, you’re tasked with working with your retirement plan provider to implement the provisions of the SECURE Act that impact your employees. One of the most exciting benefits of the SECURE Act is valuable tax credits for small businesses, but there are many other important considerations you should know about. Read on for details about these new rules (and how they can impact you).

1.  Tax credit for new plans

Thanks to these new rules, substantial tax credits will be available for employers with 100 or fewer employees. That’s great news for small businesses who’ve been on the fence about starting a defined contribution plan because of cost concerns.

Prior to the passage of the SECURE Act, the Retirement Plans Startup Costs Tax Credit was $500. However, effective January 1, 2020, you may now be able to claim tax credits of 50% of the cost to establish and administer a plan, up to the greater of:

  • $500; or
  • the lesser of:
    • $250 per eligible non-highly compensated employee eligible for the plan; and
    • $5,000

Plus, the new rules state that you can claim this credit for the first three years of the plan. That means up to $15,000 in tax credits! And remember, unlike tax deductions that reduce your company’s taxable income, tax credits actually reduce the amount of tax you owe dollar for dollar.

It’s important to note that this tax credit is only available when you’re establishing a new retirement plan, such as a 401(k) plan. Ready to learn more about starting your own retirement plan? Betterment can help.

2.  Tax credit for adding eligible automatic enrollment

Small businesses can now earn an additional $500 tax credit for adding an eligible automatic enrollment feature to their new or existing plan. This tax credit—known formally as the Small Employer Automatic Enrollment Credit—is available for each of the first three years the feature is active, for a total of $1,500 in tax credits.

Beyond the tax credit, automatic enrollment correlates with higher plan participation rates—and helps employees save for a more comfortable future.  In fact, according to research by The Pew Charitable Trusts, automatic enrollment 401(k) plans have participation rates greater than 90%! Learn how your small business can benefit from a 401(k) plan with automatic enrollment now.

Does your small business qualify for these valuable tax credits?

Your small business may be eligible if you can answer “yes” to the following questions:

  • Do you have 100 or fewer employees?
  • Did you pay each of them at least $5,000 last year?
  • Was there at least one “non-highly compensated employee” who earned less than $120,000 last year?

If so, you could enjoy valuable tax credits—and help your employees save for retirement in the process. Want to learn more? Talk to Betterment.

3.  More flexible safe harbor rules

A safe harbor 401(k) plan offers a great way to avoid the stress of annual nondiscrimination testing while helping your employees build a more comfortable future. The SECURE Act modifies a few of the safe harbor provisions to give you more flexibility—and your employees the opportunity for increased lifetime income. Here’s what changed:

More relaxed nonelective employer contribution requirements

  • Before—Your plan document had to include the 3% nonelective safe harbor provision—and participants had to be provided with the safe harbor status notice—before the beginning of the plan year.
  • After—The SECURE Act eliminated the participant notice requirement for nonelective contributions. Plus, you can amend the 401(k) plan as late as 30 days before the end of a plan year to provide for a 3% nonelective safe harbor contribution. Alternatively, a 401(k) plan may be amended as late as the end of the following plan year, if a 4% nonelective safe harbor contribution is provided. (Note that these changes don’t apply to safe harbor matching contributions.)

Increase in the automatic deferral rate for qualified automatic contribution arrangements (QACA)

  • Before—A QACA safe harbor was permitted to automatically increase a participant’s deferral election up to 10% of eligible compensation.
  • After—The SECURE Act increased the cap from 10% of eligible compensation to 15% of eligible compensation. That means that you have an even greater opportunity to help employees save the lifetime income they need to thrive in retirement.

Need help with your safe harbor 401(k) plan?

These new SECURE Act changes have many implications, including revisions to your policies, procedures, participant notices, plan documents, and more. Betterment can help.

4.  Expanded eligibility for long-term, part-time employees

Currently, 401(k) plans can limit access for employees who work under 1,000 hours per year, which averages out to about 20 hours per week. However, the SECURE Act changes that rule—helping part-time workers get a jumpstart on retirement saving.

Beginning in 2021, plans must provide access for part-time workers who haven’t met 1,000 hours in one year, but have worked for over 500 hours for an employer for at least three years.

This change is a great opportunity for large and small companies alike to improve retirement access for all individuals in their workforce. Plus, offering part-time workers a 401(k) plan is an effective way to boost your recruiting efforts.

5.  Bigger penalties for late filing

To improve deadline compliance, the new rules increase the penalties for late retirement plan document filings:

  • Failing to timely file Form 5500 can be assessed up to $250 per day, not to exceed $150,000 per plan year. (Before the SECURE Act, the penalty was $25 a day, not to exceed $15,000.)
  • Failing to file Form 8955-SSA can be assessed up to a daily penalty of $10 per participant, not to exceed $50,000. (Before the SECURE Act, the daily penalty was $1 per participant, not to exceed $5,000.)
  • Failing to provide income tax withholding notices can be assessed up to $100 for each failure, not to exceed $50,000 for the calendar year. (Before the SECURE Act, the penalty was $10 for each failure, not to exceed $5,000.)

So, what do these new rules mean to you? Well, it’s more important than ever to file your forms in a timely manner—or face significant financial repercussions. To make it easier for you, Betterment helps you prepare your Form 5500—and offers the support you need throughout the process.

6.  Higher required minimum distribution (RMD) age

Prior to the passage of the SECURE Act, employees needed to take RMDs from their IRAs and qualified employer-sponsored retirement plans (like 401(k)s) at age 70 ½. Now, they can take them beginning at age 72—allowing extra time for earnings to potentially accumulate. This is great news for retirement savers who now have more opportunity to accumulate the lifetime income they need.

It’s important to note that unlike Traditional IRAs and 401(k) plans, there are no RMDs for Roth IRAs during the account owners’ lifetime. So if employees have a Roth 401(k) account, they can roll it into a Roth IRA, avoid taking RMDs, and continue building lifetime income.

7.  Penalty-free withdrawals for birth/adoption expenses and student loan payments

Offering a welcome financial respite, the SECURE Act provides provisions for two brand-new penalty-free distributions:

  1. Birth or adoption—Now people can withdraw up to $5,000 from their qualified retirement accounts—without paying the usual 10% early withdrawal penalty—to cover expenses related to a birth or adoption. However, account owners will still be liable for the applicable income taxes, including those for any capital gains.
  2. Student loan payment using 529 plan—Now, people can use their 529 plan to pay the costs of apprenticeship and student loan payments. Specifically, account owners can withdraw up to $10,000 during the beneficiary and their siblings’ lifetimes. For example, a family with three children can take a $10,000 distribution to pay student loans for each child—for a total of $30,000. However, it’s important to note that any student loan interest that’s paid with tax-free 529 plan earnings can’t also be claimed as a tax deduction.

Both of these new penalty-free distributions offer more flexibility to pay for important lifetime expenses. With this newfound freedom, individuals have greater opportunity to pay down debt and gain more secure financial footing.

8.  Required retirement projections for employees

Rather than just reporting a lump sum of what employees have saved, retirement plans will now be required to project expected income at retirement. With this retirement income projection, employees will have a better idea of what their future will look like (and whether they’re on—or off—track for retirement).

While the retirement income projection requirement is a new rule, Betterment for Business already offers this level of insight for current 401(k) plan participants. In fact, our intuitive investment platform ensures that employees can get advice on all of their financial goals in one place.

We aim to help employees set a clear, realistic retirement goal and stay on track to achieve that goal. In this way, it is an elaboration on the fundamentals of our goal-based approach to financial planning. We aim to include the following components of retirement planning:

  • Projecting an estimate of desired spending in retirement -- We use several factors to help estimate retirement spending, including how earned income will grow over time, what the local cost of living will be like, and what an individual’s spending habits look like before retirement.
  • Determining the total pre-tax savings amount likely needed to achieve that spending level with high confidence -- we can figure out the total amount an individual should have saved by the time of their desired retirement date to have a 96% chance of success they will not run out of money during retirement. Considerations include expected lifespan, other retirement income sources, and taxes.
  • Calculating how much should be saved during each period prior to retirement -- The savings amount required depends on how much time remains until retirement age, the level of risk someone is willing to bear in order to pursue higher returns, and how much certainty they feel they need to hit that balance.
  • Prioritizing which retirement savings vehicles are likely to be most efficient -- Prioritizing which accounts people save into depends on their specific tax situation and access to retirement accounts. Our recommendation for retirement goals only incorporates the external accounts that an employee has synced and any Betterment accounts within their Retirement goal. As always, we recommend individuals contact a qualified tax advisor to understand their personal situation.

9.  New regulations for pooled employer plans

Starting in 2021, unrelated companies can join a single Pooled Employer Plan (PEP) in an effort to access greater economies of scale and cost efficiencies. Prior to the new rules, “open” Multiple Employer Plans (MEPs) existed; however, there were concerns about how the DOL viewed them. This new regulation solidifies PEPs as an option for employers who are looking to lower their fees, reduce their fiduciary liability, and offer their employees a higher quality retirement plan.

However, Betterment offers the key benefits of a pooled employer plan—lower fees and reduced fiduciary liability—with less complexity and greater personalization. Here’s how:

  • Lower fees: Fees on Betterment plans are some of the lowest available, so there’s no need to compromise on a pooled plan that may not meet all of your needs or provide the flexibility you may want.
  • Reduced fiduciary liability: We serve as a 3(16) administrative fiduciary and 3(38) investment fiduciary to your plan. This limits your risk exposure and allows you to focus more of your time on running your business--not your plan.
  • Greater personalization: We’ll partner with you on your 401(k) plan design so you can tailor it to meet your company’s needs—from adding a safe harbor provision to electing an automatic enrollment feature.

Don’t your employees deserve a better 401(k) plan? Get the Betterment 401(k) plan.

10.  Deadline filing extension

The SECURE Act also impacts the deadline for employers to establish a new 401(k) plan. Specifically, it extends this date from the last day of the tax year (December 31) to the due date of the tax return (April 15 of the next year). That’s good news for employers because you have an extra 3.5 months to set up a plan! Thinking about setting up a plan? Betterment can help tailor the plan that’s right for you.

Want to learn more? We can help.

The SECURE Act retirement bill contains 30 sections in all, which you can read about in more detail here. However, if you don’t want to sift through these dense regulations on your own, Betterment can help.

As a full-service provider, we aim to make life easy for you by assisting with everything from compliance testing to plan design consulting. Not only do we provide highly optimized 401(k) plans, we also offer your employees high-tech retirement planning, a big picture view of their finances, and personalized advice—all at a fraction of the cost of most providers.