The U.S. Senate approved the catch-all spending legislation that contains the Setting Every Community Up for Retirement Enhancement (SECURE) act on Dec. 19, allowing the legislature to be signed by the President. This is the biggest piece of legislature in over a decade. Many key provisions will go into effect on the date of enactment, while others will come into effect Jan. 1, 2020.

The SECURE Act is designed to help Americans save more for retirement and is a top priority of the American Retirement Association. Other features of the Act will help small businesses offer retirement plans to their employees and provide more investment opportunities to retirement account participants. It will also increase the Required Minimum Distribution (RMD) age and will repeal the age limit for IRA contributors.

If you are saving for retirement, how will SECURE Act impact you?

SECURE ACT Impact on IRA Holders

If you are an IRA holder, there are several provisions that will have a major impact on how you save for retirement, both positive and negative. If you are an IRA holder, please note the following:

Positive Impacts

• The SECURE Act will repeal the prohibition on contributions to a traditional IRA for individuals age 70 1/2.
• The increase for the required minimum distribution (RMD) will be pushed up from 70 1/2 to 72. The provision would apply to distributions made after Dec. 31, 2019 for individuals age 70 1/2 after such date.

Negative Impacts

There will be a modification of required distribution rules for designated beneficiaries. Under the legislation, in general, distributions must be made for the following individuals by the end of the 10th calendar year of the employee or IRA owner’s death:

• Individuals other than the surviving spouse of the employee or IRA owner
• Disabled or chronically ill individuals
• Individuals who are not more than 10 years younger than the employee or IRA owner
• Child of the employee or IRA owner who has not reached the age of maturity

The new provision is a revenue raiser, but is gaining controversy because many IRA holders have based their estate and tax planning on the ability to use the Stretch IRA to stretch out the benefits of the IRA deferral by designating a younger IRA beneficiary.

SECURE ACT Impact on 401(k) Participants

The SECURE Act has many provisions that 401(k) participants can benefit from.

Positive Impacts

• Multiple Employer Plans (MEPs)/Pooler Employer Plans: Two or more unrelated employers can join a pooled employer plan. The one bad apple rule is eliminated. The provision will make it easier and less costly for businesses to establish 401(k) plans for their employees.
• Rules relating to election of Safe Harbor 401(k) status: The Safe Harbor notice requirement for non-elective contributions is completely eliminated. Additionally, plan sponsors can switch to a Safe Harbor 401(k) with non-elective contributions at any time before the 30th day before the close of the plan year.
• Increase credit limitation for small employer pension plan startup costs: This will increase the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of $500 or the lesser of $250 for each employee of the eligible employer who is not a highly compensated employee, and is eligible to participate in the eligible employer plan maintained by the eligible employer, or $5,000. The credit will apply for up to three years.
• Qualified plans prohibited from making loans through credit cards and similar arrangements: This rule will make it more challenging for participants to take loans, which can help resolve the problem of asset leakage from plans due to failure of repaying the loan(s).
• Plan adopted by filing due date for year may be treated as in effect as of close of year: This will treat a 401(k) plan like a SEP IRA for establishment purposes. It will permit businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year as having been adopted as the last day of the taxable year.

The last provision will most likely help small businesses establish 401(k) plans and offer more benefits to employees than a SEP IRA because of the 3/4 rules in SEP IRAs.

Negative Impacts

There is one negative impact of the SECURE Act for 401(k) plans. There will be an increase in penalties for failure to file retirement plan returns (IRS form 5500). The penalty will be modified to $250 per day, but will not exceed $150,000. Failure to file a registration statement would incur a penalty of $10 per participant per day, not to exceed $50,000.

SECURE ACT Impact if You Don’t Have a Company Sponsored Plan

The SECURE Act emphasizes on making it easier and less costly for a small business to establish a 401(k) plan. The following are the key provisions in the SECURE act that do so:

• Multiple Employer Plans (MEPs) / Pooled Employer Plans:  Allows businesses in different industries to use one plan, which will lower admin and investment costs for small businesses.
• Increase credit limitation for small employer pension plan startup costs: Financial incentives to small businesses to establish a plan will certainly help.
• Plan adopted by filing due date for year may be treated as in effect as of close of year: Allows business to establish a plan for a business after 12/31 and before filing the return, which will help small businesses set-up 401(k) plans, especially Solo 401(k) plans. This can greatly impact the individual’s retirement savings, as one can save more through a Solo 401(k) plan than a SEP IRA. This is because the Solo 401(k) has the employee deferral feature included in the plan which is not included in a SEP IRA.

The SECURE Act has received much positive feedback within the retirement plan industry. President and CEO of Financial Service Institution (FSI), Dale Brown went as far as to say, “The passage of the SECURE Act is a significant victory for Main Street Americans.” The impacts of the SECURE Act are mostly positive, particularly among 401(k) participants. Furthermore, it partially aids the small business community with pooled employer plans, increased credit for pension plan startup costs and many other benefits.