How the SECURE Act Could Improve Retirement Security for Americans
The Setting Every Community Up for Retirement Enhancement (SECURE) Act recently passed the U.S. House of Representatives by an overwhelming vote of 417-3. If passed by the Senate, the SECURE Act features modifications to existing retirement rules that promise to increase access to workplace retirement savings and individual retirement savings.
Most observers feel passage of some or all of the provisions of the SECURE Act in the Senate is likely, although timing continues to be uncertain. The SECURE Act has been warmly received by Senate Finance Committee Chairman Chuck Grassley (R-IA), who co-authored a similar bill in the chamber – the Retirement Enhancement and Savings Act (RESA) of 2019 – with Sen. Ron Wyden (D-OR), the Ranking Member of the Finance Committee.
With that legislative backdrop in mind, let’s look at what this all could mean for Americans.
Impact on Workplace Retirement Plans
The most prominent changes the bill would make to existing rules revolve around increasing access to workplace retirement plans for small businesses by loosening rules surrounding Multiple Employer Plans (MEPs) and employee eligibility.
Everyone is welcome here. Under current Department of Labor guidance, employers participating in a MEP are required to be established by a bona fide group or association of employers who share a common economic or representational interest or a genuine organizational relationship unrelated to the MEP. The SECURE Act would eliminate this requirement and allow unrelated employers to participate, thus widening the pool of companies that can benefit from the cost savings of a MEP.
A bad apple no longer ruins a bushel. Current IRS rules for MEPs include the “One Bad Apple” rule, under which a violation by one participating employer of the plan qualification rules can disqualify the entire MEP. Under the SECURE Act, an employer that runs afoul of the rules would have its plan “spun off” into a separate plan for which that employer would be solely liable.
Part-time work, full-time benefits. Current rules allow employers to exclude part-time employees from their 401(k) plan. The SECURE Act requires employers to include employees that have worked at least 500 hours for three consecutive years. Such employees would not need to be provided matching or other employer contributions.
Keep auto enrollment rolling. The concept of automatic enrollment has been demonstrably successful as a way of battling human inertia, and the SECURE Act is looking to take it a step further than the Pension Protection Act of 2006. Under SECURE, employers with up to 100 employees can receive a $500 tax credit for including automatic enrollment in their plan for up to three years. It will also increase the automatic escalation limit that applies to safe harbor plans from 10% to 15%.
As it stands, there are still 55 million Americans who do not have access to a retirement savings program through their workplace. The SECURE Act won’t cover them all over night, but it does appear to be a step toward cutting that number significantly.
Impact on Individual Savers
Another component of the SECURE Act is a modification of IRA rules to reflect the demographic and sociological changes that have taken place over the last few decades – a main factor being that Americans are living longer and working longer to save for retirement.
Age is just a number. Currently, Roth IRA owners can contribute past 70½, but an individual who has a traditional IRA is unable to continue contributing to a traditional IRA once they hit that age, even if they still have income from work. The SECURE Act would eliminate this seemingly arbitrary prohibition.
Rethinking RMDs. Along similar lines, the SECURE Act would alter the rules surrounding Required Minimum Distributions (RMDs). The law today requires individuals to begin taking their RMDs by April 1 of the year after they turn 70½, otherwise known as the Required Beginning Date. Under SECURE, the Required Beginning Date would be pushed back to the year after turning age 72 for anyone turning age 70½ in 2020 or later.
There are many more components to the SECURE Act, but these primary examples illustrate the potential impact of this legislation. The SECURE Act still needs to pass in the Senate, but if it does pass, some of these components may be modified as a compromise with the aforementioned RESA legislation or to address a particular senator’s concerns. As long as the major themes hold true in the final legislation, it’s a positive step towards addressing some of the shortcomings of our retirement system.
The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.