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The Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act, expands Americans’ access to retirement plans, while making it easier to save. We spoke with Goldman Sachs’ Michael Moran, a pension strategist at Goldman Sachs Asset Management, who discussed some of the provisions that went into effect on January 1, 2020. Here are answers to a few questions you may have.
Q: I work for a small business that doesn’t offer a retirement plan. Does this bill affect me?
It might. One of the primary goals behind the SECURE Act is to expand coverage under retirement plans, given that roughly a third of private industry workers lack access to a workplace retirement plan. Starting in 2021, unrelated employers will be able to join a pooled employer plan, or an “open” multiple employer plan (MEP).
Because these new plans are intended to shift many of the administrative burdens and fiduciary responsibility from the employer to the MEP sponsor (a third party such as a financial institution), the intent of the bill is to make it easier for employers to adopt retirement plans. To sweeten the deal, the legislation also offers up to $5,000 in tax credits per year for three years to certain small employers that set up a retirement plan.
Q: Are there other limits on plan coverage that have changed? How about the age limits that apply under the plan and IRA rules?
Yes. The bill also will permit long-term, part-time employees to participate in 401(k) plans, meaning those who work 500 hours or more over three consecutive years (though because of the three-year rule, actual participation for part-time workers is not required until 2024). Also, with the growing number of people living longer and working longer in their jobs, the legislation removes the prior age limit for individuals contributing to Traditional IRAs.
So starting with the 2020 tax year, individuals can contribute to a Traditional IRA – regardless of age – as long as they have taxable income. Similarly, to address the fact that people are living longer, the law increases the age at which individuals are required to begin taking minimum distributions from their plans and IRAs (which has been moved from age 70.5 to 72 for distributions starting in 2020).
Q: One of the notable provisions of the SECURE Act relates to lifetime income in retirement, which is relevant against the backdrop of rising life expectancy. Why haven’t more employers offered retirement income products or annuities – which often guarantee a monthly stream of income, typically for as long as a retiree lives – in the past?
One of the reasons companies have historically shied away from adding annuities in 401(k) plans has to do with the fiduciary risk they may take on if that annuity provider is later unable to meet its financial obligations under the annuity. The SECURE Act has created a new fiduciary safe harbor for the selection of an annuity provider that gives clearer guidance to companies on what they must do to satisfy their fiduciary obligations, so perhaps we will begin to see more offerings in plans as a result.
In addition to this change, the SECURE Act has two other provisions aimed at retirement income. The first will require companies to show the amount of a participant’s 401(k) plan balance, converted into an annuity stream of monthly income, on 401(k) annual account statements. The second change addresses portability of annuity products and permits plan participants to transfer an annuity to another plan or IRA if it’s no longer offered in the plan.
Q: Does the legislation address financial wellness and planning?
There are a few provisions designed to provide additional flexibility for distributions from retirement plans and 529 plans. Under the SECURE Act, parents can take penalty-free distributions of up to $5,000 from their 401(k) plans or IRAs within a year of having or adopting a child. Also, families can make tax-free withdrawals of up to $10,000 from 529 plans to pay down student loans or to pay for certain apprenticeship programs.
Q: Does the SECURE Act affect estate planning?
Yes, and if this is an area of interest for you, you should consult your tax advisor. For example, one key change in the SECURE Act is that it eliminates so-called “stretch IRAs”, meaning that for deaths that occur in 2020 or later, distributions to individual beneficiaries under retirement plans and IRAs will need to be completed within 10 years and may not be “stretched” over the life of the beneficiary. Exceptions include spouses, minor children (until they reach the age of majority), disabled/chronically ill individuals and individuals no more than 10 years younger than the descendent.
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