There’s no secret there is a concern among politicians about the preparedness of the American people for retirement. Pensions are increasingly a thing of the past while individuals simply aren’t setting enough aside to provide for the lifestyle they are looking forward to in retirement. Because of this reality, the government is anxious about the public having to rely upon entitlement programs that are already beleaguered. Enter the SECURE Act.
IRAs and 401(k)s are two of the most popular vehicles in which millions of Americans have amassed trillions of dollars throughout the last 40 or 50 years. As baby boomers approach (and enter) retirement, an entire generation of Americans will become more and more reliant upon these accounts in their 70s and 80s. Congress passed the SECURE Act with an eye towards providing more Americans with the ability to save more within these accounts. The Act makes contributing to IRAs and 401(k)s for individuals and plan participants a little easier, while it makes providing for retirement plans less costly for retirement plan sponsors.
We recently sat down with Jeremy Schira, QPA, QKA, Vice President from SMS Retirement to talk about the SECURE Act and the implications it will have on individuals, employers and employees. Located in Blue Ash, SMS Retirement is a consulting firm that has been providing retirement plan services to local (and non-local) small businesses since 1985. Jeremy works with many small businesses to provide their owners with the ability to set aside a significant amount of savings (more often than not on a pre-tax basis) while affording the business’ employees the opportunity to participate in a retirement plan and take advantage of its benefits.
We had an interesting conversation about the SECURE Act and its far-reaching implications; excerpts from our discussion are below:
Chris: What opportunities are you most excited about?
Jeremy: As a plan provider, we are always looking for plan design opportunities and I’m excited about two areas in particular: changes to the safe harbor non-elective notice requirements as well as changes associated with the due date by which a new plan has to be adopted.
I think the changes to the safe harbor non-elective notice requirements will provide more flexibility in plan design. The changes permit employers to switch to a safe harbor non-elective plan design (which allows all participants to contribute up to the annual max. without having to worry about participation rates and plan testing) during the applicable plan year (or even after); previously, the old “policy” required plans to make a decision prior to the beginning of the applicable plan year. Essentially, the changes provide for employers to take a “wait-and-see” approach, rather than forcing an employer to commit to the plan design prior to the beginning of the applicable plan year.
Also, prior to the SECURE Act, certain new plans had to be adopted by the last day of the applicable plan year. The SECURE Act now permits employers to adopt a new plan as late as the due date of the tax return (including extension) for the applicable plan year. This change allows employers to have a better feel for profitably for the year when considering whether or not to adopt a new plan.
Chris: What are your clients asking about?
Jeremy:The biggest area of discussion so far has been around Pooled Employer Plans (PEPs). It’ll be interesting to see how PEPs are perceived and I think everyone is anxiously awaiting further guidance on this topic as there are still a lot of details to be worked out. Small employers will be interested in the potential savings and how it will impact their ability to offer retirement plans in a more cost-effective manner. For example, will the perceived savings out-weigh the potential audit costs? Or will there be changes associated with how an audit is determined as a result of these PEPs?
Chris: Does the SECURE Act do anything to incentivize small business owners to establish new retirement plans?
Jeremy: The Act significantly increases the tax credits available to employers with start-up plans. Previously, employers were eligible for a total $500 tax credit. Going forward, employers will be eligible for a credit (which could amount to as much as $5,000) that can be used to offset administrative fees for the first three years. The actual calculation is the greater of $500 or $250 per non-highly compensated employee eligible to participate in the plan, up to the $5,000 maximum.
Chris: How does the Act impact automatic enrollment features within 401(k) plans?
Jeremy: Automatic enrollment is a retirement plan feature the government has been wanting plan sponsors to incorporate into retirement plans for some time now. If employees are automatically enrolled, they’re more likely to be long-term participants of (and contributors to) a retirement plan. The purpose is to increase participation and help plan participants save more for retirement. This is obviously a good thing and one of the main motivations of the SECURE Act. With this in mind, the government is encouraging more employers to adopt the automatic enrollment feature by way of an increased tax credit (up to $500/year), which is in addition to the previously mentioned credit. It is also available to employers that add an automatic enrollment feature to an existing plan.
Chris: How does the SECURE Act impact part-time employees?
Jeremy: The SECURE Act will make 401(k) plans more accessible for part-time employees who have worked at least 500 hours in three consecutive years (the first year for consideration will be 2021). In the past, many part-time employees were unable to contribute to a 401(k) because their employer imposed stricter eligibility requirements (i.e.: required to work at least 1,000 hours during the plan year, or roughly 20 hours/week). This change could be particularly impactful for individuals who have always worked on a part-time basis, and even for part-time employees who are approaching retirement but aren’t yet ready to walk away entirely. These individuals may very well cut back on their hours with the intention of continuing to work at least 10 hours/week so that they can contribute to their retirement plan.
Chris: Are Multiple Employer Plans likely to become more popular?
Jeremy: Multiple Employer Plans (MEPs) have been gaining traction for years. Open MEPs have been on a lot of people’s radars, but they were still under scrutiny due to a lack of guidance as well as the “one bad apple rule.” With the introduction of Pooled Employer Plans (PEPs), it seems like the government is trying to create a clearer picture by assigning certain criteria in order to qualify as a PEP. In addition, by eliminating the “one bad apple rule,” adopting employers can feel more confident in their decision to be a part of a PEP without having to worry about the entire plan being disqualified as a result of the operations of another adopting employer.
As you can see, the SECURE Act has some wide-ranging implications for many Americans as they approach retirement. Individuals and employees will have expanded access to the types of accounts that will be needed to supplement other income streams in retirement. Small business owners will have additional incentives to provide for meaningful benefits for their employees. We encourage you to reach out to your trusted advisor(s) to see about the Act’s impact on individuals like you.
Chris Brennan, CFP®, with MAI Capital Management, LLC, can be reached at 513.579.9400 or by email at email@example.com.Jeremy Schira, QPA, QKA, Vice President with SMS Retirement Co., can be reached at or 513.984.6100 by email at firstname.lastname@example.org.
MAI Capital Management, LLC (MAI) is a privately held independent investment advisor registered with the Securities and Exchange Commission and headquartered in Cleveland, Ohio with regional offices in Columbus and Cincinnati, Ohio as well as offices in California, Florida, New Hampshire, New York and Virginia. MAI’s Cincinnati office is located at 625 Eden Park Drive, Suite 310, Cincinnati, OH 45202. For more information, call 513.579.9400 or visit www.mai.capital. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.