What is the Secure Act?

The Secure Act is a piece of legislation that Congress passed in December 2019, and it’s causing quite a stir in the world of retirement planning.

At its core, the Secure Act is about encouraging Americans to save more for retirement, but how it does this is both innovative and controversial.

The proposed legislation includes several key provisions to encourage Americans to save more for retirement and make it easier for employers to offer retirement plans to their employees. Here are some of the most significant provisions:

1. Automatic Enrollment

   Under this provision, employers would be required to automatically enroll their employees in retirement plans, such as 401(k) plans, unless the employee opts out. This would make it easier for workers to start saving for retirement without having to take any action, and it would also ensure that employer-sponsored retirement plans cover more workers.

   This provision has been shown to be highly effective at increasing retirement savings rates. Studies have found that workers are much more likely to participate in retirement plans when automatically enrolled than when they have to take action to enroll themselves. This is because many workers never get around to enrolling in their employer’s retirement plan, even if they intend to do so.

   One potential concern with automatic enrollment is that some workers may not be able to afford the contributions, especially if they are automatically enrolled at a high contribution rate. To address this concern, the SECURE 2.0 Act includes provisions to allow workers to opt out of automatic enrollment or adjust their contribution rates.

2. Increase in catch-up contributions

   The SECURE 2.0 Act includes a provision to increase catch-up contributions for workers over the age of 50. This may not sound exciting, but it’s a big deal for anyone behind on their retirement savings.

   The current catch-up contribution limit is $6,500, which means that workers over the age of 50 can contribute an additional $6,500 to their retirement accounts on top of the regular contribution limit. The SECURE 2.0 Act would increase this limit to $10,000, giving older workers an even greater opportunity to save for retirement.

   Why is this important? Well, many workers are not saving enough for retirement. According to a recent survey, the median retirement savings for Americans between the ages of 55 and 64 is just $120,000 – far less than most financial experts recommend. Increasing the catch-up contribution limit allows older workers to make up for lost time and get on track for a more secure retirement.

   But the increase in catch-up contributions is also significant for another reason: it recognizes the changing nature of work in America. With more and more workers staying in the workforce well into their 60s and even 70s, it’s important to ensure that older workers have the tools they need to save for retirement.

   The increase in catch-up contributions is one way to do that, and it sends a message that older workers are valued and important contributors to the economy.

3. Expansion of eligibility for part-time workers

   The Secure Act also includes a provision that expands eligibility for part-time workers to participate in employer-sponsored retirement plans.

   Previously, many employers required employees to work at least 1,000 hours per year to be eligible to participate in their retirement plans. This requirement often excluded part-time workers who did not meet the threshold.

   The Secure Act changes this requirement so that long-term part-time employees who work at least 500 hours per year for three consecutive years are eligible to participate in their employer’s 401(k) plan. This means that more part-time workers can access retirement savings options and take advantage of employer-matching contributions and other retirement benefits.

   This provision is especially important for women and other individuals who may work part-time due to caregiving responsibilities or other factors. By allowing more part-time workers to participate in employer-sponsored retirement plans, the Secure Act helps to address the retirement savings gap and improve financial security for these individuals.

4. New tax credit for small businesses

   The Secure Act introduces several new tax credits for small businesses that start or maintain a retirement plan for their employees.

   One of the tax credits is the “Small Employer Pension Plan Start-Up Credit,” which provides eligible small employers with a tax credit of up to $5,000 for the first three years of starting a new retirement plan. This credit is available to employers with no more than 100 employees who have received at least $5,000 in compensation in the preceding year.

   Another tax credit is the “Automatic Enrollment Credit,” which provides eligible small employers a tax credit of up to $500 per year for three years for implementing an automatic enrollment feature in their retirement plan. This credit is available to employers with no more than 100 employees who automatically enroll employees in their retirement plan at a rate of at least 3% of compensation.

   In addition, the Secure Act also creates the “Small Employer Plan Maintenance Credit,” which provides eligible small employers with a tax credit of up to $500 per year for three years for the costs associated with maintaining their retirement plan. This credit is available to employers with no more than 100 employees who have received at least $5,000 in compensation in the preceding year and who have implemented an eligible retirement plan.

   These tax credits are designed to encourage small businesses to offer retirement plans to their employees, which can help improve employee retention, attract new talent, and provide financial security for workers in their retirement years.

5. Simplification of 401(k) safe harbor rules

   The Secure Act includes provisions that simplify the rules for 401(k) safe harbor plans, which are retirement plans designed to pass certain nondiscrimination tests automatically and exempt from certain requirements.

   Under the previous rules, employers had to provide notice to employees about the safe harbor plan before the beginning of each plan year. If they wanted to change or suspend the plan mid-year, they had to provide a supplemental notice to employees within a specified timeframe. Failure to meet these requirements could result in a costly penalty.

   The Secure Act simplifies these rules by allowing employers to amend their safe harbor plans any time before the plan year’s end, as long as they make a non-elective contribution of at least 4% of compensation for eligible employees (or a matching contribution that meets certain requirements). This means employers have greater flexibility in making changes to their safe harbor plans without worrying about complex compliance requirements.

   In addition, the Secure Act eliminates the annual safe harbor notice requirement for plans that use the non-elective contribution option and provides a new opportunity for plans to become safe harbor plans mid-year by making a non-elective contribution of at least 4% of compensation for all eligible employees.

   These changes make it easier for employers to establish and maintain safe harbor plans, which can help increase participation in retirement plans and improve financial security for employees.

6. Incentives for annuities

   The Secure Act includes provisions that provide incentives for employers to offer annuities as a retirement savings option for their employees.

   An annuity is a financial product that provides regular payments to an individual over a specific time period, typically for the rest of their life. Annuities are designed to protect individuals from outliving their savings and can provide a stable source of income in retirement.

   Under the Secure Act, employers who offer annuities in their retirement plans are provided with certain protections from liability as long as they meet certain requirements. This means that employers who offer annuities are not held liable if the insurance company providing the annuity is unable to meet its financial obligations under the contract.

   In addition, the Secure Act requires employers to provide better disclosures about annuity options in their retirement plans, including information about fees, expenses, and the lifetime income stream that annuities can provide.

   These provisions are intended to encourage more employers to offer annuities in their retirement plans, which can help provide more retirement income security for employees. By offering annuities, employees can have a guaranteed source of income in retirement, regardless of how long they live or how the market performs.