IRS Issues New SECURE Act Guidance for 401(k) Withdrawals
The IRS announced new SECURE Act guidance in early September 2020 to expand retirement savings access and eligibility for part-time workers and new parents. Find out what you need to know and how these changes could impact your workplace.
Background: What is the SECURE Act?
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) is a law that was passed in December 2019 to encourage employees to invest in and have access to retirement savings.
According to the U.S. House Committee on Ways & Means, key provisions of the SECURE Act include:
- Expanded retirement savings by increasing the automatic enrollment safe harbor cap from 10% to 15%, meaning that small businesses can more easily establish 401(k) plans
- Simplified safe harbor 401(k) rules to “provide greater flexibility, improve employee protection, and facilitate plan adoption”
- Increased the credit limitation for small employer pension plan startup costs, which makes the process more affordable for small businesses
- Offered a $500 max tax credit to employers that created an automatic enrollment 401(k) or SIMPLE IRA plan
- Increased the retirement plan contribution age limit from 70½ to 72, which makes it easier for Americans to continue building retirement funds as they age
What Guidance Did the IRS Issue Regarding the SECURE Act and 401(k) Plans?
The most notable updates can be split into three categories:
- New Parent Exceptions: According to the new guidelines, each parent is now permitted to withdraw up to $5,000 from retirement plans or accounts without incurring tax penalties for any qualified birth or adoption. These withdrawals must be made during the one-year period following the date of birth or adoption. However, law firm Seyfarth Shaw LLP points out that the distributions are not mandatory.
- Part-Time Eligibility: Beginning January 2024, long-term, part-time workers will be permitted to take part in 401(k) plans, as long as these employees have completed three consecutive years of at least 500 hours of service per 12-month period. For employers, this means that 12-month periods must be taken into account between 2021 and 2023; eligible part-time employees will be able to contribute to plans beginning in 2024.
- Special Vesting Rules: Service years from long-term, part-time employees that predate 2021 can be disregarded for 401(k) plan eligibility but not for employer vesting purposes. Employees have “a nonforfeitable right to employer contributions (other than elective deferrals) for each 12-month period during which the employee completes at least 500 hours of service.”
What Does This Mean for Employers?
The guidelines issued by the IRS are intended to make it easier for employees to invest in and have access to retirement funds. This should be a net positive for employers to provide more security for their team and for employees to better build retirement funds.
With that said, provisions like retirement plan eligibility for long-term, part-time employees will require HR to monitor new compliance variables beginning in 2021. An HRIS like BerniePortal can assist you with time tracking and planning for the future.
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