New IRS SECURE Act Guidelines for Retirement Plans | BerniePortal

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.

*Note: This article has been updated to reflect the changes brought about by the potential Secure Act 2.0.

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?

SHRM reported that the IRS released Notice 2020-68 in September 2020, which clarified several questions small business owners had regarding the SECURE Act. 

The most notable updates can be split into three categories: 

1. 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.
2. 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.
3. 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 Is the Significance of the Secure Act 2.0 

The Secure Act 2.0, which has been officially titled the Securing a Strong Retirement Act, and according to the Ways and Means Committee, is a means of building onto the ideas of opening up communities better opportunities for improving retirement savings. 

Should the Act pass, then it would require companies to automatically enroll their employees in their employer funded retirement plans, as well as open up opportunities for small businesses to save money via new financial incentives. Several of the numerous provisions include:

• Easier retirement options for military spouses with frequently changing jobs
• Allow students to put more money toward student loans while still receiving employer match toward 401k
• Allow more flexibility when gifting to charity via IRA
• Protect retirees who unknowingly receive overpayments

The measure is being pushed in an effort to combat the ever-growing financial crisis currently taking shape in the United States. Ways and Means Committee Chairman Richard E. Neal has stated “In addition to meeting workers’ and families’ most pressing, immediate needs, we must also take steps to ensure their well being further down the road. With the Securing a Strong Retirement Act, Ranking Member Brady and I build on the landmark provisions in the SECURE Act and enable more workers to begin saving earlier – and saving more – for their futures. This bill will help Americans approach old age with the confidence and dignity they deserve after decades of hard work and sacrifice.”

It is clear that not enough people are saving money for retirement, and many who are, are not saving enough. The committee believes that this measure will enact a positive movement for the retirement outcomes of US workers. The bill has been approved by both the committee and the White House, and currently awaits a congressional vote. Should it pass through Congress, it could be enacted sooner rather than later.

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.  

As with the potential revisions laid out in the Securing a Strong Retirement Act, employers would likely be subject to new regulations, considering one major provision is auto enrolling employees into a retirement plan. Many of the other revisions would require more attention on the employer's part as well. Whether the bill passes through congress is still unknown.

With that said, provisions like retirement plan eligibility for long-term, part-time employees require HR to monitor new compliance variables as of 2021. An HRIS like BerniePortal can assist you with time tracking and planning for the future.