The Setting Every Community Up for Retirement Enhancement Act, commonly known as the Secure Act, is considered one of the most significant pieces of retirement legislation since the passage of the 2006 Pension Protection Act more than a decade earlier.
The measure — most of which took effect Jan. 1, 2020 — increases access to IRAs and workplace retirement plan accounts, such as 401(k) plans. It also expands employee access to annuity options and makes it easier for small businesses to offer retirement plans to workers.
In May 2019, the U.S. House of Representatives passed the Secure Act, HR 1994, with bipartisan support. In June, the bill moved to the Senate. It was later attached to the year-end spending bill before it was signed into law on Dec. 20, 2019.
In many ways, the legislation is an attempt by Congress to address the increased difficulty many people face saving and investing for retirement.
While retirement costs grow, research shows that the average American is not saving enough, if at all.
A 2019 report on retirement security from the U.S. Government Accountability Office found that over a quarter of all Americans aged 55 and older have neither a defined contribution plan, such as a 401(k) plan, or a retirement pension.
A 2017 study from The New School’s Schwartz Center for Economic Policy Analysis and Department of Economics found that 50 percent of older workers earning less than $40,000 annually have no pension or retirement savings. It noted that even for those with savings, the median account balance was $92,000 — enough to provide just $300 a month over the course of retirement.
Several factors, including longer life expectancies and rising health care costs, are contributing to this gap in retirement savings, according to researchers.
Secure Act Highlights
There are 29 new provisions in the Secure Act, but some impact more employees and business owners more than others.
Below are a few of the most significant highlights, followed by more detailed information. To read the entire Secure Act, visit the U.S. Congress’ website.
Highlights of the Secure Act include:
- Provides tax credits to employers who create a 401(k) or Simple IRA plan with an automatic enrollment feature.
- Enables businesses to enroll more part-time long-term workers in employer-sponsored retirement plans.
- Gives employers greater flexibility to include annuities in workplace-sponsored retirement plans.
- Increases the required minimum distribution age for retirement plans from 70.5 to 72 years old.
- Allows workers to continue contributing to an IRA, regardless of age, as long as they are still earning income.
- Eliminates a stretch provision rule that allowed retirement account beneficiaries to spread distributions over their lifetime.
- Allows new parents to withdraw up to $5,000 from a 401(k) or IRA plan penalty-free the first year after the birth or adoption of a child.
Nearly all the people I work with exhibit significant anxiety about saving enough for retirement. Not surprisingly, government-sponsored initiatives that facilitate saving for retirement are hugely popular. The SECURE Act and the SECURE 2.0 Act are the most recent examples of ways the U.S. government has made an effort to address widespread savings challenges.
Thomas J. Brock, CFA®, CPAInvestment, Corporate Finance and Accounting ProfessionalThomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.
Annuities Held Within 401(k) Plans
One unique feature of the Secure Act is a provision that allows employers to more widely offer annuity options within 401(k) plans.
An annuity is a financial product that guarantees retirees a steady stream of income, similar to a pension or Social Security. Consumers fund the policy with a premium paid as a lump sum to an insurance company, which then agrees to provide monthly payments to the annuity owner beginning immediately or years in the future.
Annuities, like pensions, provide employees peace of mind that they won’t run out of money after exiting the workforce. IRAs and 401(k) plans don’t offer this same guarantee.
Even though including this option might improve retirement security for workers, annuities historically have been less popular than other 401(k) plan offerings, such as stocks or mutual funds.
According to the Society for Human Resource Management, a 2019 employee benefits survey revealed that only 7 percent of HR specialists said their organizations offered lifetime income solutions, such as in-plan annuities.
Prior to the Secure Act, businesses were held legally responsible in a lawsuit if an insurer went out of business and was unable to pay the promised income to annuity owners.
The new legislation creates a safe harbor for employers when choosing a group annuity to include within a 401(k) or similar plan. This shifts the liability burden from the business owner to the insurance company.
However, employers must still perform due diligence when vetting potential insurance companies. Businesses must show, among other requirements, that the potential annuity provider has:
- Been licensed by the state insurance commission for at least seven years
- Filed audited financial statements and complied with state laws
- Maintained healthy financial reserves
This new provision gives consumers an opportunity to see if an annuity is a good fit for their retirement plan. It may also make annuity offerings for workers more affordable than those available on the retail market.
Another Secure Act provision allows employees who purchase an annuity in their 401(k) to move it to a different employer 401(k) or to an IRA without paying surrender charges or penalties.
Workers will also receive more information to help them evaluate how an annuity option could work for them. Defined contribution plans will be required to provide participants with lifetime income estimates. This yearly disclosure will illustrate how much the participant can receive if the account balance is used to provide a lifetime income stream during retirement.
Mapping Out Your Retirement: Are You on Track?
Increasing Required Minimum Distribution Age
Your required minimum distribution is the minimum amount you must withdraw from your account each year. Prior to the Secure Act, the IRS required people to begin taking out funds the year they turned 70.5 years old. Now, retirees can wait until they’re 73 years old to start making withdrawals from their 401(k), IRA or similar account.
This gives people more time to grow their investments tax deferred.
As of September 2022, 25.8% of adults over age 65 to 74 and 8.6% of those 75 and older are either working or looking for work, compared with 10 percent of those 65 and older in 1985.
With more Americans living — and working — longer, another Secure Act provision allows employees to continue contributing to their IRA, no matter their age, as long as they are still earning income. Previously, employees were barred from making contributions after 70.5 years old.
Expanded Options for Small Business Owners, Part-Time Employees and New Parents
For small businesses interested in offering 401(k) plans to employees but have been reluctant to do so, the Secure Act includes a provision that may provide a viable solution at a reasonable cost.
Now, two or more unrelated companies can join a pooled employer plan as a cost saving measure. The law states that each adopting employer is responsible for selecting and monitoring the plan provider.
The act insulates companies in these multiple employer plans (MEPs) from penalties if other members violate a fiduciary rule, such as failing to allocate worker contributions to the plan on schedule.
Legislation also boosted a tax credit from $500 up to $5,000 for small businesses that establish a workplace retirement plan. The credit extends over a three-year period, for a potential total credit of $15,000.
Employers have a chance to receive another $500 annual credit if the plan includes automatic enrollment. This is available for three years, beginning the first taxable year in which automatic enrollment is enacted.
Long-Term Part-Time Employees
The Secure Act also expands retirement options available to long-term part-time employees.
Now, all part-time employees 21 years and older who work at least 500 hours each year for three consecutive years at the same company are eligible to enroll in a workplace 401(k) plan, if their employer offers one. This means an employee needs to work roughly a minimum of 9.5 hours a week every week for three years to gain eligibility.
The law does not require a company to match any contributions made by part-time employees.
Early Withdrawal Opportunity for Families
If your family recently expanded, the Secure Act allows you to make a penalty-free withdrawal of up to $5,000 from your 401(k) plan or IRA during the first year after the birth or adoption of your child. Normally, you must be at least 59.5 years old to avoid a 10 percent early withdrawal penalty from the IRS, though some other exceptions exist.
While new parents can later replenish withdrawn funds, this is not a loan and does not adhere to the strict 401(k) repayment process.
Keep in mind that any funds you take out will still be subject to regular income tax. Also, making large withdrawals will reduce your overall retirement savings for the future.
No More IRA Stretch for Account Beneficiaries
People can pass along whatever is left in their tax-advantaged retirement accounts to designated beneficiaries as part of estate planning. To offset a major tax bill, some heirs have historically spread IRA distributions over their lifetime, a strategy known as a stretch IRA.
But under the Secure Act, the withdrawal window shrinks. Now, heirs must take out all the money left in the account within 10 years. And all withdrawals will be subject to income tax.
This 10-year rule applies to both traditional IRAs and Roth IRAs. However, it doesn’t apply to everyone, including:
- Surviving spouses
- A minor child (Note: The 10-year rule applies once the child turns 18 years old.)
- A disabled individual
- A chronically ill individual
- Someone who is not more than 10 years younger than the IRA owner
Some experts say this new rule is a revenue raiser added to the bill to help offset federal tax losses caused by other Secure Act provisions.
