SECURE Act: Educating Employees About What It Means for Them

The recently passed Setting Every Community Up for Retirement Enhancement (SECURE) Act includes many changes designed to help strengthen employees’ retirement security. For the law to achieve its intended goal of helping workers prepare for retirement, employees need to understand how the wide-ranging changes affect them. Plan sponsors can play an important role by developing a communications strategy for educating employees about what the SECURE Act means for their retirement planning.

 

Background on the SECURE Act

The SECURE Act became law in December 2019 as part of a broader $1.4 trillion spending bill. The SECURE Act, which is the first significant retirement legislation since the 2006 Pension Protection Act, contains many wide-ranging provisions that amend the Internal Revenue Code (IRC) and Employee Retirement Income Security Act (ERISA). BDO’s National Tax Office issued an alert detailing the actions that plan sponsors need to take immediately to comply with the SECURE Act.
 
In addition to learning about these immediate compliance steps, plan sponsors should be thinking about the longer-term effects of the law. BDO’s National Tax Office issued an alert detailing planning opportunities for plan sponsors. Communicating what the law means to employees should be a central part of that planning. Although employers generally do not give employees personal tax advice, they often educate employees about the importance of retirement savings.

 

Developing an Effective Communication Strategy

An effective communication strategy will take time and effort given the breadth of changes brought about by the SECURE Act. Below, we highlight several of the provisions that most directly affect employees’ retirement planning and provide ideas for how plan sponsors can develop a successful communication plan to educate participants about these changes. 

• Part-time Work Benefits: In general, long-term part-time workers now will be eligible to participate in company 401(k) plans. Qualifying employees will have the right to contribute to the plan if they are at least 21 years of age and worked at least 1,000 hours in one year or have worked at least 500 hours each year for three consecutive years. Employers can help part-time workers understand the new benefit and how it may apply to their personal situation. Employers should also examine their payroll and time-tracking systems to ensure they have an effective and efficient way to track employees’ eligibility for such benefits.

• Increased Age for Required Minimum Distributions: Employees who turn 70 ½ after December 31, 2019 will now be able to delay taking required minimum distributions (RMDs) from their employer-sponsored retirement plans or individual retirement accounts (IRAs) until they reach age 72. This change, which reflects the fact that Americans generally are working and living longer, can provide a significant addition to employees’ retirement savings. Once an RMD is initiated, it cannot be suspended, so it is important that employees are aware of this rule change. Employees who were expecting to begin RMDs when they reached age 70 ½ in 2020 or later may want to rethink their options.

• Penalty-Free Distributions for Birth or Adoption Expenses: The law allows penalty-free retirement plan withdrawals of up to $5,000 within a year of the birth or adoption of a child to pay for eligible expenses. While the distribution would be penalty-free, it would be subject to income tax. Plan sponsors should make sure their employees, especially younger ones, are aware of this new opportunity, as well as the tax consequences. A unique feature of these special distributions is that the participant can repay the full amount to the plan at any time in the future (if the plan so allows).

• IRA Contributions after 70 ½: IRA owners now can continue to contribute to their IRAs after age 70 ½, as long as they are still working. While IRAs are typically outside of the company 401(k) plan, employers may want to educate participants about this new rule, which now aligns with 401(k) provisions.

• Mandatory Lifetime Income Disclosure: The SECURE Act requires employers to give participants a snapshot of the monthly income they might expect from an annuity, based on their current account balance. The snapshot will be included annually on participants’ benefits statements. It should be noted that employers aren’t required to provide an annuity option, only to educate employees regarding the size of an annuity that corresponds to their account balance. While the Department of Labor (DOL) needs to develop a model for this disclosure before it becomes effective, employers should start thinking about how they want to communicate this information to participants.

• Elimination of “Stretch” Beneficiary Distributions: Previously, people who inherited an IRA or 401(k) could receive—or “stretch”—distributions from the account over their entire lifetimes. Now, non-spouses and other specific beneficiaries who inherit these accounts must take all of the money out within a 10-year window. This new provision could affect the estate planning strategies of some employees, particularly those who have established trusts for younger generations. Employers have an opportunity to alert employees about this change and encourage them to talk with their financial advisors about how it might affect the employees’ estate planning.