The 401(k) Audit CPA Success Show: Episode 17
The Secure Act was passed in 2019 and while we discussed about this a year ago to enlighten our listeners about its impact to their businesses there is a revised version that is expected to pass this year a lot are talking about this to gain clarity of its implications. Today, Jamie Nau sits down with Kim Moore to talk about the Secure Act 2.0 and the key provisions that 401(k) Plan Administrators need to know about this legislation.
Jamie Nau: Hello everyone, and welcome to today's episode. Today, we are going to hit on a topic that we actually talked about, I think maybe a year ago or maybe a couple of years ago. We're going to talk a little bit more about the Secure Act. I know there was the original passing of this in 2019 and they're actually thinking about passing a Secure Act 2.0. So we're going to go into the details of what's in that current legislation. While is hasn't passed just yet, it's definitely worth talking about so we can kind of get ahead of that. So welcome to the show, Kim.
Kim Moore: Thanks, Jamie. Glad to be here. Thanks, everybody for tuning in. This is a topic that is getting attention from folks. And we're going to talk about why here in a little bit. But it is something that, as Jamie mentioned, has not passed yet. So obviously it is subject to change, but very important. If it does pass, it will probably become effective pretty quickly. So we wanted to kind of get ahead of it and let everybody know that this is potentially coming. We thought we'd start off talking about the actual legislation that did pass, the “Secure Act 1.0” or what's actually called the Secure Act, passed in 2019, for setting every community up for retirement enhancement. The Secure Act, most of it came into effect at the very end of 2019, some of it in 2020. So it's kind of all over the place. There's not like one rule. So we thought we would go through the components of this because the Secure Act 2.0 follows along with what’s actually been passed. You will see as we get into the 2.0, why it's important to understand the first part of it. The first part of it that got a lot of attention is that it allows multiple plans to pull together to join a pooled account. So the thinking there from Congress was that small employers that want to offer 401(k) plans but the administrative costs are too expensive. They could pull together, they could share the expenses, you know, and get a better plan for their employees without the added cost. That would be effective after 12-31-20. So it's in play now. That got a lot of attention because obviously that would allow more players in this space. Second thing is it changed the automatic enrollment cap from 10 to 15 percent of pay that became effective beginning in 2020. So if you in your plan say if you participate, we're going to raise your deferral percentage. So you're going to go from a 5 percent deferral to 6 percent to 7 percent to 8 percent. You know, a percentage usually is what they do each year capped at 10. This year it is going to change to 15 percent. There were some safe harbor changes. I'm not going to go into those because they only apply if you're safe harbor. Then there were some tax credits that happened as part of this. Again, these were incentives to small businesses to set up 401(k) plans for their employers. So there was increasing credits to small plans to start a 401(k) plan and then new tax credit, up to five hundred dollars if you started a plan and added the auto enrollment. So auto enrollment means more people will be enrolled in the plan because you're automatically putting them in the plan unless a person physically declines. Now, the big thing though, that I think most people need to really pay attention on, unless you're a small company and you don't have a 401(k) plan. But if you're a business that has either part time employees, that's the big one. But it also impacts if you have seasonal employees or if you have employees that maybe kind of come and go a lot. So they're with you for a while, then either they leave on their own or maybe you have some fluctuations in employment needs. So you let them go and then the business picks back up again and they come back. So if you have people coming and going for any of those reasons, the rules have been that unless they work a thousand hours per year in general you didn't need to offer the plan to them. So we have a lot of people that say, well, my plan rules are blah, blah, blah, blah, whatever they are, except for part time people, you know, of course, they're not eligible. This changes that. You now have to have two part eligibility requirements. So one requirement for full time staff, which you can set. There's a lot of variations there. But you also have to have this second option for these part time, seasonal etc. employees if they worked more than 500 hours of service in a year for 3 consecutive years, then you have to offer the plan to them. The reason that I make such a big deal about this is because it will go in effect beginning now in 2021. So it started four years after 12-31-20. Not in the sense that you have to start offering them enrollment, but you have to start tracking. So in three years, potentially, if you had employees that hit that 500 hour mark, then you're going to have to offer the plan to them and you're going to have to track, because if somebody comes to you and says hey, I'm eligible for the plan, why didn't you offer it to me? You have to be able to prove that they didn't hit that hours worked mark or vice versa. I am not sure how payroll companies are set up to handle this. It may be a manual tracking on your part. Might be a bunch of spreadsheets or, you know, I don't know how people are going to do it, but you're going to have to start tracking and you don't want to start when this actually hits the three year point. Then all of a sudden you have to go back and try to figure it all out. That would be a nightmare, especially if you have people coming and going a lot. So we really wanted people to be aware of that. So keep that in the back of your mind. Three years, consecutive 500 hours.
Jamie Nau: So we did do a podcast. I went back and looked while you were speaking. We did one on February 17th of 2020. So a little more than a year ago. We spent a good 25 minutes talking about this. If you want more information on that, you can go dig that podcast out of the archives. There is a lot of information on there. So Kim, my next question is, with this next one, why are they adding more to this? Why did Congress think more was needed to be done here?
Kim Moore: Yeah, there's a couple of speculative reasons. I never like to get into politics when you're in a work setting, but, you know, it is Congress, so you can't help yourself. There's a speculation that some of the, and this is the House of Representatives would be the one putting this forward, but some of the speculation is that some of them think this is going to help get them get re-elected in their district. This is a big issue, the retirement piece of it that is. The other thing that that definitely is on everybody's mind. You know, I don't know if you want to say we just “came out” of the pandemic or we're “coming out” of the pandemic, but we all know 2020 was a tough year. And so whether it's from a business or an employer standpoint, looking at their employees or whether it's individual employees or in this case would be participants in 401(k) plan, a lot of people were really struggling financially. They were having trouble. You know, asking how do I pay my bills? How do I pay my rent or mortgage? You know, I've got kids home from school. How do I juggling that and my job? Maybe you had people getting furloughed or laid off. There was all kinds of things going on from an employment standpoint, and so it was difficult for people just to make ends meet. So they were not, you know, contributing to the plan. So there's a lot of statistics out there of just almost decimation for people contributing to their 401(k) plans. That of course will cause problems on down the line, because if you're not contributing early on, and we've talked about this in earlier podcasts, you really need to start contributing early and let that be accumulating over years and years and years. So any time that accumulation gets interrupted, it causes big problems. The other thing that happened, we know the market was just up, down and all over the place. So that impacted anyone who maybe were continuing on to contribute. Those fluctuations impacted earnings. So I think Congress just kind of looked back and said, you know, we know there's a shortfall anyways. When you look at people getting ready to retire, there aren't defined benefit plans anymore. We're already unsure about Social Security. In the best case scenario, there may still be Social Security. In either case, you're looking at a whole lot of people retiring in the future with not a lot of money to keep them going post retirement. And so that's why folks were set up in the first place. But this doesn't help fill that short gap. If people aren't contributing their money isn't earning over their lifetime. So that's really why the Secure Act started and then this Secure Act 2.0 is partly to help with that situation partly because of political reasons. I think it's also the folks that sponsored the Secure Act in the beginning wanted it to go further. But you know how the congressional stuff works. It's you know, you never get everything. So this is I'm coming back for another bite of the apple kind of thing too, I think is part of the reason.
Jamie Nau: Yeah, that makes sense. So does the Act currently look like, and what are some of the provisions that we need to keep an eye out for?
Kim Moore: Yeah, so the tentative name and again, this has not been passed. So all of this is subject to change. But the tentative act is called “securing a strong retirement act of 2020”. It was actually first introduced in October of 2020. A lot of people thought that this would actually get passed in 2020. There was a big push and they thought maybe when we get to the end of the year, you know, how the Congress tries to do one last big act and they kind of throw everything in the end or in that last ditch effort. A a lot of times it's a budget act and then they'll throw a bunch of stuff in. They thought maybe this would get put in there, but it didn't. It did not get finalized or anything. So it's still out there. It's still definitely on the radar. Definitely people pushing for it. The people in the know that really look at this and spent a lot of time talking to the congressional folks really feel like 2021 is going to be the year. Now, we'll see. We're not quite to the halfway point in 2021. I think a lot's going to have to do with, you know, the pandemic, as we mentioned. If Congress feels like they need to put more money into that, and there's other bills out there, obviously, that the president and some of his staff have been talking about. So it just kind of depends on can they put this in with something else? Is there going to be money left for this? We are going to talk about why it hasn't passed. It’s part of a money thing too. So let's get to that at the end here. But for right now, let's talk about what are they proposing to be in this, and we are calling it Secure Act 2.0. First thing that's been very popular and you've heard a lot in the news about student loans. So a lot of pressure for those folks who maybe graduated college, young 20, 30 somethings who have these huge debts out there. Well, then came a pandemic and they are thinking, how do I get that paid off and while I’m supposed to be saving for retirement? How in the world am I going to do all of that? So one of the big proposals there is to help with that. I don't know all of the specifics exactly, but what everybody's thinking is that it would allow the participant, or in this case employee, to make their payment to the loan, whatever that would look like in a month, or however they pay it off. And then the employer would treat that like a contribution to the 401(k), even though it's not. It's obviously a payment going towards a loan. But let's say you had one hundred dollar payment and the employer was going to match 50 percent. They would normally be matching fifty dollars. So 150 dollars would go into the participants account. In this case, the hundred dollars would go to pay the loan, the fifty dollars the employer would contribute to an account for the participant. So it would help the employee to save for retirement while they're still paying down their loan. So very popular provision. There's a lot of support for it. It's one way to help with the student loan situation without Congress having to fund a bunch of it because the employer would fund it. So I'm not sure how employers are going to feel about it, because it's a match that’s not really a match and there's implications to for it. So again, not sure exactly where it's going to go but that's definitely something that we think will probably go. It's been very popular.
Jamie Nau: Just so I'm clear on it. So basically, if I put money into paying off my loans, like you said, a one hundred dollars payment, the match goes to my 401(k), not to my loan.
Kim Moore: Correct. It would follow whatever the match formula is already existing in the plan. So whatever match you would have gotten had that money going into your plan, you would get that same match. And all the other rules are the same. I mean, it doesn't change anything with regard to the plan. There is an IRS ruling around allowing people to do this already in plans. It's not really kind of authoritative guidance. Someone submitted a situation and the IRS allowed that to go ahead. So they're saying we can't say this is okay for everybody, but you can already see the push for employers going down this path. So we definitely think this will be probably included if the act actually ever does pass. Second thing is that all new plans would have to be auto enrollment plans. This is a little bit different because we've had auto enrollment before, but it's never been required. So this would actually require the auto enrollment. It would start at 3 percent, it would go up to 10 percent, but would allow for employees to opt out, which of course, is always true with auto enrollment. And it would allow plans that are already in place that don't have auto enrollment you would not have to implement it if you're already there, you can leave it the way it is. But if you set up a new plan, you have to do the auto enrollment.
Jamie Nau: For newer businesses or businesses who might be thinking it’s time to get a 401(k) plan, if this passes you will be required to do auto enrollment going forward.
Kim Moore: Right, and the Secure Act has some credits that you can get back for setting up plans through auto enrollment. So it's kind of a force incentivizing you to do it. This would increase the required minimum distribution age up to 75. It was 70 and a half with provisions, other provisions it went to 72. Then with some of the COVID things that happened, the CARES Act, it was kind of waiving it for a while, this now would raise it up to 75. There's a lot of different opinions on this one. There's mixed things going on. You've got folks living longer. So we don't really want you to use up your retirement savings and then you've got another 10, 15 years of life. People are living longer and living healthier longer. So, you know, they might want to spread that money out because they really could use it to do fun things and you know, things that they saved up for all their life. So there's kind of that school of thought. There's also the school of thought that from a tax standpoint, the IRS doesn't like this because the whole point of the age required minimum distribution is, you know, you probably put that money in your 401(k) pretax so no tax was ever paid on it. The IRS is fine with that. But once you hit retirement, they want you to start paying some tax on that money. So the longer you leave it, that's another problem with this act, it's a not a good impact on trying to balance the budget. So that's kind of a controversial piece. It also would increase the catch up contribution limit as employees reach the retirement age. So again, recognize the fact we had COVID for those people that are getting really close to retirement they're trying to get as much money in their plan as they can. And I had a setback last year potentially because maybe my hours got cut or I lost my job, once you hit the age 60 going forward, the limit will go up currently from 6500 to 10000. So it gives a little bit more room that you can contribute a little bit more. I don't think there's much controversy on that. One big thing here, this is the big one, I think, for people and we just mentioned this, the part time folks, 500 hours in each of the three years potentially this would change it to two. So if depending on when this would get issued, when things would become effective potentially in next year, by the end of next year, you know, it would be the next year. So we would be in the beginning of 2023. Potentially, you could have to start letting all these part time people in and you would have had to track their hours. I think people are looking at and thinking oh three years, I have plenty of time. But this this could really force your hand. If you figure we may not know if this passes until the end of the year, and you've already blown a year of time that should have been tracked, now you've only got a year to get this all set up. So that's really why I wanted to bring this up. We know the initial one, the first Secure Act is in effect . The three year thing is happening. They are not going to change that. This would just make it worse because it would make you have to do it sooner. So my recommendation is get on it, start tracking now, because it's not going to get better. It's essentially could only going to get worse.
Jamie Nau: Any time you have to implement a process like that there’s going to be bumps along the way. So you want to make sure you get those bumps ironed out again. So I think this is great advice. If is it one thing you take away from this podcast is pay attention to this.
Kim Moore: Yeah I mean, you know your business, if employment is pretty stable for you then maybe this isn't that big of a deal for you. You don't have that many part time people. We have a lot of clients that have seasonal employees. They have a lot of in-and-out hires in terms of a lot of part time people. So it kind of depends on your business, whether this is going to be a big deal or not. The other things, there's a disclosure change. It may well make it a little bit easier for administration. I think everybody will like that. It expands some of the involuntary correction programs that the IRS has, which are helpful. And we've talked about on other podcasts, some of those correction programs. I'm not going to go in a lot of detail here. We don't know exactly what it would look like, but that would be a good thing. I mean, I don't think anybody would be arguing those. And it allows for plans to be amended when the plan amendments have to be done, because all of these acts that we've been talking about, the CARES Act, the Secure Act, require you to amend your plan. But most of these allow you to do it later. So they're giving you a little bit of time. You can implement now and officially amend your plan a little later. So it give a little bit more time for that. So you're all saying, why do I care about this, is it going to pass or not? Best guess, current thinking. is that it is expected to pass during 2021. Not sure exactly when, but the insiders that are talking to Congress, it's a big deal for them. I think they've got, you know, those elections that happen on the congressional cycle, I believe is next year. So I think they want to get this in and be able to tout, look what I did for you. So most bets are that it's going to probably pass during 2021. And the current expectation is that it would become effective 1-1-2022. So that’s not far away.
Jamie Nau: Yeah. That's right around the corner.
Kim Moore: Yeah. So this could have a big impact on your administration. So why hasn’t it already passed if it’s so big? What happens when and you put forward a bill like this is that it has an impact on the budget. So what happens is it has to go to what's called the Congressional Budget Office and they have to do a process. I forget the name of that. But they have to go through and kind of like score it and say based on whatever the provisions are that they're given. So whatever that looks like, we estimate the hit to the bottom line for the country is an up of so much or is going to cost us a negative of so much. And of course, there's probably back and forth and everything else. They expect this will be a hit to the bottom line. So it's going to cost taxpayers money. I mentioned like increasing the R&D age is a hit because that would be money coming into the Treasury that they could use now, which, of course, you're delaying it potentially almost five years. So you know, that would be a hit over those five years. And we're already a hit to the Treasury because of the pandemic and people not having income tax payments because they lost their job or, you know, whatever the pandemic did to their salary. So there's a lot of question about, this is a great idea, everybody loves it, but how are we going to pay for it? So that's the unknown at this point. The research I did shows it's still with this group, this Budget Office. So they've got to come back with “the” number and then once they do that then it's up to Congress to say okay, here's what we're proposing. And that would change potentially what goes in the law. So they may say we love everything. We clearly can't afford it. So we'll slap out that R&D piece and then that would make the number come down to an acceptable level. That would be an example of something they could do. So that's where it's set. So if they can get over that hurdle that like I said, this is already out there. It's not like they have to draft it up. It's already there. They would just have to finalize it and then put it forward for a vote. So probably pretty close.
Jamie Nau: Like you said, beginning of next year will be a big turnaround I think the biggest thing is to kind of keep your ears to the street and we'll keep you updated with the podcast. As we get close to the end here I want to throw our email address out there. We are always looking for new topics. Haven't had many guests on the show. So if anybody wants to be a guest, we'd love to have you. The email address is: email@example.com. I'm sure a lot of people will listen to this one because it's something that's out there so much is unknown. The more information you can get about this is really help. So Kim, any final thoughts for our listeners?
Kim Moore: No, I don't think so. As you mentioned, we'll keep watching. If we hear anything, we'll let you know. I also post on our blog weekly, so we'll put it out there on the blog as well. So take a look there too. That’s probably where we'll put it first if we hear anything or any updates.
Jamie Nau: Great. Well as always, appreciate all your information and I'm sure our listeners do as well.
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