The SECURE Act is Changing Retirement Saving Plans for Business Owners and Employees

The SECURE Act, which was passed in December of 2019, enacted new tax laws that affect both employer-sponsored retirement plans and individual retirement plans. Find out how these changes may impact you and your business.

Saving for retirement just got a little easier—in theory—with the introduction of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December of 2019.  The Act ushers in new tax laws that may impact both the retirement plans business owners offer employees and personal retirement accounts. Here’s a brief overview of how the changes may impact you and your business:

First, the Internal Revenue Service (IRS) has increased the contribution limits for 401(k)s and other retirement plans as follows starting January 1, 2020:

  • Maximum employee contribution rises $500 – from $19,000 to $19,500
  • Combined employer and employee contribution rises $1,000 to $57,000
  • Employee catch-up contribution for participants ages 50+ will rises $500 to $6,500
  • Combined employer and employee contribution for 50 years and older rises $1,500 to $63,500
  • Annual compensation limit for calculating contributions increases $5,000 to $285,000
  • Highly Compensated Employee (HCE) limit increases $5,000 to $130,000

Next, the SECURE Act represents the most significant changes to retirement legislation since the Pension Protection Act of 2006 including:

  • Small businesses offering their employees 401(k) plans may be eligible for tax credits and protections on collective Multiple Employer Plans. In essence, the Act would allow small employers to collaborate to set up and offer 401(k) plans with less liability and less cost than before.
  • A new $500 tax credit is available to businesses to offset the start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is available for three years and is in addition to the existing credit mentioned above. The credit is also available to small businesses that convert an existing retirement plan to an auto-enrollment plan.
  • 401(k) plan sponsors can now offer in-plan annuities inside of a 401(k) by alleviating concerns about the liability related to picking an annuity provider for the plan.
  • Retirement benefits can be offered by employers to long-term, part-time employees who have worked at least 500 hours per year for at least three consecutive years. The part-time employee must also be 21 years old by the end of the three-year period. The new rule doesn’t apply to collectively-bargained employees.


  • The SECURE Act requires 401(k) plan administrators to provide annual “lifetime income disclosure statements” to plan participants showing how much money they could get each month if their total 401(k) account balance were used to purchase an annuity. These new disclosure statements aren’t required until one year after the IRS issues interim final rules, creates a model disclosure statement or releases assumptions that plan administrators can use to convert account balances into annuity equivalents, whichever is latest.
  • Penalty-free withdrawals of up to $5,000 from retirement plans for qualified expenses associated with the birth or adoption of a child are now allowed. This means that if you have a 401(k), IRA or other retirement account, the new retirement law lets you take out up to $5,000 following the birth or adoption of a child without paying the usual 10% early-withdrawal penalty. Keep in mind that you will still owe income tax on the distribution unless you repay the funds. If you’re married, your spouse can also withdraw $5,000 from their own account, penalty-free.
  • Penalty-free withdrawals of up to $10,000 can be made from 529 education-savings plans for the repayment of certain student loans.
  • If you are a student amounts paid to you to aid the pursuit of graduate or post-doctoral study or research (such as a fellowship, stipend or similar amount) are treated as compensation for purposes of making IRA contributions. Similarly, if you are a foster-care provider, “difficulty of care” payments will also be considered compensation under the new retirement law when it comes to 401(k) and IRA contribution requirements.
  • The maximum age limit on retirement contributions (formerly capped at age 70½) is eliminated. The required minimum distribution (RMD) age increases to 72 from 70½. Together, these two provisions will delay both the tax burden of withdrawals and slow the drawdown rate on savings.

Some other significant changes to be aware of with these new laws in regard to being a beneficiary of someone else’s retirement plan through an inheritance:

  • If you know that you are going to be the beneficiary of an inherited retirement plan such as a 401(k)s, traditional IRA, or Roth IRA, beware that the SECURE Act has made some significant changes to how you can spread the distributions of these plans. Instead of being able to draw from them over your own life expectancy, you must now take distributions over a 10-year period. This may impact your taxable income, especially if you are in your prime earning years.  
  • Another important change the SECURE Act ushers in is a revision to the law in the Tax Cuts and Jobs Act that raised taxes on benefits received by family members of deceased veterans, as well as students and some Native Americans.

For many of us, Social Security payments will also factor into our retirement income. If you are self-employed, making estimated tax payments including Social Security and Medicare allocations is critical throughout the year. For 2020 the Social Security and Medicare remain unchanged at 15.30% for self-employed individuals (7.65% for individuals who are employed and receive a W-2). The Social Security taxable income threshold increases for 2020 from $132,900 to $137,700. There is no maximum threshold for Medicare taxes and, if you make in excess of $200,000 ($250,000 for those married filing jointly), you will pay a 0.9% Medicare surtax.

The SECURE Act’s changes to retirement savings plans are significant enough that businesses and individuals should consider how their retirement savings and tax situation may be impacted to ensure they are doing everything they can to reduce tax obligations now while creating financial security for the future.

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