SECURE Act changes rules for retirement savings accounts
On December 20, 2019, President Trump signed the SECURE Act into law, changing some rules for certain types of retirement savings accounts, including 401(k) plans that many companies offer their employees. Before the SECURE Act (which stands for “Setting Every Community Up for Retirement Enhancement”), employers offering 401(k) plans could require their employees to work at least 1,000 hours within a 12-month period to be eligible for the plans. The “1,000 hour rule” effectively made many part-time and temporary workers ineligible for their companies’ plans. However, under the SECURE Act, employees will be eligible for 401(k) plans offered by their companies if they either: (1) meet the “1,000 hour rule”; or (2) work at least 500 hours within each of 3 consecutive 12-month periods. In other words, a long-term, part-time employee who works at least 500 hours per plan year for 3 consecutive plan years will be eligible for a company’s 401(k) plan (if the company offers one). Notably, even though the new law makes more long-term, part-time employees eligible for 401(k) plans, it doesn’t require an employer to give the “500-hour employees” the same contribution-matching and vesting benefits as its “1,000 hour” employees. This part of the law is effective for plan years beginning after December 31, 2020.
The SECURE Act also raises the percentage of “safe harbor” automatic deferrals into a 401(k) from 10 percent to 15 percent. Before the SECURE Act, employers could automatically defer up to 10 percent of an employee’s income into a 401(k) account by default if employees didn’t elect or decline a 401(k) contribution on their own. These employers were protected from claims by workers who were unhappy about an unexpected 10 percent payroll deduction when they failed to agree or decline to contribute to their 401(k) after becoming eligible for the plan. The SECURE Act raised that employer safe harbor upper limit from 10 percent to 15 percent. This part of the law is effective for plan years beginning after December 31, 2019. The SECURE Act was one small portion of a massive year-end appropriations bill (HR 1865 - Further Consolidated Appropriations Act, 2020).
Tips For Employers: The SECURE Act also changed other rules related to retirement savings accounts, including raising the age limit for required minimum distributions on certain qualifying retirement accounts. As an employer, you should consult your tax attorneys, financial planners, and retirement plan advisors for more information about how the SECURE Act may affect your organization. Also, see our Legal Guide, Temporary Employees and Model Form, Temporary or Seasonal Employment Agreement.