The awkwardly named ‘Setting Every Community Up for Retirement Enhancement’ Act made sweeping legislative changes that will have an impact on more than just retirement planning. As financial counselors, it is important to understand how these changes might impact your clients. Below are some of the key provisions to keep in mind.
- The cap for default enrollment (and automatic increases) goes from a contribution rate of 10% to 15% in qualified defined contribution plans. This is great for a more prepared retirement but not for clients that are struggling to afford necessities. Let your clients know that they must actively choose a different contribution rate if necessary.
- Part-time workers that have worked three consecutive years with at least 500 hours of service are now eligible for 401(k) participation! Again, keep in mind that a part-time worker struggling to afford necessities might see an unexpected reduction in their paycheck if the employer automatically enrolls employees into the plan.
- Automatic enrollment is more attractive than ever for small employers due to a tax credit of $500 per year to employers starting section 401(k) and SIMPLE IRA plans that include automatic enrollment. The $500 would be used to defray starting costs for that small employer. Clients might benefit from their small employer now offering a retirement plan but keep in mind that the automatic enrollment rate might be more than the client can afford.
- Clients impacted by major disasters can now take up to $100,000 from retirement accounts with no penalty on the distribution. Ordinary income tax would still be due unless a Roth account is used. This could prove to be big for many clients living on coastlines impacted by hurricanes or those in tornado-prone areas.
- Home healthcare workers receiving ‘difficulty of care’ income, while still not treated as taxable income, can now count those dollars as income for the purpose of making contributions to defined contribution plans and IRAs. This could be a great way to encourage clients to begin saving for retirement.
- 529 plans are now able to cover the costs of homeschooling and up to $10,000 in qualified student loan repayment for the account’s beneficiary or sibling! This could be a great way to help a client struggling with student loan debt.
- Clients that went through foreclosure, short sale, loan modification, or other forms of mortgage debt forgiveness can exclude up to $2 million of the forgiven debt from taxable income.
Staying abreast of the legislative and legal landscape will help you better serve your clients. Legislative changes impact all states but keep in mind that there might be some state-specific changes that will have an impact on your clients. For example, in January 2020, the Alabama Court of Civil Appeals ruled that low-income Alabamians have a constitutional right to protect up to $1,000 in wages per paycheck from garnishment by debt collectors. This is a huge win for a state where 39% of the adults have debt in collection status. This is a change from 2015 law that removed prior protection against wage garnishment by defining wages as property. The case challenged that definition and the ruling allows up to $1,000 from each paycheck, meaning clients with weekly checks would have more protection than clients paid monthly.
Guest Contributor: Rich Stebbins, PhD, JD, CFP®, University of Alabama
To read the full bill, you can download the PDF here: https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf.
Or if you prefer, the shortened version of 6 pages published by the House Committee on Ways and Means is available here: https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf
The Alabama Court of Civil Appeals case is available here: https://law.justia.com/cases/alabama/court-of-appeals-civil/2020/2181042.html
Debt delinquincy percentages by state and county are available on an interactive map here: https://apps.urban.org/features/debt-interactive-map/?type=overall&variable=pct_debt_collections