The SECURE Act of 2020 made some of the biggest changes to retirement planning in the last decade. Business owners and employees alike have a number of options, opportunities, and potential issues to consider in the wake of these new rules and regulations, and great advice can be the difference between saving big and missing out.
Joining me today to talk about these developments is Brian Hartstein. Brian is Bayntree Wealth Advisors’ Director of Corporate Development. He has over 30 years of experience handling 401(k)s, CPAs and CPA firms, and pension plans, and even worked in his family’s third-party administration firm’s office when he was a middle-schooler.
Today, Brian and I talk through how the SECURE Act is changing tax planning and what you should focus on and look at as you review your plans and make changes. As an added bonus, if you have a retirement planning question for Brian that wasn’t covered in today’s episode, email us at firstname.lastname@example.org and he’ll answer it, no commitment necessary.
In this podcast interview, you’ll learn:
Hi. This is your host, Andrew Rafal, the founder and CEO of Bayntree Wealth Advisors. And I want to welcome you to the Your Wealth & Beyond Podcast, a show that was created to help you simplify the financial world and to ensure that you’re living your best life now and in retirement. Each show we’re going to be bringing on experts that are going to help you build wealth and most importantly find purpose in what matters most.
[00:00:29] Andrew Rafal: Welcome back to another episode of Your Wealth & Beyond. I’m your host, Andrew Rafal. And today, we’ve got an action-packed show. I actually have on not only a good friend, but Bayntree Wealth Advisor’s own Director of Corporate Development, Brian Hartstein. How are you today, Brian?
[00:00:46] Brian Hartstein: I am doing very well. It’s great to be back. I had a lot of fun last time and looking forward to another great show.
[00:00:51] Andrew Rafal: Always fun to get us together. So, those of you who have been listening to the show know there’s been a major change to retirement accounts affecting both individuals and business owners and trustee of 401(k) plans. Previous episodes, we’ve talked about how the SECURE Act will impact your retirement, everything from the change to RMDs to the death of the stretch IRA. Today, we’re going to hit on items that are going to affect you, the business owner, and you the trustee of 401(k) plans and who better to talk through how the SECURE Act can affect you than our own Brian Hartstein. Brian, your background is over 30 years working with 401(k) plans, CPAs, pension plans, CPA firms?
[00:01:38] Brian Hartstein: Absolutely. It’s funny and I kidded you last time I started in my family’s third-party administrator firm literally when I was in middle school, starting in the file room and then working my way up through high school and college and in the pension industry and have a tax background. So, I always kid it’s a very good thing. I really like what I do because I wasn’t trained to do much of anything else.
[00:01:58] Andrew Rafal: And he’s very good, ladies and gentlemen, in what he does. So, with the sweeping changes through the SECURE Act and I think it’s the biggest changes we’ve seen in well over a decade, it’s more important than ever as a business owner to understand some of the benefits, what they threw in there, why they threw that in there. And this law passed at the end of last year. Some of the things were some surprises, some we thought was going to be put in place. So, today, I want you guys to take notes. Also, below us will be the show notes where we’ll be able to bullet and summarize all of these important changes. But there’s been a couple of big ones, Brian. And let’s start off with what you think is one of the most important changes to retirement planning based on the SECURE Act.
[00:02:41] Brian Hartstein: Yeah. I’d like just to quickly dig for an overview. Look, the SECURE Act, which had a wide variety of different pieces of improvements, whether it’s on the individual side or on the company planning side really was designed from the retirement side to make retirement options and retirement plans more accessible and cheaper to not only employers to set up but also to the employees and participants. So, that was kind of the general thrust of the pension side, which is the part that obviously, I delved into the most. And really, if you look at the whole entire SECURE Act, I just think it means now more than ever, good advice is really essential. Whether it’s a group like us or another qualified financial advisor, you really need one to help guide you through all the new rules and ensure that you’re really best positioned to take advantage of all the new brakes while avoiding perhaps some of the pitfalls.
[00:03:35] Andrew Rafal: And so, what you brought up there that some of these changes are going to make it easier. Is that what you’ve seen over the years where you looked at a business owner and in your mind, you’re like, “They need to be doing some type of retirement planning,” but it was just either too complicated or maybe too expensive, and they just kind of push the can down the street and said, “I’m not going to do anything?”
[00:03:52] Brian Hartstein: Absolutely. I 100% agree with that. And there’s complexity and there’s cost, but the more things that they can do at the congressional level and at the IRS level to make it simpler, to make it cheaper for employees, again, helps business owners from a recruitment retention standpoint, helps employees and participants, and also helps our country because there’s going to be more retirement assets for people to draw upon when they get to retirement so maybe there’s not as much burden on social programs like Social Security, Medicare and things like that. So, it’s kind of an interwoven fabric of improvements that I think go to help everybody. And you hit on really the biggest and the first thing that I looked at here, which was the small employer plan startup credit. So, there was a credit, a tax credit and a credit’s different than a deduction because a credit is a dollar-for-dollar offset of cost to set up a plan.
So, before, it was up to a $500 that you could utilize from a tax credit and now, they’ve really expanded it. So, I don’t want to get into some of the calculations of how they build that but you can get a credit of up to $5,000 per year for a new plan set up and that will cover startup costs for the first three years, the plans in effect starting in year 2020 and later. So, just to give a quick example, if you’re one employer, that you’re an owner, you have five eligible employees to be into the plan, you now have the ability to have up to $1,250 tax credit dollar-for-dollar up to 50% of your initial cost. So, in theory, you had that plan and your plan cost was $2,500 to set it up. You have a dollar-for-dollar tax credit for half of that, and the other half is still tax-deductible. So, your true net-out-of-pocket might be literally a third of what the total actual bill may be. So, I think a really big advantage there, a lot of momentum for people to start setting up those small plans.
[00:05:49] Andrew Rafal: And with business owners who may have a CPA and they have a financial advisor, but what do you see out there because with us at Bayntree and mainly because of your relationships and your history in this, I mean, we oversee close to 30 plans, both large scale and small scale. So first, what can a business owner, what can they say to their advisor, their CPA, who’s maybe not bringing this information to them to weighing out the pros and cons of putting together a plan, what it’s going to do to them to help put their tax dollars more in their pocket, as well as maybe to give a nice benefit to their employees?
[00:06:23] Brian Hartstein: Yeah. I mean, one of the things is you can literally say, “Hey, look, I understand there were some legislative changes at the end of last year, and built into that was changes, were things that could really benefit us as a company from a recruitment standpoint, a retention standpoint, and also from a cost of setting up these plans standpoint. So, hey, we really need to look at these again and do a deep dive into what we call a pension analysis,” which is engaging a TPA, third-party administrator, which helps make sure the plan’s compliant, files the tax forms for the plan, and have them do a pension analysis to say, okay, here’s what our company census looks like, here’s what the different plan design options look like, and here’s what the costs look like. Because if they review it again, in light of some of these changes, I guarantee they’re going to be like, “Wow, this may be a lot cheaper and easier and there’s a heck of a lot more benefits to the company and employees if we do it.”
[00:07:09] Andrew Rafal: Yeah. It’s just amazing that just so many don’t get the proper advice or at least the information so that they can make a sound decision. And that’s important.
[00:07:18] Brian Hartstein: Yeah. I think you nailed it. Because if they have the right analysis and the right advice, I think 8 or 9 times out of 10 they’re going to be like, “Yeah, we need to do this.”
[00:07:25] Andrew Rafal: Okay. So, credits, they’re awesome. That’s great. That’s going to help push people. What else have you seen with regards to the SECURE Act affecting businesses, the creation of retirement plans? What else is out there that we need to be looking for?
[00:07:36] Brian Hartstein: Yeah. So, I would say the second thing is what’s called the automatic enrollment credit. And this is a new tax credit that’s built-in for actually new or existing small 401(k) plans, hundred employees or fewer, where you basically have a maximum annual tax credit, remember dollar-for-dollar as a tax credit, up to $500 for the first three plan years, where if you put in what’s called an automatic enrollment provision. And that means if you’ve hired somebody, they’re automatically going to be enrolled in the 401(k) as opposed to having to opt-in. And they’re going to defer a certain percentage of their pay unless at one point they say, “Hey, when you enrolled me, I’d like out.” Most people if they’re automatically enrolled in will just kind of stay in and then they start continuing the plan. So, number one, that helps them because now they’re saving for retirement, I’m not going to say in a forced way, but they’re automatically being put in the plan and usually, people just start deferring.
So, they’re automatically now putting money away for their retirement, and most likely taking advantage of some type of a match, an employer match it in the company. So, free money. So, helping the employee but also helping them build assets for retirement. So, the government sees this as, “Hey, more people have more retirement assets. That means hopefully less reliance on social programs.” So again, this is for a new or an existing plan. So, if you’ve got a CPA, you got an advisor you’re working with, you may say, “Hey, should we look into adding automatic enrollment to our plan?”
[00:09:02] Andrew Rafal: Is it that easy? You just tell them, “We want to change that,” and if you’re using John Hancock or Principal or American Funds, it’s that easy? Or do you have to go through the CPA firm to actually change the plan document?
[00:09:13] Brian Hartstein: I think you hit it right on the head. You are going to have to probably change the plan document. Now, whether the TPA firm that you’re using can do that or the plan platform, like you said, a John Hancock, a Principal, a Nationwide can do that, it’s usually pretty simple though to do, but it will have to be a plan document change, and then you announce it to your employees and you pick a date. You start moving forward.
[00:09:30] Andrew Rafal: Okay. So, we’ve got the credits. We’ve got the auto-enrollment credits. This is I think a win for both the employer and the employee, win-win. And then what else did you see in the act that’s kind of some of the major components to it that’s going to affect the businesses?
[00:09:47] Brian Hartstein: Well, I’d say the last one, and I think it’s a biggie, not only just for businesses in general, but also for the way that we practice here and you’ll see why is the deadline to establish a plan. So, traditionally, to establish any qualified plan, any type of pension plan, you had to do it by the end of your fiscal year. There had to be certain things in place for you to preserve the right to do that plan for that fiscal year. So, as you know, and you’ve seen it here, end of December because most plans are not what we call a calendar fiscal year-end, we’re scrambling. Business owners wait at the last minute. We’re doing a lot of design work. We’re working with their CPAs. And they were trying to get all the pieces in place to get the plan up and running before the end of the year. So, obviously, for some firms, the holiday seems to be kind of a quieter time for us. You see we’re working right up the New Year’s getting a lot of stuff done, so we’re going crazy. But now, the deadline to establish a plan can be as late as the business tax filing deadline, which includes extensions.
So, under previous rules, employers add to the last day of their business year. Now, you’ve got basically the business tax filing deadline, including your extension. So, again, this doesn’t necessarily apply to all plans. It will apply maybe to a profit-sharing plan or a defined benefit pension plan or anything what we call an employer-funded plan, which are usually the more benefit-rich plans, which are very helpful for owners or highly compensated employees for tax planning, retirement planning purposes. But now we have so much more time to be able to maybe analyze the data, have final pay numbers, and we’ll do things right and not to feel like we’re scrambling in the end. So, boy, I’m going to tell you it’s like a breath of fresh air just from a personal standpoint, but also, I think it was a much-needed change.
[00:11:27] Andrew Rafal: Yeah. Just thinking in terms of all the business owners we work with. There’s so many times where they came to us too late for that particular year, and they had a great income year and it’s just we look at that and we don’t want to tease them and say, “Here’s what you could have done,” but at that point last year, the year before, this is what we got to get for next year but this is what you should have done this year. And they kind of walk out of there not feeling great about things. Obviously, we’re not going to let that happen if they had been working with us prior to that but now what you’re saying is if we meet with somebody or if you’re looking at this in October, you still have the opportunity to put things in place for that year versus previous years it was a little bit more difficult.
[00:12:06] Brian Hartstein: Absolutely. Now, you’ve gotten rid of that, “Hey, I feel like I missed an opportunity,” feeling when you’re meeting with the business owner or the CPA doing your kind of end of year tax planning. Now, I will say it’s good for procrastinators in a way because we all know very successful business owners that because they’re so busy operating a successful business, they’re putting things off to the last minute. So, it gives those types of procrastinator’s time, but then again, you don’t want them to keep pushing it out farther and farther and farther. So, there’s a point we’re going to say, “Look, we’re going to do this. We’ve got to do it now.” It just gives us more time to be able to do the planning properly. And I think that’s just so crucial for you and I and other firms like ours.
[00:12:43] Andrew Rafal: Yeah. And if listeners out there, whether you’re here in Arizona or you’re across the country, you got questions on these types of things, just send us an email at info@bayntree and we can set up a time. Brian can sit down in 15 minutes discover and provide you some answers to questions you have. Not that you’ll be a client, but we can be here to be a sounding board and to help lead you in the right direction. You know, if you’re a CPA listening to this show, which we do have a lot of listeners that tune in that are CPAs, just reach out to us. A lot of this stuff, we have some of the info, but it’s because this is where Brian lives and breathes and spends day-to-day-to-day, you might as well take advantage of the knowledge and the expertise that he has. And it can’t hurt to call, “Hey, I got this client. Here’s the situation. What do you think? What do you recommend?” And then we can give you some guidance. Brian, you can even run a proposal using one of the TPA firms, very easy stuff to let them see what the value is of planning.
[00:13:36] Brian Hartstein: Yeah. If nothing else, we want to be a resource. We can provide details, good information, and whether you use us past that point or not, that’s kind of what we do. We’re happy to be a resource, a place to get a second opinion and to gather more information. That’s our starting point and we kind of springboard from there.
[00:13:54] Andrew Rafal: So, we talked about some of the what you saw major importance that they put in some of its simple but the key is simple sometimes is good. There’s more stuff in there in the SECURE Act. Let’s hit on some of the things that maybe aren’t going to move the needle as much, but still going through what’s in there. And for the few that it may benefit, let’s make sure we hit upon that.
[00:14:16] Brian Hartstein: Yeah. There’s a few things there, which I think are being touted as huge benefits. Now, again, this is subjective, and we look at it from our point of view. We see them as, yeah, is this positive? Yes. But do we see it with a lot of application from our end or from the employers that we work with end? Probably not, but we’ll go through them anyway because for some people, there’s positives but others read them and say, “Hey, this looks wonderful,” and then you see you kind of understand what they’re doing here. So, the first would be [inaudible – 14:45] that everybody’s talking about what are these multiple employer plans. And all that means is that it’s a pooled employer plan or you have multiple employers coming together to kind of form and be in one 401(k) plan. The whole crux to that was to make it simple and to make it cheaper, which, you know, in theory, it did. And that’s what the whole SECURE Act again was about, retirement options more accessible and also cheaper.
But I still see some of the same issues that we’ve had before with multiple employer plans, which is, basically every employer has the same type of funds, the same structure. There’s no customization. And obviously, from our client base, customization is just so key not only from somebody wanting something that’s specific to their organization, but it has to be specific to their organization or they’re not going to get the full participation out of it. So again, you’ve got kind of some plain vanilla as opposed to customization. If one plan is an audit, what does that mean for the other 99 plans that are in this multiple employer plan? Do they have to go through an audit? There’s a lot of questions and maybe some exposure that’s coming out of this, which I think still needs to be explored. I think where this might help is for groups where we call PEOs, professional employer organizations, employing leasing companies, payroll companies. Again, not things that we normally deal with here, a client may have. But that’s where I think that was geared towards. So again, I don’t see a lot of applications from their end or from our end, but I can see maybe some groups really, really saying, “Hey, this is great.”
[00:16:11] Andrew Rafal: Awesome. So, we got MEPs, you know, not so much going to move the needle. And then, one that we’ve been hearing a lot about, and I know the insurance industry is pushing for it, from our standpoint at Bayntree, whether you’re business owner or an individual executive climbing the corporate ladder, the key is when you get to the top of the mountain, Brian, it’s to have an income plan. Where’s my money coming from? Where’s my paycheck? So many people don’t have pensions. So, that’s where we focus a lot of times on not just the accumulation, but deaccumulation. We help our clients put together the proper plan so that they have different buckets of income, different buckets of risk. But what is the thought process in the SECURE Act to now allow for potentially annuities to be built in and taking some of the risks off the trustees who helped build the plans?
[00:16:57] Brian Hartstein: Yeah. Boy, that that glide path when you get to retirement is just so important. Obviously, building lifetime income is a huge piece of that. And there were several provisions of the SECURE Act that were designed to make it easier for employer plans to offer annuities to participants, including fiduciary protection, which was a huge hot button. So, what does that mean? It means you may see more annuity investment options and employer plans starting at 2020. But I always say if you’re really interested in lifetime income protection, and you’re eligible to roll over whatever company plan you’re in, those funds overturn IRA, you just might be better served by rolling those funds to the IRA and working with either us or another good financial advisor to select the product and the income items that are best for your retirement income needs. I just think in certain cases an IRA rollover might provide you with more customized product choices than the limited employer plan choices but generically, you may see more options now in employer plans and they provide a fiduciary leaf, which I think is a good thing.
[00:18:04] Andrew Rafal: Okay. So, look for that. That’s something that if you do have questions within the plan, when that comes about, make sure you talk to beyond the trustee. Usually, these plans have a financial advisor that you can chat with. You can weigh that out. But a lot of times, it makes more sense to maybe do that type of planning outside of the 401(k) but either way, we don’t know really how this whole thing’s going to evolve. Not sure if they’re going to be good products within or not but the key is if you can have a pension, if you can have a guaranteed type of income, not a bad thing in retirement, along with making sure you optimize social security and those type of things. So, those again, on the individual side, make sure you’re having those questions answered by your team and that you’ve got a plan in place. That’s the key. And then I know there was one more that you wanted to chat about regarding part-time employees.
[00:18:51] Brian Hartstein: Right. And so, again, remember the SECURE Act is really designed to make plans more accessible to employees. So, when they put this together, they were looking at employees that work less than 1,000 hours. Why is that important? Well, the definition in the code of a full-time employee is 1,000 hours, which really is only about 20 hours a week. But if you work more than 1,000 hours, you’re eligible to be in 401(k) plans. But what about employees that work 500 to 1,000 hours, right? So, normally they were excluded from being part of any plan. Again, that may have kept participation down, did a variety of different things. So, from an employee standpoint, they may have to be included and that’s great. From an employer standpoint, there’s a little bit more administrative function that’s got to be done now to include them. And what that means is employees who now have three consecutive 12-month periods of 500 hours of service, really up to 1,000 hours of service because that was the gap they were missing, and who satisfies the plan’s minimum age requirement, they must be allowed to make elective deferrals in an employer’s 401(k) plan.
The current and more restrictive eligibility rules, you can still apply to other contributions sources like matching to what we call the ADP, ACP testing that has to be done for non-Safe Harbor plans, things like that. So, you can still exclude them for some things but you do need to let them be eligible to make elective deferrals if they fall within that service requirement of really 500 hours or more over a three-year period. So, again, might be a little bit more in cost if you have to include them from an administrative standpoint. It shouldn’t affect you too much but it was interesting that they kind of decided to say, “Hey, there’s a group of employees out here that we feel are being excluded. We as Congress, we in the IRS want to make sure that they’re being included.” So again, might affect your plan a little bit but it is very important to note that that could be something that you have to look at. And again, if you’re working with a good TPA or a good investment platform, they’ll make sure that you know about it.
[00:20:47] Andrew Rafal: Okay. So, listeners, it’s very important. If you’ve been diligent enough to actually have a plan, it’s so important to go back and talk with your current team to see if any of these changes affect you, if you have to go in and change your plan documents. Also, even outside of the scope of the SECURE Act, if you’re going to go in and start reviewing documents and making changes, if you haven’t added the ability for you or your team to start contributing within the 401(k) plan to an after-tax or the Roth portion, you might want to add that in. With the low tax rates we’re in right now, just to have that option that you can put money into an after-tax vehicle inside of the 401(k), it’s not a bad thing to have that flexibility. And if you’re going and changing plan documents, you might as well kill two birds with one stone.
[00:21:34] Brian Hartstein: Absolutely. And again, three things that we – if you’re an employer that has an existing plan beyond the SECURE Act, which we could talk about for several more hours, just not sure you’d be interested in listening, but we love this type of stuff. Couple things you need to focus on when you’re looking at your plan. Number one is efficiency and cost. Make sure your plan is efficient, and make sure that costs are appropriate and reasonable because most employers don’t realize that there’s a lot of hidden costs in their plan that they can probably remove. Two, find a way to help you ensure your trustee and fiduciary liability work with the right groups that will help you do the right things so that you could lower that liability. And three, make sure that your employees are getting the right services from an educational and support standpoint. If there are three things I can hit upon, Andrew, you’ve heard me say it before, those are the three.
[00:22:20] Andrew Rafal: Perfect. So, SECURE Act, it was built to help make planning for retirement easier. It was built to make it easier for businesses to create a plan. And then for individuals, it was built and created to help put more of your money away and make it easier but also with the death of the stretch IRA, which we talked a little bit about, which could be a whole episode in itself, it’s definitely causing people to go back to the table to look at their planning, and as always, your plan is not static. It’s fluid. It changes. You should always have a plan. The key on that is not just creating it. That’s the first step. The key is always making sure you review, maintain, and evolve as your situation changes, and as laws change because we know they will continue to and that’s one of those areas. Nothing’s permanent, right? Tax cuts are never permanent. Whoever’s power in Congress or the president, things are going to always change and that’s where you need a trusted team and trusted advisor and that’s why we at Bayntree and part of why we do the Your Wealth & Beyond Podcast is to help you make good sound decisions by giving you the information, let you learn on your own.
So, Brian, always a pleasure. I know we went through a lot today. All of this will be in the show notes. It’s been great. Thanks for coming on.
[00:23:33] Brian Hartstein: Hey, my pleasure. Anytime you want me, you know I’ll be on.
[00:23:36] Andrew Rafal: Awesome. Well, listeners, stay tuned for another episode of Your Wealth & Beyond later this month. Happy planning, everybody. We’ll talk soon.
[00:23:44] Brian Hartstein: Thanks. Take care.
[00:23:46] Andrew Rafal: Thank you for joining me for today’s episode of Your Wealth & Beyond. To get access to all the resources mentioned during today’s podcast, please visit Bayntree.com/Podcast, and be sure to tune in later this month for another episode of Your Wealth & Beyond.
Investment advice is offered through Bayntree Wealth Advisors, LLC, a registered investment advisor. Insurance and annuity products are offered separately through Bayntree Planning Group, LLC. Bayntree is not permitted to offer and no statement made during the show shall constitute legal or tax advice. You should talk to a qualified professional before making any decisions about your personal situation.