By Penny Russ

The SECURE Act (acronym for Setting Every Community Up for Retirement) was enacted on December 20, 2019. It is intended to encourage Americans to save for their futures and to incentivize businesses to make retirement saving opportunities more accessible to their employees. The bill makes some substantial changes to retirement plan legislation which will affect both individual and business taxpayers. 

Here are some of the significant provisions:

• The age at which required minimum distributions (RMD’s) must begin went from 70 ½ to 72. Note that if a taxpayer was 70 ½ in 2019, RMD’s must be withdrawn for 2019 and 2020 even if he or she won’t be 72 until 2021.

• Previously, an individual aged 70 ½ or older on December 31st could not make contributions to a traditional IRA. This restriction no longer applies. (There was and continues to be no age restriction for Roth IRA contributions.)

• Taxpayers may withdraw up to $5,000 from a defined contribution plan or IRA as a “qualified birth or adoption” distribution without incurring a penalty. The distribution is still subject to income tax. The distribution must be made during the one-year period beginning the day the child is born or the day the adoption is finalized.

• Tax-free 529 Plan distributions of up to $10,000 (lifetime limit) may be made for certain apprenticeship programs and student loan payments. However, taxpayers may not deduct interest paid on a qualified education loan to the extent the interest was from a tax-free distribution.

• Employer-sponsored retirement plans may provide arrangements whereby participants may borrow from their accounts under various arrangements. Beginning December 20, 2019, loans which an employee can access by using a credit card are prohibited. Accordingly, such loans will now be treated as taxable distributions.

• Taxpayers may not contribute more than their taxable compensation to an IRA. Previously, stipends and non-tuition fellowship payments to graduate and postdoctoral students were not treated as compensation. For tax years beginning after December 31, 2019, these payments are treated as compensation for purposes of calculating allowable IRA contributions.

• Benefits of the “stretch IRA” – long an estate planning tool – have been severely curtailed. Previously, those who inherited IRA’s and defined-contribution plans could withdraw distributions (and pay tax on the withdrawals) based on their life expectancies. Beginning in 2020, beneficiaries will have 10 years to spend down these amounts. The five exceptions to this change are when the beneficiary is –
  • the surviving spouse,
  • a minor child of the deceased,
  • a disabled person,
  • a chronically ill individual, or
  • a person not more than 10 years younger than the owner.

Once minors reach the age of majority, the 10-year rule applies. Defined benefit plans do not fall under the new rule.

• Before the SECURE Act, small business employers were allowed an annual tax credit for three years equal to 50% of the costs – up to a maximum of $500 – of starting and administrating a plan. Beginning in tax years starting after 2019, the $500 maximum has been increased to the greater of – 
  • the lesser of $250 times the number of non-highly compensated eligible employees, or $$5,000; or,
  • $500.

• An additional credit of $500 per year is granted to small business employers that adopt automatic enrollment provisions.

• Previously, automatic enrollment arrangements could not exceed 10% of employees’ pay. Starting in 2020, the 10% limit still applies for the first year, but goes to 15% thereafter.

• Before 2020, retirement plans had to be adopted as of the end of the employer’s tax year. For business tax years beginning after 2019 employers have until the due date (including valid extensions) of the tax return for the year to adopt a plan.

• Previously, employers could exclude from their defined contribution plans any employees who worked less than 1,000 hours per year. Under the new law, 401(k) plans must allow employees who are at least 21 years old and have worked 500 hours per year with the employer for at least three consecutive years to make elective deferrals. The three-year time window cannot include 12-month periods beginning before 2021.

• Multiple Employer Defined Contribution Plans (MEP’s for short) are plans adopted by two or more unrelated employers. Because of economies of scale and shared administrative costs, many small businesses that otherwise would find them cost prohibitive are able to offer retirement benefits to their employees through MEP’s. However, the unified plan rule (also known as the “one bad apple” rule) meant all participants suffered if one employer neglected to meet the various qualifications. For plan years beginning after December 31, 2020, an exception is available if one participant fails to meet the qualifications and either can’t or won’t make the necessary corrections. 

Costs of the SECURE Act are largely being offset by increased penalties when filing requirements for plan forms are not met on a timely basis.