The SECURE Act’s Impact on Your Retirement
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted on 12/20/19. This is the first substantial legislation related to retirement savings to become law since 2006. The Act brings significant retirement legislation changes for both individuals and employers. Below we have summarized the major provisions of the Act and their effective dates.
Changes Applicable to Individuals
Required Minimum Distribution Age Increase Under the Act, if you had not yet reached age 70 ½ as of 12/31/2019, you can now wait until age 72 to take required minimum distributions (RMDs) from traditional, IRAs, SEP IRAs, and SIMPLE IRAs and qualified retirement plans instead of taking them at age 70 ½. RMDs must start by April 1st of the year following the year an individual reaches age 72 or, for certain employer retirement plans, the year an individual retires, if later. For those who had already attained age 70 ½ by 12/31/2019, you must continue taking RMDs. The Act also reduces the qualified charitable distribution exclusion by the excess of the allowed IRA deduction for all taxable years ending on or after age 70 ½ over the amount of all prior year reductions.
Repeal of Maximum Age for IRA Contributions The Act repeals the maximum age limit for traditional IRA contributions. Effective for contributions made to a traditional IRA after 12/31/19, there is no maximum age. In prior years, the age limit for contributions to a traditional IRA was age 70 ½.
Limitation on “Stretch” IRAs The Act changes the “stretch period” applicable to non-spouse inherited IRAs, generally from a lifetime distribution period to a 10-year maximum distribution period. There are exceptions to the 10-year maximum distribution period, including distributions to disabled or chronically ill beneficiaries, a beneficiary who is a surviving spouse, and a beneficiary who is no more than 10 years younger than the deceased participant or IRA owner. This change is effective for distributions with respect to participants/IRA owners who die after 12/31/19, and it applies to both IRA distributions and qualified retirement plan distributions. Reviewing existing beneficiary designations and how your IRA fits into your overall estate plan might be appropriate. For example, it might make sense to convert traditional IRA funds to a Roth IRA, which can be inherited tax-free (if the five-year holding period has been met). Roth IRA conversions are taxable events, but if converted amounts are spread over the next several tax years, you may benefit from lower income tax rates, which are set to expire in 2026.
Kiddie Tax The Act repeals the “kiddie tax” changes made by the Tax Cuts and Jobs Act (TCJA). Therefore, the unearned income of certain children is again taxed at the parent’s tax rate (if higher than the child’s tax rate) vs. the trust tax rates. The change is effective for tax years beginning after 12/31/19, but may be applied retroactively to tax years that begin in 2018 or 2019 if the taxpayer so elects.
Section 529 Plans Under the Act, individuals with 529 college savings plans may now be able to take tax-free distributions to help pay off qualified student loans (a $10,000 lifetime limit applies per beneficiary or sibling). Account funds may also be used for qualified higher education expenses for registered apprenticeship programs. This provision is effective for distributions made after December 31, 2018.
Penalty-free Withdrawals for Birth and Adoption Expenses The Act provides an exception to the 10% early withdrawal penalty for distributions for the birth or adoption expenses of a child up to $5,000. The Act also permits the participant to recontribute the qualified birth or adoption distributions to the plan or IRA, subject to certain requirements. This change is effective for distributions made after 12/31/19, and it applies to both IRA distributions and qualified retirement plan distributions (other than distributions from defined benefit plans).
New Items Deemed to be Compensation for IRA Purposes The Act provides that certain taxable non-tuition fellowship and stipend payments are treated as compensation for IRA purposes effective 1/1/20. This will allow graduate and postdoctoral students use of an IRA to save for retirement. Effective for contributions made after 12/20/19, the Act also provides that qualified foster care payments that are “difficulty-of-care” payments excluded from gross income under IRC Sec. 131 are treated as compensation for determining nondeductible IRA contributions. This will allow home healthcare workers who receive these tax-exempt payments to save for retirement.
Employer Plan Provisions
Part-time Employees Under the Act, long-term part-time employees who work at least 500 hours per year with an employer for at least three consecutive years, and are at least age 21 at the end of the three-year period, must be allowed to participate in an employer’s 401(k) elective deferral retirement plan. The previous requirement was 1,000 hours and one year of service. The new rule applies to plan years beginning on or after January 1, 2021. The 12-month periods beginning before 1/1/21 are not considered in determining if the long-term part-time employee is eligible for the plan under this provision. Participants eligible for the plan based on this provision may be excluded for nondiscrimination and coverage testing purposes and from application of the top-heavy rules.
Credit for Small Employer Retirement Plan Expenses Under the Act, the tax credit that small businesses can take for starting a new retirement plan has increased. The new rule allows a credit equal to the greater of (a) $500 or (b) $250 times the number of non-highly compensated eligible employees or $5,000, whichever is less. The previous credit amount allowed was 50% of startup costs up to $1,000 ($500 maximum credit). There is also a new tax credit of up to $500 for employers that implement a SIMPLE IRA or 401(k) plan with automatic enrollment. Both credits are available for three years. These new credits are effective for plan years beginning after 12/31/19.
Automatic Enrollment Cap Percentage Increase The Act increases the maximum safe harbor required automatic escalation of employee elective deferrals cap from 10% of pay to 15% of pay. The maximum safe harbor cap rate for the initial year remains at 10%. The change is effective for plan years beginning after 12/31/19.
Retroactive Adoption of Qualified Plans The Act permits an employer to adopt a plan retroactively to the last day of the plan year if the employer adopts the plan by the due date (including extensions) of the tax return for the tax year. Previously, qualified plans had to be adopted by the last day of the year to be in effect for that year. This change is effective for plan years beginning after 12/31/19 and does not apply to an elective deferral feature of a plan.
Nonelective 401(k) Safe Harbor Plans The Act eliminates the safe harbor notice requirement for nonelective safe harbor 401(k) plans. The change is effective for plan years beginning after 12/31/19. The Act also permits a nonelective 401(k) safe harbor contribution to be adopted as late as 30 days before the end of the plan year. This change also is effective for plan years beginning after 12/31/19.
Multiple Employer Plans (MEPs) Under the Act, employers will be permitted to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. “Open MEPs,” as they have become known, enable small employers to band together to provide a retirement plan with access to lower prices and other benefits typically reserved for large organizations. This provision is effective for plan years beginning after 12/31/20. Previously, groups of small businesses had to be related somehow in order to join an MEP. The legislation also eliminates the “one bad apple” rule, so the failure of one employer in an MEP to meet plan requirements will no longer cause others to be disqualified.
Lifetime Income Disclosure The Act requires plan sponsors to provide defined contribution plan participants with a lifetime income disclosure converting their account balance into an income stream at retirement at least once during any 12-month period. The required benefit statements would include presentation of the participant benefit as both a qualified joint and survivor annuity for the participant and the participant’s surviving spouse, as well as a single-life annuity. The effective date for the disclosure is one year after the Department of Labor (DOL) issues a final rule. The Act also directs the DOL to develop assumptions and model disclosures to be used for the lifetime income disclosure within one year of enactment of the Act.
Portability of Lifetime Income Options The Act expands the qualified plan distribution rules to provide for the portability of lifetime income options when the investment is no longer available under a plan. It allows plans to make a direct rollover to an IRA or other retirement plan of a lifetime income (annuity) investment starting 90 days prior to the date after which such investment will no longer be available under the plan. The new rules are effective for plan years beginning after 12/31/19.
Plan Loans The Act prohibits qualified plans from making plan loans through credit cards or similar arrangements. The change is effective immediately.
Costlier Penalties
Failure to File Tax Return Penalty The Act increases the penalty for a failure to file income tax returns to $435 (from $330) or 100% of the amount of the tax due. This provision applies to tax returns with a due date after 12/31/19.
Form 5500 Late Filing Penalty The Act increases the penalty for the late filing of a Form 5500 from $25 per day for each day the return is late (up to a maximum of $15,000 annually) to $250 per day (with a maximum annual penalty of $150,000). The effective date of this provision applies to Forms 5500 with a due date after 12/31/19.
Failure to File Form 8955-SSA The Act increases the penalty for failing to file Form 8955- SSA from $1 per participant per day required to be reported on Form 8955-SSA to $10 per participant per day, with the maximum annual penalty increasing from $5,000 to $50,000. This provision applies to Forms 8955-SSA with a due date after 12/31/19.
Failure to Provide Required Tax Withholding Notice The Act increases the penalty for the failure to provide a required tax withholding notice to a plan participant receiving a distribution from a plan from $10 per failure to $100 per failure, with the maximum penalty increasing from $5,000 to $50,000. This provision applies to withholding notices required after 12/31/19.
Contributing author: Michael J. Reilly, CPA/ABV, CVA, CFF, CDA, is the managing partner for the firm. Mike has extensive experience in all areas of income and estate taxation, with a strong emphasis in individual and corporate tax planning, business valuations, ownership transition and employee benefits. Contact us if you need help navigating through the substantial changes of the SECURE Act.