By Ken Berry, JD – CPA Practice Advisor Tax Correspondent December 20, 2019
In a flurry of legislative action before the end of the
year, Congress passed the “Setting Every Community Up for Retirement
Enhancement” (SECURE) Act of 2019 as part of a comprehensive appropriations
measure. The new law, which represents a major overhaul of the rules for
retirement plans and IRAs, is generally effective on January 1, 2020. The
following are several key provisions in the SECURE Act.
401(k) safe harbor rules: The
new law includes various changes designed to provide greater flexibility and
simplicity, improve employee protections and facilitate plan adoption. For
instance, the legislation eliminates the safe harbor notice requirement but
maintains the requirement allowing employees to make or change an election at
least once a year.
Credit for start-up costs:
Prior to the new law, a small business could claim a credit equal to 50% of the
start-up costs of a qualified plan, up to a maximum of $500. The new law
increases the credit limit to the greater of (1) $500 or (2) the lesser of (a)
$250 multiplied by the number of non-highly compensated employees eligible to
participate in the plan or (b) $5,000.
Automatic enrollment credit:
To encourage greater participation in qualified retirement plans, the SECURE
Act creates an additional credit of up to $500 per year for businesses that
provide new 401(k) and SIMPLE plans with an automatic enrollment feature. This
credit, not to be confused with the other credit for start-up costs, is
available for three years.
Automatic enrollment rates:
Under prior law, employers could set default rates for automatic enrollment
401(k) plans under a graduated rate system capped at 10% of annual compensation.
The SECURE Act increases the automatic enrollment rate safe harbor cap to 15%
except for a worker’s first year of participation.
Previously, taxpayers were no longer allowed to contribute to a traditional IRA
once they attained the age of 70½. The new law repeals this restriction based
on the age of the IRA participant.
Generally, employees were able to exclude part-time workers (i.e., those
working less than 1,000 hours per year) from participating in their 401(k)
plans. Now the new law opens up plans to employees who have completed one year
of service (with the 1,000-hour rule) or three consecutive years of at least
500 hours of service.
distributions: Under long-standing rules, participants in
qualified plans and IRAs were obligated to start taking required minimum
distributions (RMDs) in the year after the year they turned age 70½. The new
law pushes back the RMD age to 72 to reflect longer life expectancies.
To provide more insights into retirement savings, the new law requires 401(k)
plan administrators to provide annual “lifetime income disclosure statements”
showing earnings under annuity options. Furthermore, it provides more
flexibility to participants when buying annuities, including portability.
Early withdrawals: The
tax law already exempts certain distributions from qualified plans from the
usual 10% tax penalty on early withdrawals prior to age 59½. The SECURE Act
adds to the list by allowing penalty-free distributions for qualified birth and
Fellowships and stipends:
Because non-tuition fellowships and stipends received by graduate and
postdoctoral students don’t constitute compensation, they could not be used to
fund IRA contributions. To encourage early retirement savings, the SECURE Act
allows amounts included in income to be used for IRA contributions.
Stretch IRAs: In
a provision that adversely affects many taxpayers, the new law effectively ends
“stretch IRAs” that enable non-spouse beneficiaries to extend RMDs over their
lifetime. Instead, all funds from inherited accounts, including IRAs and
qualified plans, must be distributed to non-spouse beneficiaries within ten
years of the account owner’s death. Key exceptions: The rule doesn’t apply to
distributions over the life or life expectancy of a non-spouse beneficiary are
allowed if the beneficiary is a minor, disabled, chronically ill or not more
than ten years younger than the deceased account owner.
This is only a brief overview. The SECURE Act includes other
significant provisions, including the expansion of Section 529 plans for
homeschooling expenses. It will take some time to sort out all the rules and
develop appropriate strategies based on the new law changes.