SECURE Act

Individuals - SECURE Act

The "Setting Every Community Up for Retirement Enhancement Act", or SECURE Act, has been the single most disrupter of the retirement planning industry in recent years. The need to plan proactively has never been more prevalent and the implications are significant for anyone at or near retirement age. Below are some of the key provisions in this law that are significant changes to the retirement plan rules.

Repeal of maximum age for traditional IRA contributions. Under prior law taxpayers who had attained age 70½ were prohibited from making contributions to their traditional IRAs. Congress recognizes that as Americans live longer, an increasing number continue employment beyond traditional retirement age.

Effective for tax years beginning after 2019, the age 70½ maximum age limitation for making deductible traditional IRA contributions no longer applies. Thus, taxpayers of any age can make deductible contributions to their traditional IRAs, provided all of the other IRA contribution rules are met. A similar rule has always applied to making nondeductible Roth IRA contributions.

This rule also modifies the rules for qualified charitable distributions (QCDs). In general, a taxpayer who is at least age 70½ can make a QCD of up to $100,000 to a qualified charity. The qualified charitable distribution is not reported as income and is not reported as a charitable contribution (the two transactions cancel each other out).

Under the new law the amount of any distributions not includible in gross income by reason of the QCD rules for a tax year must be reduced (but not below zero) by an amount equal to the excess of:

  1. The aggregate amount of IRA deductions allowed to the taxpayer for all tax years ending on or after the date the taxpayer attains age 70½, or
  2. The aggregate amount of reductions under this rule for all tax years preceding the current tax year

Increase in age for required beginning date for mandatory distributions. Under current law participants are generally required to begin taking distributions from their retirement plans by April 1 of the calendar year following the later of:

  1. The calendar year in which the employee attains age 70½, or
  2. The calendar year in which the employee retires

The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. However, the age 70½ rule was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy. Effective for distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after December 31, 2019, the required minimum distribution age is increased from age 70½ to age 72.

A similar rule applies to the required beginning date for receiving distributions from an IRA. The age 70½ rule is changed to age 72. A similar rule also applies to spouse beneficiaries and the special rules for more than 5% owners.

  • Penalty-free withdrawals from retirement plans for individuals in case of birth of child or adoption. Effective for distributions made after 2019, the 10% early withdrawal penalty does not apply to a distribution from an applicable eligible retirement plan if it is a qualified birth or adoption distribution. The aggregate amount which may be treated as a qualified birth or adoption distribution cannot exceed $5,000.
  • Increase in credit limitation for small employer pension plan startup costs. Small businesses are allowed a tax credit for up to three years for the costs associated with pension plan start-up costs. Effective for tax years beginning after 2019, the new law increases the limitation.
  • Small employer automatic enrollment credit. The new law creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment.
  • Certain taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes. Under prior law stipends and non-tuition fellowship payments received by graduate and postdoctoral students were not treated as compensation and could not be used as the basis for IRA contributions. This was true even though such payments are includable in taxable income. Effective for tax years beginning after 2019 the new law removes this obstacle to retirement savings by taking such amounts that are includible in income into account for IRA contribution purposes.
  • Treating excluded difficulty of care payments as compensation for determining retirement contribution limitations. Difficulty of care payments to home healthcare workers are exempt from taxation. Due to such payments not being considered earned income, they are not considered compensation for purposes of the limitations on making contributions to defined contribution plans and IRAs. Under the new law nontaxable difficulty of care payments are treated as compensation for purposes of calculating the contribution limits to defined contribution plans and IRAs.
  • Qualified cash or deferred arrangements must allow long-term part-time employees working more than 500 hours per year to participate. Under prior law employers generally could exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees. Under the new law, except in the case of collectively bargained plans, employers who maintain IRC section 401(k) plans must have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service per year.
  • Multiple Employer Plans (MEPs). MEPs allow small employers to band together to obtain more favorable pension investment options. The new law makes MEPs more attractive by eliminating certain barriers to the use of MEPs and improving the quality of MEP service providers.
  • Increase in 10% cap for automatic enrollment safe harbor after 1st plan year. The 10% of employee pay cap for the automatic enrollment safe harbor provision that allows for automatic enrollment into a 401(k) plan to meet the nondiscrimination rules is increased to 15% of employee pay.
  • Rules relating to election of safe harbor 401(k) status. The legislation changes the non-elective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection and facilitate plan adoption. The legislation eliminates the safe harbor notice requirement but maintains the requirement to allow employees to make or change an election at least once per year. The bill also permits amendments to non-elective status at any time before the 30th day before the close of the plan year.
  • Qualified employer plans prohibited from making loans through credit cards and other similar arrangements. The new law prohibits qualified employer plans from making distributions of plan loans through credit cards or similar arrangements. The change is designed to ensure that plan loans are not used for routine or small purchases, thereby preserving retirement savings.
  • Portability of lifetime income options. Effective for tax years beginning after 2019, the new law permits qualified defined contribution plans, section 403(b) plans, or governmental section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. The change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.
  • Treatment of custodial accounts on termination of section 403(b) plans. Under the new law, not later than six months after December 20, 2019, the IRS must issue guidance under which if an employer terminates an IRC section 403(b) custodial account the distribution needed to effectuate the plan termination may be the distribution of an individual custodial account in kind to a participant or beneficiary.
  • Clarification of retirement income account rules relating to church-controlled organizations. The new law clarifies individuals that may be covered by plans maintained by church-controlled organizations. Covered individuals include duly ordained, commissioned, or licensed ministers, regardless of the source of compensation; employees of a tax-exempt organization, controlled by or associated with a church or a convention or association of churches; and certain employees after separation from service with a church, a convention or association of churches, or an organization described above.
  • Special rules for minimum funding standards for community newspaper plans. Community newspapers are generally family-owned, non-publicly traded, independent newspapers. The new law provides pension funding relief for community newspaper plan sponsors by increasing the interest rate to calculate those funding obligations to 8%. Additionally, the new law provides for a longer amortization period of 30 years from seven years. These two changes are designed to reduce the annual amount struggling community newspaper employers are required to contribute to their pension plan.
  • Plan adopted by filing due date for year may be treated as in effect as of close of year. The new law permits businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the tax year to treat the plan as having been adopted as of the last day of the tax year. The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings.
  • Combined annual report for group of plans. The new law directs the IRS to effectuate the filing of a consolidated Form 5500 for similar plans.
  • Disclosure regarding lifetime income. The new law requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at least once during any 12-month period.
  • Fiduciary safe harbor for selection of lifetime income provider. The new law provides certainty for plan sponsors in the selection of lifetime income providers, a fiduciary act under ERISA. Under the new law fiduciaries are afforded an optional safe harbor to satisfy the prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract and are protected from liability for any losses that may result to the participant or beneficiary due to an insurer's inability in the future to satisfy its financial obligations under the terms of the contract.
  • Modification of non-discrimination rules to protect older, longer-service participants. The new law modifies the nondiscrimination rules with respect to closed plans to permit existing participants to continue to accrue benefits. The modification is designed to protect the benefits for older, longer-service employees as they near retirement.
  • Modification of PBGC premiums for CSEC plans. In 2014, different funding rules were adopted for three types of pension plans: single-employer, multiemployer and CSEC plans. The new law establishes individualized rules for calculating PBGC premiums. For CSEC plans the new law specifies flat-rate premiums of $19 per participant, and variable rate premiums of $9 for each $1,000 of unfunded vested benefits.
  • Modification of required distribution rules for designated beneficiaries. The new law modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner's death.