SECURE Act Finally Becomes Law

By Drew Cheney December 20, 2019

On May 23, 2019, the House of Representatives overwhelmingly (by a vote of 417 to 3) passed the Setting Every Community Up for Retirement Enhancement Act of 2019, generally known as the SECURE Act, and sent it to the Senate. It was expected to pass quickly, but it remained in limbo in the Senate for over six months. We previously wrote about this bill here.

On Monday, December 16, the House attached the SECURE Act to the bipartisan appropriations bill that was approved yesterday by the Senate, and is expected to be approved soon by the President. Therefore, it appears that the bill will finally be enacted.

The text of the bill can be found here, and its inclusion in the appropriations bill can be found here (starting at page 1532.) The Act contains a number of somewhat significant changes to the rules governing qualified retirement plans, and a few changes that could be of great significance to individual taxpayers. The following is an overview of some of the Act’s most important provisions.

Changes affecting individuals

• Beneficiaries of qualified retirement plans and regular IRAs are currently required to start taking distributions from their accounts starting at age 70 ½. (It is permissible to delay the first such distribution until April 1 of the following year.) The Act raises the age for required minimum distributions (RMDs) from 70 ½ to 72. This change is effective starting in 2020 and applies to individuals born on or after July 1, 1949.This change will allow account holders to enjoy longer tax-deferred growth, and may provide tax planning opportunities in the form of additional pre-RMD years in which to take distributions, or perform Roth conversions, in a year when the account holder is in a relatively low tax bracket.Based on the manner in which this provision is drafted, it appears that the minimum age at which an IRA owner can make a qualified charitable distribution is still 70 ½.
• Currently, non-spouses who inherit IRA accounts can take distributions over their life expectancies. Many people have taken advantages of this provision by creating “stretch IRAs” that can, in the case of a young beneficiary, result in payouts spanning many decades. Effective for IRAs inherited from decedents who pass away after December 31, 2019, the Act requires that almost all distributions from IRAs inherited by non-spouses must be paid out within 10 years. (There are a few exceptions, for example for beneficiaries who are minor children or disabled.)People who have made stretch IRAs an important component of their estate plans will need to revise their plans drastically.
• Currently, individuals who are 70 ½ or older at the end of a year cannot make a regular IRA contribution for that year. For 2020 and beyond, this age limit is repealed.

Changes affecting qualified retirement plans

It is fair to say that the Act will not have a radical impact on the fundamental nature of the retirement income rules of the United States. That said, the Act does contain a number of significant changes, including the following:

• It will be easier for unrelated employers to band together to form a common retirement plan.
• It will be easier to offer safe harbor 401(k) plans. The annual notice requirement will be eliminated, and it will be possible to become a safe harbor plan up to the last day of a plan year if a 4% employer nonelective contribution is made.
• Currently, employers must generally adopt a plan by year end. (There is an exception for SEP-IRA plans.) Under the Act, employers will have until the due date of the tax return, including extensions, to adopt a plan.
• Small employers (essentially employers with 100 or fewer employees who received at least $5,000 of compensation in the previous year) currently are eligible for a tax credit of up to $500 each year for 3 years, based on 50% of the plan startup costs. The Act increases this maximum credit to up to $5,000 each year for up to 3 years. The Act also offers a new tax credit for small employers, up to $500 per year for 3 years, for maintaining an automatic enrollment arrangement.
• Currently, employees who work less than 1,000 hours per year can be excluded from 401(k) plans. The Act requires employers to cover employees who work at least 500 hours per year for three consecutive years. These employees can be excluded for purposes of certain compliance tests (nondiscrimination and top-heavy.)
• 401(k) plan benefit statements will be required to provide annual lifetime income disclosures, setting forth the monthly payments that the participant would receive based upon the current account balance.
• The Act eases the fiduciary rules applicable to employers who offer a lifetime income investment option within the plan. This change is very welcome to certain providers of annuity products. However, it may have limited significance, because it does not exempt the employer from the basic duty of prudent selection of investment alternatives, and because a retired employee can currently acquire this type of investment by rolling over his or her plan balance to an IRA and then purchasing the investment within the IRA.

To discuss this tax legislation, please contact Drew Cheney or your BNN tax advisor at 800.244.7444.