How the SECURE Act Affects Retirement Plans

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 expands opportunities to increase retirement savings and improves portability from one plan to another. The changes are effective as of Dec. 20, 2019, unless otherwise specified.

Employer-Provided Plans

The SECURE Act permits new defined-contribution, pooled employer plans (open multiple-employer plans) for unrelated employers to be treated as a single plan administered by a pooled plan provider.

It eliminates the “one bad apple” rule, meaning a qualification failure by one employer would not disqualify the plan for all employers. This is effective for plan years beginning after Dec. 31, 2020.

For small employers, the act provides increased credits for start-up costs (to $5,000 from $500) and new credits for automatic enrollment ($500 credit per year for three years). It is effective for plan years beginning after Dec. 31, 2019.

Also, qualified plans must be adopted by the filing due date (including extensions) instead of the last day of the plan year. This is effective for plan years beginning after Dec. 31, 2019.

Plan Administration

Long-term, part-time employees who work at least 500 hours in three consecutive 12-month periods and meet the age requirement (if applicable) can participate in plans. Employers are not required to make matching or nonelective contributions, and vesting credit is based on at least 500 hours of service. This change is limited to 401(k) plans and is effective for plan years beginning after Dec. 31, 2020.

The act simplifies 401(k) safe-harbor rules by eliminating the safe-harbor notice and permitting amendments midyear. It also increases the safe-harbor cap to 15%. This is effective for plan years beginning after Dec. 31, 2019.

Combined annual reports (Form 5500) are permitted for similar plans (defined contribution plans with the same trustee, same named fiduciary or administrator, same plan year, and same investments or investment options). Penalties have increased for failure to file ($250 per day up to $150,000), and is effective for returns, statements, and notifications required to be filed after Dec. 31, 2019.

Plan Distribution

Changes were made to post-death plan distributions: 10 years will be permitted instead of five. Therefore, there are no more “stretch IRAs.” The mandatory distribution age increases from 70½ to 72, and there is now an exception to the 10% early withdrawal penalty for distributions up to $5,000 for expenses related to the birth or adoption of a child. These are effective for distributions made after Dec. 31, 2019.

Changes to IRAs

Several alterations have been made to IRA rules:

• The maximum age has been repealed.
• Fellowship and stipend payments are considered compensation, as are “difficulty of care” payments received by home health care workers.
• Minimum distributions are required in the year an owner attains age 72, and the five-year rule is expanded to a 10-year period.

These changes are all effective for tax years beginning after Dec. 31, 2019.

Lifetime Income

The act requires defined contribution plans to disclose annually the illustrated income streams based on the participant’s account balance purchase of an annuity.

Further, if a lifetime income investment is no longer permitted to be held by a qualified plan, a direct trustee-to-trustee transfer to another qualified plan or IRA may be made within 90 days. This is effective for plan years beginning after Dec. 31, 2019.

Other Changes

Below are several other alterations made to retirement account rules:

• Changes to defined benefit plans include relief from nondiscrimination testing for frozen defined benefit plans to protect older, longer-service participants.
• Expansion of 529 plans to cover distributions for costs associated with apprenticeship programs and repayment of student loans up to $10,000 in aggregate over the individual’s lifetime. This is effective for plan years beginning after Dec. 31, 2018.
• No later than six months after the date of enactment, the Treasury will issue guidance on the termination of 403(b) custodial account plans, which will be retroactive to taxable years beginning after Dec. 31, 2008.
• Beginning before, on, or after the date of enactment, clarification is required of individuals who may be covered by plans maintained by a church-controlled organization.

The above is not all-inclusive, nor does it describe all the details of each provision. The components of the SECURE Act have different enactment dates, so plan administrators should pay careful attention as to when they can take advantage of the new rules.

Melissa M. Wolf, CPA, is a senior manager at Baker Tilly Virchow Krause LLP in Wilkes-Barre. She can be reached at melissa.wolf@bakertilly.com.