SECURE Act Update

The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) was signed into law on December 20, 2019, and makes some of the most significant changes to the administration and inheritance of retirement accounts since the Pension and Protection Act of 2006. Following are some key provisions:

    • Repeal of Maximum Age for Traditional IRA Contributions – The rule which had previously prohibited individuals who had reached age 701/2 from making contributions to a traditional IRA has been repealed.
    • Age Required for Minimum Distributions – Prior to the new law, participants were generally required to take distributions from their retirement plan at age 701/2. Under the new law, the required minimum distribution age is increased to 72.
    • Penalty-Free Withdrawals for Birth or Adoption – The new law provides for the waiver of the additional 10% income tax on retirement plan distributions (up to $5,000), if used for childbirth or adoption. If married, each spouse can withdraw $5,000 from his or her own account penalty-free.
    • Lifetime Income Disclosure – Plan administrators are now required to provide defined contribution plan participants with a lifetime income disclosure at least once during any 12-month period. The disclosure will illustrate the monthly payments the plan participant could expect to receive if the total account balance were used to provide lifetime income streams.
    • Tax Relief for Certain Children – Taxes levied on children’s military survivor benefits and certain other unearned income are reduced.
    • Changes to Required Minimum Distribution Rules – With certain exceptions, the new law requires that any remaining account balance owned by a plan participant who dies must be distributed to all designated beneficiaries not later than 10 years after at the date of death. The exceptions are a surviving spouse, a disabled beneficiary, a minor child of the deceased (until they reach the age of majority), and any beneficiary who is not over 10 years younger than the original plan owner.
    • Inclusion of Part-Time Workers – Except in the case of collectively bargained plans, employers providing a defined contribution plan are now required to allow part-time workers to participate in the plan as long as they have three consecutive years of service with at least 500 hours of service each year.
    • Pooled Employer Plans – Unrelated small business employers are now allowed to join together and open 401(k) pooled employer plans, also known as an open multiple employer plan (MEP). The new law also eliminates the “one bad apple” rule under which a failure by one employer (or by the plan itself) to satisfy an applicable plan requirement would result in the disqualification of the plan for all employers in the MEP.
    • Safe Harbor 401(k) Plan Contributions Timing – Employers are now permitted to add a 3% safe harbor non-elective contribution at any time up to 30 days prior to the close of the plan year. Such an addition is also allowed after the 30th day before the close of the plan year as long as the amendment to adopt safe harbor 401(k) status is made by the end of the following plan year, and the non-elective contribution is at least 4%. The new law also eliminates the annual safe harbor notice requirement.
    • Startup and Automatic Enrollment Tax Credit – Under the prior law a small business could claim a tax credit equal to 50% of their retirement plan startup costs, up to a $500. The new law raises the current cap of $500 to an amount up to $5,000. In addition, small businesses can earn an additional $500 tax credit by adding an automatic enrollment plan. This credit will be available for each of the first three years the automatic enrollment feature is effective.