The Setting Every Community Up For Retirement Enhancement Act of 2019 (The SECURE Act)

The SECURE Act which went into effect on January 12, 2020 made a number of changes to laws that will effect the retirement of nearly every American. Most notable was the elimination of Stretch IRA’s, which will now force most non-spouse beneficiaries to withdraw inherited IRA balances in a 10 year timeframe. Other significant IRA changes was increasing the age that Required Minimum Distributions (RMD’s) must begin from 70 ½ to 72 as well as repealing the age limit for making Traditional IRA contributions. Additionally, many changes were passed that will effect employer-sponsored qualified plans along with many other miscellaneous changes. In this article, we outline the key changes in the act and what they mean to you.

TITLE I: Expanding and Preserving Retirement Savings

Section 102.  Simplification of Safe Harbor 401(k) Rules 

The legislation changes the nonelective 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 nonelective status at any time before the 30th day before the close of the plan year.  Amendments after that time would be allowed if the amendment provides (1) a nonelective contribution of at least four percent of compensation (rather than at least three percent) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year. 

Section 103.  Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs 

Increasing the credit for plan start-up costs will make it more affordable for small businesses to set up retirement plans. The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years. 

Section 104.  Small Employer Automatic Enrollment Credit  

Automatic enrollment is shown to increase employee participation and higher retirement savings. The legislation 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.  The credit is in addition to the plan start-up credit allowed under present law and would be available for three years.  The credit would also be available to employers that convert an existing plan to an automatic enrollment design. 

Section 105.  Treat Certain Taxable Non-Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes  

Stipends and non-tuition fellowship payments received by graduate and postdoctoral students are not treated as compensation and cannot be used as the basis for IRA contributions. The legislation removes this obstacle to retirement savings by taking such amounts that are includible in income into account for IRA contribution purposes. The change will enable these students to begin saving for retirement and accumulate tax-favored retirement savings. 

Section 106.  Repeal of Maximum Age for Traditional IRA Contributions 

The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½.  As Americans live longer, an increasing number continue employment beyond traditional retirement age.   

Section 108.  Portability of Lifetime Income Options  

The legislation 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 will permit participants to preserve their lifetime income investments and avoid surrender charges and fees. 

Section 109.  Treatment of Custodial Accounts on Termination of Section 403(b) Plans 

Under the provision, not later than six months after the date of enactment, Treasury will issue guidance under which if an employer terminates a 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. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until paid out, subject to the 403(b) rules in effect at the time that the individual custodial account is distributed. The Treasury guidance shall be retroactively effective for taxable years beginning after December 31, 2008. 

Section 111.  Allowing Long-term Part-time Workers to Participate in 401(k) Plans 

Under current law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees.  As women are more likely than men to work part-time, these rules can be quite harmful for women in preparing for retirement.  Except in the case of collectively bargained plans, the bill will require employers maintaining a 401(k) plan to 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. In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules. 

Section 112.  Penalty-free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption  

The legislation provides for penalty-free withdrawals from retirement plans for any “qualified birth or adoption distributions.” 

Section 113.  Increase in Age for Required Beginning Date for Mandatory Distributions 

Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. 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 70 ½ 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.  The bill increases the required minimum distribution age from 70 ½ to 72. 

Section 115.  Treating Excluded Difficulty of Care Payments as Compensation for Determining Retirement Contribution Limitations 

Many home healthcare workers do not have a taxable income because their only compensation comes from “difficulty of care” payments exempt from taxation under Code section 131.  Because such workers do not have taxable income, they cannot save for retirement in a defined contribution plan or IRA.  This provision would allow home healthcare workers to contribute to a plan or IRA by amending Code sections 415(c) and 408(o) to provide that tax exempt difficulty of care payments are treated as compensation for purposes of calculating the contribution limits to defined contribution plans and IRAs.   

TITLE II: Administrative Improvements

Section 201.  Plans Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Year  

The legislation permits businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year to treat the plan as having been adopted as of the last day of the taxable 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. 

 Section 202.  Combined Annual Reports for Group of Plan 

The legislation directs the IRS and DOL to effectuate the filing of a consolidated Form 5500 for similar plans.  Plans eligible for consolidated filing must be defined contribution plans, with the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries.  The change will reduce aggregate administrative costs, making it easier for small employers to sponsor a retirement plan and thus improving retirement savings. 

Section 204.  Fiduciary Safe Harbor for Selection of Lifetime Income Provider 

The legislation provides certainty for plan sponsors in the selection of lifetime income providers, a fiduciary act under ERISA.  Under the bill, 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.  Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a defined contribution plan. 

 Section 205.  Modification of Nondiscrimination Rules to Protect Older, Longer Service Participation  

The legislation modifies the nondiscrimination rules with respect to closed plans to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer service employees as they near retirement. 

TITLE III: Other Benefits

Section 302.  Expansion of Section 529 Plans 

The legislation expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.  

TITLE IV: Revenue Provisions

Section 401.  Modifications to Required Minimum Distribution Rules  

The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner.  Under the legislation, 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.   

Section 402.  Increase in Penalty for Failure to File  

The legislation increases the failure to file penalty to the lesser of $400 or 100 percent of the amount of the tax due.  Increasing the penalties will encourage the filing of timely and accurate returns which, in turn, will improve overall tax administration. 



Author: Danny Michael
Danny G. Michael has 17 years of experience as an advisor working with individuals, families and business owners. Danny has also been a Certified Financial Planner™ since 2006 and is also an Accredited Investment Fiduciary.

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