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Understanding the SECURE Act

By Susan Burnoski, CPA | Principal, Audit & Assurance

Congress recently signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act, resulting in easier savings for retirement and expanding access to more Americans. Retirement experts are calling the SECURE Act the most comprehensive retirement legislation over the last 10 years.

Susan Burnoski, CPA

The SECURE Act was signed into law on December 20, 2019, and expands retirement coverage to many Americans. Most of the provisions were effective on January 1, 2020, and with the quick turnaround immediately before the year-end holidays, people may be unaware of the immediate benefits and opportunities provided by the SECURE Act. As with any new legislature, the regulations still need to be written.

There are several key takeaways for individuals and employers:

For Individuals

Key Takeaways:

  • Required minimum distributions (RMDs) are now set at age 72.
    • Increased from age 70½.
    • Reflects the trend of Americans working longer and will no longer require withdrawals from IRAs 401(k)s, and other qualified plans beginning at 70½.
    • Effective in the calendar year 2020 for individuals turning 70 ½ after December 31, 2019.
    • There is no change for persons whose RMD started prior to 2020. IRA contributions can be made past age 70½.
  •  Individuals working past age 70½, including those with self-employment income, can continue to contribute to an IRA. This change reflects similar rules for 401(k) plans and other employer qualified plans.
    • This change is effective for tax year 2020 contributions. This is a great planning opportunity.
  • Inherited IRA distributions must be taken within 10 years.
    • Before the SECURE Act, individuals inheriting an IRA or 401(k), could spread distributions and tax payments over the individual’s life expectancy.
    • Under the new law, inherited IRAs from the original owners that have passed away on or after January 1, 2020, are required to be distributed within 10 years.
      • This change may impact your estate planning. Consult your estate advisory team as soon as possible.
    • Exceptions include assets left to a surviving spouse, a minor child, disabled or chronically ill beneficiary, and receivers that are less than 10 years younger than the original IRA owner or 401(k) participant.
  • Parents are eligible to withdraw up to $5,000 per parent penalty-free from an IRA or retirement plan, other than a defined benefit plan, for the birth or adoption of a child.
    • Recognizing the financial burden facing younger employees starting a family, the SECURE Act allows individuals to take a “qualified birth or adoption distribution” of up to $5,000.
    • The standard 10% early withdrawal penalty will not be applied.
    • A birth or adoption in 2019 can signal the start of the one year, allowing qualified birth and adoption distributions as soon as January 1, 2020.
  • Funds in Section 529 plans can be used for student loan debt and apprenticeship costs.
  • Student loans are not just hurting millennial graduates, but also their parents. Principal, not exceeding $10,000, or interest payments on any qualified education loan of the designated beneficiary or his or her siblings are now qualified expenses.
  • Fees, books, supplies, and equipment required for the designated beneficiary’s participation in a certified apprenticeship programs.

For Employers

Key Takeaways:

  • Penalties for failure to timely file Form 5500/Form 5500EZ are increased.
    • Effective for returns due after 12/31/19.
    • Form 5500 IRS penalty is increased to $250 per day, not to exceed $150,000; previously $25 per day, not to exceed $15,000.
  • Long-term, part-time employees can join employer-sponsored 401(k) plans.
    • Prior to the SECURE Act, employees that worked less than 1,000 hours per year were not eligible for a company’s 401(k) plan.
    • Employers are now required to offer all employees that worked more than 1,000 hours in one year, or 500 hours over three consecutive years, participation in the company’s 401(k).
  • Small business owners are encouraged to set up a retirement plan with increased credits.
    • Eligible employers include small businesses with up to 100 employees over a three-year period, beginning after December 31, 2019. The credit is applicable for SEP, SIMPLE, 401(k), and profit-sharing plans. Start-up credit is increased from the lesser of $500 or 50% of qualified startup costs to greater of $500 or the lesser of $250 for each employee who is non-highly compensated or $5,000.
      • Can be taken in the year preceding the year the plan is first effective.
    • New start-up credit of $500 available for plans with auto-enrollment, including SIMPLE IRAs.
  • Safe harbor plans are modified.
    • The Safe harbor notice for nonelective 401k safe harbor plans is eliminated.
    • Plan can be amended after the 30th day prior to the close of the plan year to become a nonelective safe harbor, but contribution increases to 4%.
  • The SECURE Act recommends employers increase the cap for auto-enrollment contributions from 10% to 15%.
  • Employers are barred from making loans through credit cards.
  • Two great planning opportunities that are effective after December 31, 2020:
    • Small business owners can come together to create a pooled employer plan.
    • Plans adopted by filing due date may be treated as in effect as of the close of the year.

The changes implemented as a result of the SECURE Act are significant.  To discuss specific questions to either your personal retirement plan, or as an employer, contact our team today.