The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE” or the “Act”) was signed into law by President Trump on December 20, 2019 in addition to other key retirement and savings provisions in the year-end spending bills. The Act makes significant changes to IRAs and Qualified Plans. Clients and Plan Sponsors need to be aware of how these changes affect their IRAs and Qualified Plans and when those changes become effective.
All told, there were approximately 28 substantive changes. Following are the main changes affecting clients and Plan Sponsors:
The Required Minimum Distribution (“RMD”) required beginning date - The age 70½ rule for RMDs has been changed to age 72. This change would apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date. The exception for less than 5% owners remains unchanged. Any employee (other than a 5% owner) who continues employment is not required to take an RMD from their employer's plan until the year they are no longer employed.
“Stretch” IRA RMDs – The “designated beneficiaries” lifetime was replaced with 10 years. For an “eligible designated beneficiary” the lifetime rule still applies if distributions begin within one year of death.
An eligible designated beneficiary is:
- The surviving spouse
- A child under the age of majority
- Disabled or chronically ill
- Any other person who is not more than 10 years younger than the participant/IRA owner (decedent)
The changes would apply generally with respect to deaths after 2019.
Post 70½ IRA Contributions - The limit prohibiting individuals who have attained age 70½ from making non-rollover contributions to traditional IRAs was repealed. The individual must still qualify to make IRA contributions, including earned income requirements. This change would apply to contributions made for taxable years beginning after December 31, 2019
529 plan withdrawals used for apprenticeship programs – The definition of 529 plan qualified higher education expenses would be expanded to include fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act. This change would apply for distributions made after December 31, 2018.
529 plan withdrawals used to pay student loans – A $10,000 lifetime limit is permitted for 529 withdrawals applied to student loan debt. Principal and/or interest is permitted. This change would apply for distributions made after December 31, 2018.
Plan adoption deadline – Previously, a Qualified Plan (401(k), etc.) had to be adopted by the last day of the plan year for that plan year. The new law allows Plan adoption up until the tax return due date, including extensions. This change would apply to plans adopted for taxable years beginning after December 31, 2019.
Startup credit for small employer plans – The $500 annual cap would be increased to the greater of 1) $500 or 2) the lesser of a) $250 for each non-highly compensated employee who is eligible to participate or b) $5,000. A small employer is generally defined as having no more than 100 employees. These changes would apply to plan years beginning after December 31, 2019.
Retirement plan eligibility for long-term part-time employees – 401(k) Plans will now be required to allow eligibility for an employee who has completed 500 hours of service for 3 consecutive years to contribute salary deferral contributions. The 1000 hour rule will no longer apply. The age 21 restriction could still apply. Employer contributions are not required for these participants. Vesting for 500 hours of service would be credited (although mostly irrelevant). The participants would also be excluded from ADP/ACP non-discrimination testing. These changes would apply to plan years beginning after December 31, 2020.
Increased form 5500 penalties – The penalty for failure to file increased from $25 to $250 per day during which the failure continues. The maximum penalty that can be imposed increased from $15,000 to $150,000. These changes would apply for returns filed for periods after December 31, 2019.
In-service distributions in certain qualified plans – In-service distributions will now be permitted at age 59½ in defined benefit plans, money purchase plans and governmental 457(b) plans. This change mirrors in-service distributions for salary deferrals in 401(k) plans. These changes would apply for plan years beginning after December 31, 2019.
Retirement plan loan relief for victims of natural disasters – The Act would increase the maximum loan limit for qualified individuals to the lesser of: 1) $100,000; or 2) the greater of $10,000 or 100% of the present value of the participant’s non-forfeitable accrued benefit. Moreover, the Act would also extend for one year the due date of any qualified individual’s loan repayment that would otherwise be due during the period beginning on the date of disaster and ending 180 days after the last day of the disaster.
Please contact David Waddington or your FLLP professional to discuss these important topics.
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