Tucked into the 1,700-page spending legislation that Congress passed in December 2019 with a government shutdown deadline looming was a bill called the Setting Every Community Up for Retirement Enhancement Act (Division O of P.L. 116-94).
The SECURE Act was designed to encourage retirement savings in various ways and to simplify administrative requirements in order to make it easier for employers to offer retirement plans. Like a smorgasbord, the act contains a wide assortment of changes to existing law. The unifying theme, for the most part, is to help individuals save more for retirement.
Congress also slipped in an important change regarding after-death distributions from inherited retirement accounts.
The following is a summary of the SECURE Act’s key provisions pertaining to individuals.
Maximum age for traditional IRA contributions. The act repeals the maximum age for contributing to a traditional IRA. Under prior law, individuals who worked past age 70½ were barred from continuing to contribute. In a related change, the act reduces the amount of charitable IRA distributions allowed to taxpayers over 70½ by the aggregate IRA contribution deductions allowed to them after they turn 70½ (Section 107 of the act; Secs. 219 and 408 of the Internal Revenue Code (the Code)).
Age to begin required minimum distributions (RMDs). The act increases the age after which RMDs from certain retirement accounts must begin to 72 (from 70½). The committee report explains that life expectancy has risen, and more Americans are working past traditional retirement ages (Section 114 of the act; Sec. 401(a)(9) of the Code).
Inherited retirement accounts. The act requires beneficiaries of IRAs and qualified plans to withdraw all money from inherited accounts within 10 years. Under prior law, beneficiaries were generally allowed to withdraw inherited amounts from a tax-favored account or plan over the beneficiary’s lifetime. Certain beneficiaries are exempted from the new 10-year limit: surviving spouses, minor children, chronically ill individuals, and individuals within 10 years of the deceased person’s age. The provision, a revenue-raising measure, has generated significant discussion because of its impact on estate planning (Section 401 of the act; Sec. 401(a)(9) of the Code).
Graduate and postdoctoral students’ IRA contributions. Graduate and postdoctoral students often receive stipends, fellowships, and similar payments that are not treated as compensation and cannot be used as the basis for IRA contributions. The act 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 in IRAs (Section 106 of the act; Sec. 219 of the Code).
Home health care workers’ retirement contributions. The act allows certain home health care workers to contribute to a defined contribution plan or IRA. Specifically, the act applies to home health care workers who do not have a taxable income because their only compensation comes from certain foster-care payments (“difficulty of care” payments) exempt from taxation. Under the act, for purposes of determining the contribution limit to an IRA or defined contribution plan, difficulty-of-care payments are treated as
compensation or earned income (Section 116 of the act; Secs. 131, 408, and 415
of the Code).
Penalty-free withdrawals for birth or adoption. The act allows penalty-free distributions of up to $5,000 from qualified retirement plans and IRAs for birth and adoptions, subject to certain limitations (Section 113 of the act; Secs. 72(t), 401–403, 408, 457, and 3405 of the Code).
Portability of annuity contracts etc. The act addresses portability issues concerning lifetime income products. For instance, if an employee has to liquidate such an investment held in an employer-sponsored retirement plan — perhaps because of a change in investment options or a limit on investments held in the plan — the employee may be subject to a charge or fee. The employee may be unable to avoid the charge or fee because of restrictions on in-service distributions. The act amends prior law to allow distributions or rollovers in such cases (Section 109 of the act; Secs. 401(a), 401(k), 403(b), and 457(d) of the Code).
The SECURE Act also contains provisions related to the administration of employer plans, including the following.
Part-time employees’ participation. The act makes it easier for long-term, part-time employees to participate in elective deferrals. In particular, the act requires Sec. 401(k) plans to permit an employee to make elective deferrals if the employee has worked at least 500 hours per year with the employer for at least three consecutive years and certain other conditions are satisfied. Under prior law, employers generally could exclude employees who worked less than 1,000 hours per year (Section 112 of the act; Secs. 401(k) and 412(k) of the Code).
Creation of multiple-employer plans. The act modifies requirements for multiple-employer retirement plans to make it easier for small businesses to offer such plans to their employees by allowing otherwise completely unrelated employers to join in the same plan (Section 101 of the act; Sec. 413 of the Code). A separate provision reduces Pension Benefit Guaranty Corporation premiums for certain multiple-employer defined benefit plans of cooperatives and charities (Section 206 of the act).
Loans from employer plans. Employer-sponsored retirement plans may provide loans to participants. Unless the loan satisfies certain requirements, however, it is deemed a distribution from the retirement plan. Under the act, a plan loan that is made through the use of a credit card or similar arrangement does not meet the requirements for loan treatment applicable to qualified retirement plans and therefore is a deemed distribution (Section 108 of the act; Sec. 72(p) of the Code).
Tax credit for pension plan startup costs. The act increases the tax credit for small employer pension plan startup costs, which is intended to encourage eligible small employers to offer plans. The annual credit will now be as much as $5,000 (from $500) (Section 104 of the act; Sec. 45E of the Code).
Tax credit for automatic enrollment. To encourage auto-enrollment mechanisms, the act creates a new tax credit of $500 per year to defray the startup costs of eligible employers that create new 401(k) plans and SIMPLE IRA plans that include enrollment as the default choice. The credit is available for up to three years. The credit is also available to eligible employers that convert an existing plan to an auto-enrollment design (Section 105 of the act; Sec. 45T of the Code).
Combined annual report for group of plans. The act allows consolidated filings of Forms 5500, Annual Return/Report of Employee Benefit Plan, for similar plans. The act directs the IRS and the U.S. Department of Labor to work together to modify Form 5500 for this purpose (Section 202 of the act; Sec. 6058 of the Code).
401(k) safe-harbor rules. Sec. 401(k) plans must meet nondiscrimination tests, and there are related safe-harbor rules. The act makes certain changes to the safe-harbor rules, generally aiming for simplification and increased flexibility (Sections 102 and 103 of the act; Sec. 401(k) of the Code).
Custodial accounts on termination of 403(b) plans. The act provides a mechanism that allows the termination of a 403(b) plan to proceed while keeping assets that cannot otherwise be distributed to participants in a tax-favored retirement savings vehicle (Section 110 of the act; Sec. 403(b) of the Code).
Retirement plans of church-controlled organizations. The act clarifies the types of workers who may be covered by plans maintained by church-controlled organizations (Section 111 of the act; Sec. 403(b)(9) of the Code).
Community newspaper pension plans. The act reduces the annual amount that certain struggling community newspaper employers are required to contribute to their pension plan, by making computational changes (Section 115 of the act; Sec. 430 of the Code).
In addition to the provisions summarized above, Congress included in the SECURE Act a few changes unrelated to retirement plans, including expanding Sec. 529 education savings accounts to cover registered apprenticeships and distributions to repay student loans of the beneficiary or sibling up to a $10,000 lifetime limit and repealing the kiddie tax amendment (former Sec. 1(j)(4)) introduced by the law known as the Tax Cuts and Jobs Act, P.L. 115-97.