Highlights of the SECURE Act

By Kenneth H. Bridges, CPA, PFS March 2020

In late 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted.  Below is a summary of the highlights.

Elimination of the “Stretch IRA” – For persons who passed away prior to 2020, it was possible to stretch out over a very long period of time their RMDs (required minimum distributions) by naming a very young beneficiary, on whose life expectancy the RMDs could be based.  Going forward, however, the inherited IRA will generally have to be paid out over a period not to exceed 10 years.  There is a limited exception for beneficiaries under the age of 21 who inherit IRA from a parent (but not a grandparent), whereby the required time period may be stretched to age 31.  Individuals who have previously named a trust as their IRA beneficiary should have these trust agreements reviewed by an attorney, as trust provisions which were favorable under prior law may be very unfavorable under the new law (e.g. a “Conduit Trust” might now not permit any distributions until the 10^th year, with required full distribution in that year, or a “Discretionary Trust” might have to receive and retain distributions each year at the trust level at the high trust tax rates).

RMDs not required until age 72 – In the past, you had to begin taking your required minimum distributions (RMDs) in the year you attained age 70 ½ (with a grace period to April 1 of the next year for your first year’s RMD).  For those who did not reach the age of 70 ½ before 2020, the required starting date is now the year in which you attain age 72.  The April 1 of next year grace period for first year’s RMD continues to apply (although availing yourself of the grace period means doubling up the RMD in that year).

QCDs still okay at age 70 ½ – Although the required date for starting RMDs has been pushed back to age 72, you can still make a qualifying charitable distribution (QCD) from your IRAs at age 70 ½ (up to $100,000 per year).

IRA contributions after the age of 70 ½ now okay – The prohibition on making traditional IRA contributions after age 70 ½ is repealed (provided you or your spouse are still working and have sufficient compensation to support the deduction).

Exception to early distribution penalty for birth or adoption – Generally, a 10% penalty applies if you take a distribution from IRA or 401(k) prior to attaining the age of 59 ½.  However, a new rule permits you to take up to $5,000 during the one-year period beginning on the date of a birth or adoption, and not incur the penalty. This $5,000 amount is per child and per parent, so if both parents have qualified plan assets they could potentially have up to $10,000 of distributions free from the penalty following the birth or adoption of a child.  The amount is, however, still subject to income tax.

Kiddie tax reverts to pre-TCJA rule – Prior to the Tax Cuts and Jobs Act (TCJA) legislation enacted in late 2017, unearned income of minor children (or students up through the age of 23) was subject to tax at their parents’ marginal tax rate.  TCJA changed that to provide that the children’s unearned income was taxed at trust rates.  However, trusts move into the highest rate bracket at a fairly low level of income, which meant that this rule was very punitive for families of modest income. Accordingly, for 2020 and beyond, the SECURE Act changes back to the old rule of taxing the child’s income at the parents’ rate, and provides that for 2018 and 2019 you can elect whichever of the two sets of rules you prefer.

Use of 529 plan funds for apprenticeships and loan repayments – 529 plan funds may now be used for certain qualified apprenticeship programs and up to $10,000 (per person lifetime limit) may be used to repay qualified student loans.

Ability to adopt retirement plan up to extended due date of return – Prior to the SECURE Act, generally for an employer to adopt a retirement plan such had to be done by the end of the tax year. Now, effective for 2020, the employer has up until the extended due date of its tax return to adopt a plan that is entirely employer funded.

Fiduciary safe harbor for selection of annuity provider for 401(k) plan – Although nothing under prior law prevented a 401(k) plan from offering an annuity option, it was estimated that fewer than 10% did because of concerns about fiduciary liability if the annuity provider ran into financial trouble and could not meet its obligations.  The legislation alleviates this concern by providing a safe harbor for the selection of an annuity provider.

Increased tax credit for adoption of retirement plan by small business – Prior to 2020, small businesses could receive a tax credit of up to $500 per year for up to 3 years for establishing a retirement plan.  For 2020 and beyond, the credit is increased to up to $5,000 per year for up to 3 years (with the amount being $250 for each non-highly compensated employee eligible to participate). 

Tax credit for adoption of auto-enrollment – A small business which adopts an auto-enrollment feature for its 401(k) plan can receive a tax credit of $500.

Long-term part-time employees must be eligible for plan – Historically, employers have been able to exclude from their retirement plans employees who work less than 1,000 hours per year.  The new rule (essentially first effective for 2024) is that employers will have to offer participation to employees who have worked at least 500 hours in at least three consecutive years.

Easier to establish multiple employer retirement plan – The new rules make it easier for two or more unrelated employers to establish a single retirement plan (which, in theory, may result in economies of scale and lower costs).

Penalty increased for late filing of 5500 – The general penalty for late filing of a Form 5500 (annual report for a retirement plan) is increased from $25 per day to $250 per day.

Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP, an Atlanta-based CPA firm.

This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice.  The article provides only a very general summary of complex rules.  For advice on how these rules may apply to your specific situation, contact a professional tax advisor.