Secure Act 1.0 (December, 20 2019)
The SECURE ACT signed into law December 20, 2019, contains 125 pages of legislation containing 30 provisions. This paper will comment on 16 of the provisions likely to affect most plans. Some will require employers to make operational decisions, and/or require formal plan amendments. Meanwhile, you have been allowed to operate in accordance with this law without having to amend the plan documents until later this year.
Many of the SECURE Act provisions became effective as of Jan. 1, 2020, while others have different effective dates. When these rules were published the government had a due date for amendments as of 12/31/2022.
There are also amendments for other law changes under the CARES Act and the Bipartisan American Miners Act as of 12/31/2022.
The Internal Revenue Service extended the due date for amendments to 12/31/2025. We are bringing this to your attention because now Congress has passed more legislation requiring more operational changes and subsequent amendments. This new law, SECURE 2.0, signed into law on December 29, 2022, is further to the one being discussed below that is referred to as the SECURE Act.
We will be providing you with specific plan changes that you may adopt as our standard plan design (default) or make changes that meet your goals. The optional plan provisions and amendments will be provided to you in 2023. We need to have you adopt these changes this year because of all the other changes that are coming into being under the SECURE ACT 2.0.
Following the SECURE/CARES Act amendments the SECURE 2.0 will be due in 2024-2025.
Summary of SECURE Act Provisions
Table of Contents
Automatic Enrollment Safe Harbor
No Maximum Age for Traditional IRA Contributions
Portability of Lifetime Income Options
Treatment of Custodial Accounts on Plan Termination for 403(b) Plans
Church Controlled Organizations
Long Term Part Time Employees (LTPT)
Distributions for Childbirth or Adoption
Increase in Age for Minimum Required Contributions (RMD)
New Plans can be adopted by tax filing due date
New Distributions Rules for Designated Beneficiaries
Increased Penalties for Failure to File Form 5500 (IRS Return for Retirement Plans)
Funds for Qualified Disaster Relief
back to top
Automatic Enrollment Safe Harbor
This provision increases the automatic enrollment safe harbor elective deferral limit cap from 10% of pay to 15%. This provision, if adopted by employers, will require their documents to outline the higher cap in the plan document.
Tax Credit for Start Up Plans
The credit for start-up expenses paid or incurred in connection with establishing or administering a new eligible employer plan increases to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of eligible non highly compensated employees or (b) $5,000. One person plans are not eligible for the credit. An additional $500 credit would apply to eligible employer plans with an automatic enrollment feature. Both credits apply for up to three years. A small employer for purposes of the credit is one who, in the preceding tax year, had no more than 100 employees receiving at least $5,000 in compensation.
Safe Harbor Election Notices
The safe harbor notice requirement for nonelective contributions (employer contributions) is eliminated. The law allows employers to switch to a safe harbor 401(k) plan with nonelective contributions 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 that all eligible employees receive 4% of compensation for the previous plan year.
No Maximum Age for Traditional IRA Contributions
Eliminates the restriction on contributions to a traditional IRA by an individual who has attained age 70½. This provision puts traditional IRAs on par with Roth IRAs, which do not have an age limitation.
Portability of Lifetime Income Options
Provides for portability of annuity or lifetime income options via a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA if a lifetime income investment is no longer authorized to be held as an investment option under the plan.
Treatment of Custodial Accounts on Plan Termination for 403(b) Plans
Under the current law, it was very difficult for employers who sponsor 403(b) plans with custodial accounts to terminate the plan, if participants did not respond to employer’s request to distribute their account. This was not the case for 403(b) plans that contained only individual annuity contracts. The SECURE Act places custodial accounts on par with the annuity contracts which should help to simplify 403(b) plan terminations.
Church Controlled Organizations
Clarifies individuals that may be covered by plans maintained by church-controlled organizations.
Covered individuals include duly ordained, commissioned, or licensed ministers, regardless of the source of compensation; employees of a tax-exempt organization, controlled by or associated with a church or a convention or association of churches; and certain employees after separation from service with a church, a convention or association of churches, or an organization described above.
Long Term Part Time Employees (LTPT)
Prior to this law employers could exclude employees working less than 1000 hours in a plan year. Now plans will need dual eligibility. You can have up one year and 1000 hours as the plan’s eligibility (many plans have less than one year and that’s okay) but you also have to offer the 401(k) to employees that have worked three consecutive years with more than 500 hours of service. Under this new 500 hour rule employers can exclude such employees from testing under the nondiscrimination and coverage rules and from top heavy rules. They also do not have to provide them with matching or profit sharing contributions.
Distributions for Childbirth or Adoption
This provision provides a new exemption from the 10% early withdrawal penalty for retirement plan distributions taken prior to age 59 ½ to cover the cost of childbirth or adoption expenses up to $5,000 if made during the one year period beginning on the date on which a child of the individual is born or on which the legal adoption is finalized. The Act also allows the repayment of such expenses to the retirement account.
Increase in Age for Minimum Required Contributions (RMD)
Under current law, participants are generally required to begin taking minimum distributions from their retirement plan at age 70½. The minimum age is now 72. This provision applies only to individuals who attain age 70½ after Dec. 31, 2019. Thus, individuals who have reached age 70½ during 2019 or in a prior year do not benefit from this change.
Difficulty of Care Payments
Many home health care workers do not have a taxable income because their sole compensation comes from “difficulty of care” payments exempt from taxation under IRC Section 131. Since such workers do not have taxable income, they are not allowed to contribute for retirement to a defined contribution plan or IRA. This provision allows home health care workers to contribute to a plan or IRA by treating payments as compensation for purposes of calculating the contribution limits to defined contribution plans and IRAs.
New Plans can be adopted by tax filing due date
Allows plan sponsors to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year, as if it had been adopted as of the last day of the taxable year.
Lifetime Income Disclosures
Requires plan sponsors to provide a lifetime income disclosure at least once during any 12-month period to participants in defined contribution plans. The disclosure will illustrate the monthly lifetime annuity stream the participant would receive if the total account balance were used to provide an annuity.
New Distributions Rules for Designated Beneficiaries
The SECURE Act eliminates the so-called stretch IRA for certain beneficiaries. Under current law, after the death of a plan participant or IRA owner, a non-spousal beneficiary is permitted to stretch the required minimum distributions over the beneficiary’s life expectancy. Under the new law, all amounts held by the plan or IRA must be distributed by the end of the 10th calendar year following the year of the employee or IRA owner’s death. The exceptions to the stretch IRA are for beneficiaries designated as the surviving spouse, 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.
Increased Penalties for Failure to File Form 5500 (IRS Return for Retirement Plans)
Significantly increases the failure to file penalties for retirement plan returns. The Form 5500 penalty would be modified from $25 per day to $250 per day, not to exceed from $15,000 to $150,000.
Funds for Qualified Disaster Relief
This provision creates a waiver from the 10% early withdrawal penalty for qualified disaster distributions from retirement plans up to $100,000. Individuals can spread income tax payment on the qualified disaster distribution ratably over a three-year period. Individuals are permitted up to three years to repay the distribution back into the retirement plan. Individuals who took a hardship distribution from a retirement plan for a first-time home purchase in the disaster area may recontribute the amount into the retirement plan without tax penalty. The loan limits on retirement plans subject to this relief can be increased from $50,000 to $100,000 and retirement plan loan repayment periods extended.