The SECURE Act Offers Something for Everyone

Signed into legislation in late 2019, the SECURE Act offers individuals and business owners an opportunity to reassess their college, personal retirement and employer retirement plans heading into 2020. Retirement and wealth strategies expert Matt Sommer outlines some of the Act’s key provisions and their implications for retirement plan sponsors and plan participants.

On December 20, President Trump signed the Further Consolidated Appropriations Act, 2020 (H.R. 1865), effectively avoiding a government shutdown. Attached to this legislation was the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act), which is widely considered the most significant retirement legislation enacted within the last decade.

Although the SECURE Act focuses primarily on employer-sponsored retirement plans, there are several key provisions that impact personal retirement and education savings vehicles as well.

Following is a summary of the legislation’s key provisions, many of which became effective at the beginning of 2020.

Education Savings Provisions

The SECURE Act expands the potential use of 529 college savings programs in two meaningful ways. First, the Act recognizes that for many young Americans, a traditional four-year college program may not be the best avenue after completing high school. Instead, many graduates choose to pursue careers in a particular trade or craft. To assist these students and their families, beginning in 2020, tax-free distributions may be taken for fees, books, supplies and equipment necessary for the participation in an apprenticeship program. One of the key requirements is that the program is registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act.

Second, the Act allows a tax-free distribution up to $10,000 for the repayment of student loans incurred by the account’s designated beneficiary or the beneficiary’s sibling. (The $10,000 is a lifetime – not annual – limitation.)

Personal Retirement Savings Provisions

The SECURE Act also changes some of the guidelines around individual retirement accounts (IRAs). Beginning in 2020, traditional IRA contributions may be made at any age. Furthermore, the definition of earned income has been expanded to include amounts received to aid the pursuit of graduate or post-doctoral study or research.

One of the more significant changes is for individuals who turned 70½ after December 31, 2019: The Act has pushed back the age at which required minimum distributions begin to 72.

For nonspouse beneficiaries who inherit an IRA beginning in 2020, the account must be fully distributed within 10 years. The so-called “stretch IRA” that permitted distributions over the beneficiary’s life expectancy is no longer permitted, except in cases where the beneficiary is a spouse, minor, disabled, chronically ill or not more than 10 years younger than the deceased IRA owner.

Lastly, the 10% premature distribution penalty is waived for distributions up to $5,000 for the birth or adoption of a new child. This exception also applies to qualified retirement plans.

Qualified Plan Provisions

As previously mentioned, the majority of the provisions within the SECURE Act apply to employer-sponsored qualified retirement programs. The most anticipated change is the introduction of open multiple employer pension plans (MEPs). An open MEP allows unrelated businesses to band together and operate a single retirement plan for its members’ employees. By pooling many small plans, these businesses can realize economies of scale as it relates to fees and services. Further, the Act protects the tax-qualified status of an MEP in the case of a potential violation of a participating employer. These new rules are effective in 2021 for most plans.

Another significant change revolves around the concept of lifetime income. Under the SECURE Act, plan sponsors will now be required to provide participants with a hypothetical illustration of how their retirement account balance would translate into a monthly income stream. (It’s worth noting that many employers already provide these illustrations.)

Additionally, for plan sponsors interested in providing a guaranteed income option within their plan, the Act provides fiduciary protection if the insurer experiences difficulties meeting these payments. Finally, new portability rules make it easier for participants to transfer guaranteed lifetime income options to another plan if the employer decides to remove the offering from their plan menu.

To expand coverage among part-time workers, the Act stipulates that employees who have worked at least 500 hours in three consecutive years must be eligible to participate in their employer’s retirement plan. However, employers will not be required to include these part-time employees in their nondiscrimination or top-heavy plan evaluations.

Finally, to entice businesses to establish a plan, the deadline for adoption has been moved from fiscal year end to the business’s tax-filing deadline, including extensions. Further, the $500 start-up tax credit has been increased to $5,000 and a new $500 tax credit has been enacted for new 401(k) and SIMPLE IRA plans that include automatic enrollment. This credit is available for three years and is in addition to the start-up tax credit.

In conclusion, while the impact of the SECURE Act will vary depending on each individual’s unique situation, the new legislation offers individuals and business owners an opportunity to reassess their college, personal retirement and employer retirement plans heading into 2020.