The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) began generating news this past summer when it was passed by the Senate. However, it fell off the radar until it was attached to the Further Consolidated Appropriations Act, 2020 spending bill during the final few weeks of 2019. The SECURE Act was enacted on December 20, 2019, as part of the appropriations bill to fund the federal government through September 30, 2020, and includes provisions to expand and preserve retirement savings, improve administration of the retirement system and generate revenue. This article summarizes notable provisions of the SECURE Act that are effective for tax years beginning, or transactions occurring after, December 31, 2019, unless otherwise noted. A previous BKD Thoughtware® alert provides a summary of other provisions included in the spending bill, such as several individual and business tax extenders.
- Traditional IRA contributions and qualified charitable distributions (QCD) – The SECURE Act repeals the age restriction for contributions to an IRA after age 70 1/2 as long as the taxpayer, or spouse if filing jointly, has taxable compensation. Individuals are still allowed to make QCDs after reaching age 70 1/2 but must reduce (not below $0) the $100,000 yearly QCD limit for any deductible traditional IRA contributions made after that age.
- Required minimum distributions (RMD) – Under the new law, the RMD age is increased to 72. While individuals turning 72 still have until April 1 of the following year to take their first RMD, all future RMDs must be distributed by December 31 of the respective tax year. The SECURE Act only applies to individuals who will turn 70 1/2 in 2020 or later years. Individuals who turned 70 1/2 by December 31, 2019, must continue taking RMDs as under the former law.
- Post-death RMDs – Under the new law, upon the account owner’s death, designated beneficiaries of employer-sponsored retirement plans and IRAs have a 10-year period for which the entire account balance must be distributed. There’s an exception for certain “eligible designated beneficiaries,” which include the IRA owner’s surviving spouse, minor child and chronically ill or disabled beneficiary, as well as any individual who isn’t more than 10 years younger than the decedent. For governmental and collective bargaining agreement plans, this provision is effective for tax years beginning after December 31, 2021.
Post-death RMDs for decedents who passed away during 2019 are under the previous law. Surviving spouses in those cases should consider disclaiming spousal rollovers, which would allow the contingent beneficiary to receive RMDs over his or her life expectancy instead of the shortened 10-year period. Taxpayers also should consider consulting with their attorneys to review and update any trust agreements naming conduit trusts as IRA beneficiaries. Conduit trusts require RMDs to be distributed annually to beneficiaries. The SECURE Act no longer requires annual RMDs until the end of the 10-year period when the entire account balance must be distributed, which could result in heavy tax burdens for beneficiaries.
- Kiddie tax – The SECURE Act repeals the Tax Cuts and Jobs Act provision that taxes unearned income received by children at rates applicable to estates and trusts. This income would instead be taxed according to the child’s parent’s rates. This calculation is more cumbersome, as it requires information from the parent’s tax return, but may result in a greater tax savings for children with substantial unearned income. This repeal is in effect for tax years beginning after December 31, 2019; however, taxpayers can elect to retroactively apply it to 2018, 2019 or both. Taxpayers should consider amending 2018 tax returns for children who were subject to the kiddie tax rules; they may elect to use the new rules for 2019, if more beneficial.
- Penalty-free qualified retirement plan withdrawals – Under the new law, individuals may withdraw up to $5,000 from a qualified retirement plan for the birth or adoption of an eligible adoptee without incurring an early distribution penalty. Eligible adoptees include any individual, other than a child of the taxpayer’s spouse, who is under the age of 18 or physically or mentally incapable of self-support. The funds generally can be recontributed to the plan at a later date. The distribution must occur during a one-year period beginning on the date the child was born or the date the adoption was finalized. The $5,000 limit is applied on an individual basis, i.e., both parents can withdraw $5,000 from their own respective plans, and is allowed on a per-child basis.
Employer Plan Provisions
- Small employer automatic enrollment provisions – The SECURE Act created a new $500-per-year credit, up to three years, for eligible employers with plans that include automatic enrollment. The credit applies to the startup costs of new 401(k) plans, new SIMPLE IRA plans and existing plans converted to the automatic enrollment design.
For years after a participant’s first deemed election year, the SECURE Act allows automatic enrollment plans to increase the maximum compensation deferral percentage to 15 percent of an employee’s compensation.
- Credit for small employer pension plan startup costs – Previously capped at $500, under the new law, the annual maximum credit for small employer pension plan startup costs is now limited to the greater of (1) $500 or (2) the lesser of (a) $250 for each eligible non-highly compensated employee or (b) $5,000. The credit is available for up to three years.
- Expanded coverage for 401(k) plans – Effective for plan years beginning after December 31, 2020, employers must allow long-term part-time employees who have worked at least 500 hours per year for at least three consecutive years to participate in their 401(k) plans. Eligible employees must be at least 21 to participate. Periods beginning before January 1, 2021, are excluded in satisfying the three-year requirement; therefore, 2024 is the earliest these newly eligible participants can participate in a 401(k) plan.
Plan Administration & Revenue-Raising Provisions
- Plan adoption dates – Under the new law, certain qualified retirement plans may be treated as adopted by the end of the tax year if the plan has been adopted by the tax return due date (including extensions).
- Form 5500 consolidated filing – For plan years beginning after December 31, 2021, eligible group plans are permitted to file a single consolidated Form 5500. The group must meet certain requirements to be eligible for group filing, including sharing the same trustee and having the same plan year beginning date.
- Penalty for failing to file tax returns – For tax returns filed more than 60 days late (including extensions), the SECURE Act increases the penalty to the lesser of $435 (adjusted for inflation) or 100 percent of the amount of tax due.
- Penalty for failing to file retirement plan returns – The SECURE Act increases the penalty for failing to file Form 5500 ($250 per day, not to exceed $150,000); registration statements ($10 per participant per day, not to exceed $50,000); required notification changes ($10 per day, not to exceed $10,000); and required withholding notices ($100 for each failure, not to exceed $50,000 for all failures during a calendar year).
The SECURE Act is the largest retirement reform in the past decade and contains several other provisions not mentioned above. Taxpayers should work with their BKD Trusted Advisor™ to evaluate additional planning opportunities available based on their current tax situation and long-term financial goals.
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