Setting Every Community Up for Retirement Enhancement (SECURE) Act

Karen A. Hovey, CPA CFF, CFE (Jan, 2020)

The Setting Every Community Up for Retirement Enhancement Act, better known as the SECURE Act, was signed into law on December 20, 2019.  The SECURE Act contains many changes to a variety of retirement topics and many of these changes go into effect in 2020. The SECURE Act affects individuals and employers who sponsor retirement plans.

Here is a look at some of the more important elements of the SECURE Act that have an impact on individuals.

Repeal of the maximum age for traditional IRA contributions. You may now be able to contribute if you are over 70 ½. Starting in 2020, the new rules allow an individual (or spouse) of any age to make contributions to a traditional IRA, as long as the individual has compensation, which generally means earned income from wages or self-employment.

Required minimum distribution (RMD) starts at 72, not age 70 ½. Starting January 1, 2020, the age for RMD increases by 1 ½ years. This allows plan participants who will turn 70 ½ (born on or after July 1, 1949) in 2020 or later to wait until age 72 to begin taking required distributions.

Inherited IRA - Partial elimination of stretch IRAs. Upon the death of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most nonspouse beneficiaries are generally required to be fully distributed within ten years following the plan participants or IRA owners death. So, for those beneficiaries, the "stretching" strategy is no longer as valuable.  However, there are some exceptions to the 10-year rule. If you’ve already inherited an IRA, the new rules do not apply for deaths occurring before 2020.

Expansion of Section 529 education savings plans. The Act expands the definition of "qualified higher education expense" to include expenses a beneficiary incurs for fees, books, supplies or equipment required to participate in an apprenticeship program, provided the program is registered with the Department of Labor. The Act also allows 529 plan assets (up to $10,000) to pay the principal or interest on a qualified education loan of the designated beneficiary, or a sibling of the designated beneficiary.  This is a lifetime limit, not an annual limit.

Expenses related to the birth or adoption of a child. Starting in 2020, eligible retirement plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. That $5,000 amount applies on an individual basis, so for a married couple, each spouse may receive a penalty-free distribution up to $5,000 for a qualified birth or adoption, as long as they both have separate accounts in their own names.

Though there are many more aspects and provisions to the new law that apply to individuals, we have highlighted some of the most common items.

Some key provisions affecting employer-provided retirement plans include:

Small employer pension plan start-up costs. The new rules increase the credit for plan start-up costs to make it more affordable for small businesses to set up retirement plans. The credit applies for up to three years and starting in 2020, the credit is increased from a maximum of $500 to the greater of:

  • $500, or
  • the lesser of:
    • $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or
    • $5,000

Automatic plan enrollment credit. Studies have shown that Automatic enrollment increases employee participation and leads to higher retirement savings. Starting in 2020, the new rules allow a tax credit of up to $500 per year for employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment or to employers who convert an existing plan to a plan with an automatic enrollment design. This credit is in addition to an existing plan start-up credit, and is available for three years.

Part-Time Employee Participation. The SECURE Act requires employers to include long-term, part-time workers as participants in defined-contribution plans except in the case of collectively bargained plans. Previously, part-time workers could be excluded if they hadn't worked at least 1,000 hours in a 12-month eligibility testing period. Starting in 2020, employees who have completed at least 500 hours of service each year for three consecutive years and are age 21 or older may now become eligible to participate in the retirement plan. However, these participants can be excluded from becoming eligible for company provided contributions or hurting the company for nondiscrimination testing purposes.

Extends deadline to adopt new plans. Employers can now adopt plans by their tax return due date, rather than by the last day of the employer’s taxable year. This provision is effective for plans adopted for taxable years beginning after December 31, 2019 and could prove to be very beneficial to many growing businesses.

Increased penalties.  Starting in 2020, there are new rules that increase the failure-to-file penalties for retirement plan returns.

Multiple employer plans (MEP). Employers are eligible to participate in “pooled” or open multiple employer plans (MEPs) for plan years beginning after December 31, 2020. The employers do not need to share a common interest.  MEPs may help increase opportunities for small employers to band together to obtain more favorable investment options, while allowing for more efficient and less expensive management services. These plans are required to be administered by a pooled plan provider (PPP) as the named fiduciary. PPPs will be subject to audit and examination by the Internal Revenue Service and Department of Labor (DOL). Notably, MEPs will be able to file a single annual Form 5500 listing all participating employers.

The provisions of the SECURE Act, provide a number of significant changes to retirement plans that plan sponsors must know and understand. Therefore, plan sponsors need to review how these changes affect their plan document, staff communications, and plan administration.  The content of this article is intended to be general information regarding the SECURE Act.

Please do not hesitate to contact your tax advisor regarding the SECURE Act.


The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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