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SECURE Act makes major changes to retirement-planning considerations

July 7, 2020

Brian A. Ritchie
Counsel to the Firm, Stoll Keenon Ogden PLLC
(859) 231-3648
brian.ritchie@skofirm.com

The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 marked the most significant changes to the retirement plan landscape in years. Many of the provisions of the SECURE Act took effect in 2020 and significantly impact employers and their retirement plans; they also have important implications for individuals’ tax and estate planning.

The first important change of the SECURE Act is to push back the age at which required minimum distributions (“RMDs”) from a qualified retirement plan or IRA must begin from age 70½ to age 72. As amended by the Act, the “required beginning date” at which a qualified plan participant must begin taking distributions is now the later of (i) attaining age 72, or (ii) the participant’s retirement (unless the participant is a 5 percent owner). The new age 72 required beginning date applies to participants who attain age 70½ on or after January 1, 2020 (the age 70½ required beginning date will continue to apply to participants who attained age 70½ before January 1, 2020). Note, however, that as a result of the CARES Act, RMDs are temporarily waived for 2020 for 401(k) plans and IRAs.

The SECURE Act also makes significant changes to the RMD rules for distributions to the participant’s surviving beneficiaries. Prior to the Act, the benefits of a deceased plan participant or IRA owner could be distributed over the life of the designated beneficiary of the participant or account owner. This made possible the use of a “stretch IRA” as an advantageous tax and estate planning tool for deferring taxes on retirement accounts with younger beneficiaries. Such a tool is no longer available.

Rather, the SECURE Act eliminates the “stretch IRA” and adopts a new rule requiring that a participant’s benefit be distributed in full to the participant’s designated beneficiary within ten years of the participant’s death, subject to an exception for “Eligible Designated Beneficiaries” (discussed below). This general rule applies regardless of whether distributions had commenced as of the date the participant died. There is no requirement for periodic or annual distributions; the rule requires only that the beneficiary’s entire interest be distributed by the 10th anniversary of the participant’s death.

As noted, however, there is an exception whereby benefits may be distributed over the life expectancy of an “Eligible Designated Beneficiary” (“EDB”), which includes: (i) the surviving spouse of the participant; (ii) the minor child of the participant (but only while a minor); (iii) disabled or chronically ill beneficiaries; and (iv) any designated beneficiary who is not more than 10 years younger than the participant. The determination of whether a beneficiary qualifies as an EDB is made at the time of the participant’s death. If a minor child EDB reaches the age of majority before the entire interest is distributed, then the remaining interest must be distributed within 10 years of the date the age of majority is reached. If an EDB dies before the entire interest is distributed, the remaining interest must be distributed within 10 years of the date of the EDB’s death.

The changes to the beneficiary distribution rules apply to IRAs and defined contribution plans such as 401(k) plans, but do not apply to defined benefit retirement plans. The new rules generally apply to participants who die on or after January 1, 2020 (the old rules will continue to apply to distributions made with respect to participants who died before that date).

In addition to rule changes, the SECURE Act dramatically increases the monetary penalties that the IRS can impose for failing to file a Form 5500 return and other qualified plan reporting and disclosure failures. The Act increases the maximum amount the IRS may assess for the failure to timely file a Form 5500 return to $150,000, representing a tenfold increase from the previous maximum of $15,000. The maximum penalty for failure to file Form 8955-SSA (which reports information regarding participants who have separated from service with vested plan benefits) is increased to $50,000, representing a similar tenfold increase. Payors of plan distributions who fail to timely provide the required notice of the recipient’s right to opt-out of income tax withholding can now be assessed a penalty of up to $100 per day, subject to a total penalty of $50,000 for all failures in a calendar year.

If you’re a small employer, the SECURE Act provides expanded tax benefits if you adopt a new plan or implement an automatic enrollment arrangement. The Act increases the maximum amount of a tax credit for small employers (fewer than 100 employees) for start-up expenses associated with adopting a plan from $500 to $5,000 for each of the first three years the plan is in existence. The Act also creates a new tax credit for small employers that adopt an automatic enrollment feature, providing an annual credit of $500 for each of the first three years that the arrangement is in place.

Under the SECURE Act, plans may permit a new type of in-service distribution related to the birth or adoption of a child. A qualified birth or adoption distribution must be taken within one year of the child’s birth or adoption and may not exceed $5,000. The distribution will not be subject to the 10 percent early withdrawal tax and may later be repaid to the plan or an IRA in certain circumstances.

There are several other changes which are already effective this year, including:

• Elimination of the annual participant notice requirement for 401(k) safe harbor plans that use a nonelective contribution to satisfy the ADP nondiscrimination test.

• Employers may amend a plan to add a 3 percent safe harbor nonelective contribution at any time prior to 30 days before the end of the plan year and may even adopt such an amendment during the following plan year if the amendment provides for an increased contribution of 4 percent or more of compensation.

• An increase in the maximum amount which can be automatically deferred under a Qualified Automatic Contribution Arrangement (“QACA”) from 10 to 15 percent of a participant’s compensation.

• A prohibition on plan loans being made through the use of a credit card.

• “Difficulty of Care” payments which are excluded from income for tax purposes are now included in compensation for purposes of making contributions to a qualified plan (on an after-tax basis).

• Increased portability of lifetime income (annuity) options available under a plan.

• The creation of a fiduciary safe harbor for the selection of annuity providers for a plan.

• Provisions which facilitate the termination of 403(b) plans by allowing in-kind distributions of custodial accounts.

• Changes to nondiscrimination rules providing relief for defined benefit plans with closed classes of participants.

While many of the changes made by the SECURE Act are effective now and must be complied with operationally, the deadline for most plans to be amended to reflect these changes is not until the end of 2022.

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Stoll Keenon Ogden attorneys are ready – as we have been for more than 120 years – to answer your questions about the SECURE Act or other issues facing you or your business.

On our Stoll Keenon Ogden website, you’ll find a variety of resources, including the latest information on new laws and directives enacted by federal, state, and local governments; access to firm attorneys; and details about business considerations related to the Coronavirus pandemic.