The SECURE Act Changes Rules for Individual Retirement Savings Accounts

By:
Mark H. Levin, CPA, MS (taxation)
Published Date:
Feb 1, 2020

On Dec. 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act of 2020 (FCTA). Among its many provisions, the FCTA includes the Setting Every Community Up for Retirement Enhancement Act of 2019 (aka the SECURE Act). While most of these changes affect taxpayers’ IRAs and 401(k) accounts in a positive way, certain provisions tighten some rules. This discussion will review key provisions of the act and their impact on taxpayers.

Provisions Affecting IRAs

Certain taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes

Prior to the SECURE Act, payments received by graduate and postdoctoral students as fellowships or stipends were not considered compensation and could not be considered in funding an IRA. Effective for plan years beginning after Dec. 31, 2019, any taxable fellowships or stipends are to be considered as compensation for the purpose of funding an IRA.

Repeal of the maximum age for making traditional IRA contributions
Prior to the SECURE Act, taxpayers were prohibited from making contributions to traditional IRAs once they reached 70½ years old. Effective for taxable years beginning after Dec. 31, 2019, however, this age limit is repeated for making contributions to a traditional IRA.

Early withdrawals
Prior to the SECURE Act, certain distributions from qualified plans where the taxpayer was under the age of 59½ were exempt from the 10% penalty. Effective for distributions made after Dec. 31, 2019, early withdrawals for qualified birth and adoption are exempt from the 10% penalty. The penalty-free amount of any such distribution is limited to $5,000.

The term “qualified birth or adoption distribution” means any distribution from an applicable eligible retirement plan to an individual if made during the one-year period beginning on the date that a child of the individual is born or the legal adoption by the individual of an eligible adoptee is finalized. The term “eligible adoptee” means any individual (other than a child of the taxpayer's spouse) who has not attained age 18 or is physically or mentally incapable of self-support.

Increase in age for required beginning date for mandatory distributions
Prior to the SECURE Act, participants in qualified plans and IRAs had to start taking their required minimum distributions (RMD) no later than:

  • April 1 of the year after the employee attains age 70½, or
  • the calendar year in which the employee retires.

Effective for distributions required to be made after Dec. 31, 2019, to individuals who attain age 70½, the SECURE Act increases the age for RMDs to 72. This provision also applies to surviving spouses.

Modification of RMD rules for certain designated beneficiaries
Prior to the SECURE Act, non-spouse beneficiaries were permitted to extend their RMDs over their expected lifetime.

Effective for distributions required to be made with respect to employees who die after Dec. 31, 2019, non-spouse beneficiaries must within 10 years of the account owner’s death. This provision adversely affects spousal beneficiaries of IRAs.

Provisions Affecting 401(k) and Certain Other Qualified Plans

Multiple employer plans and pooled employer plans
Prior to the SECURE Act, small employers may have resisted setting up a 401(k) plan due to the cost of setting up and maintaining the plan. Effective for plan years beginning after Dec. 31, 2020, the SECURE Act attempts to reduce the cost to small employers by permitting multiple employer plans with pooled plan providers. This will allow multiple small employers to band together and form a 401(k) plan covering the employees of the several employers.

Increase in the 10% cap for automatic enrollment safe harbor after the first plan year
Prior to the SECURE Act, employers could set default rates for automatic enrollment 401(k) plans that were capped at 10%. Effective for plan years beginning after Dec. 31, 2019, the SECURE Act caps the default rates for automatic enrollment 401(k) plans as follows:

  • 10% during the employee’s first year of participation, and
  • 15% during the employee’s second and subsequent years of participation.

Increase in the credit limitation for small-employer pension start-up costs
Prior to the SECURE Act, a small business could claim a credit of 50% of the costs of starting qualified plan, not to exceed $500 in the first taxable credit year and each of the two succeeding credit years. Effective for taxable years beginning after Dec. 31, 2019, the SECURE Act increases the credit limit to the lesser of—

  • $500,
  • $250 for each employee of the eligible employer who is not a highly compensated employee [as defined in section 414(q)] and who is eligible to participate in the eligible employer plan maintained by the eligible employer, or
  • $5000.

Additional automatic enrollment credit
Effective for taxable years beginning after Dec. 31, 2019, the SECURE Act provides a $500 credit per year to encourage employers to provide for automatic enrollment in new 401(k) and SIMPLE plans. This credit is available for three credit years described above.

Qualified employer plans prohibited from making loans through credit cards and other similar arrangements
Prior to the SECURE Act, a 401(k) plan could issue credit cards permitting plan members to take loans from their 401(k) account. Effective Dec. 20, 2019, 401(k) loans may no longer be made via credit cards or similar arrangements. These 401(k) credit cards could lead to excessive use of 401(k) plan loans: Since any amounts charged on these 401(k) credit cards could be considered 401(k) distributions, many taxpayers who have utilized a 401(k) credit card may not have realized the tax consequences for failing to pay it back.

Qualified cash or deferred arrangement plans must allow long-term employees working more than 500 but less than 1,000 hours to participate
Prior to the SECURE Act, an employer could prohibit part-time employees working less than 1,000 per year from participating in the employer’s 401(k) plan. Effective for plan years beginning after Dec. 31, 2020, employers may no longer prohibit part-time employees working less than 1,000 per year who have completed one year of service, or three consecutive years of at least 500 hours of service, from participating in the employer’s 401(k) plan.

Plans adopted by the filing due date to be treated as in effect as of the close of the taxable year
Prior to the SECURE Act, a pension, profit-sharing, or annuity plan must have been adopted by the last day of the taxable year to which it applies. Effective for plans adopted for taxable years beginning after Dec. 31, 2019, by the filing due date (including extensions), the employer may elect to treat the plan as having been effect as of the last day of the taxable year.


Mark. H. Levin, CPA, MS (taxation), was previously the tax manager for Anchin, Block & Anchin, LLP and an adjunct assistant Professor in the York College/CUNY department of accounting.  He has worked in the field of public accounting since 1961 and has specialized in taxes since 1972.  He is a member of the AICPA and NYSSCPA. He is past chair of the NYSSCPA’s New York, Multistate, and Local Taxation Committee and has been an active member since 1986.  Mr. Levin previously chaired the sub-committee on Relations with New York City.  He has served a member of the NYSSCPA's Tax Division Oversight Committee and was a member of both the New York State Department of Taxation and Finance Commissioner's Advisory Council and the New York City Finance Commissioner's Advisory Council.

 
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