10 key provisions of the SECURE Act: significant changes to retirement plans

On December 20, 2019, the President signed into law the Setting Every Community Up for Retirement Act (SECURE Act). The new legislation contains the most significant changes to retirement plans that we have seen in years. This article explores 10 key provisions of this new law.

Expansion of 529 Plans: Distributions from 529 plans are allowed for registered apprenticeships and for up to $10,000 of lifetime qualified student loan repayments. Repayments of student loans can be made to the siblings of the designated beneficiary. Effective for distributions made after December 31, 2019.

Stretch IRAs: Effective for distributions made for employees or IRA owners who die after December 31, 2019, the designated beneficiary is required to distribute all funds within ten years of the death of the account holder. This applies whether the employee or IRA owner dies before or after their required beginning date for receiving distributions. Thankfully there are exceptions that allow the distributions to be made over the life of the designated beneficiary. These exceptions are: the surviving spouse, a minor child, a chronically ill individual, and any other person who is not more than ten years younger than the employee or IRA owner.

Credit for Plan Start-up Costs: Under pre-Act law, a small employer could claim a credit for the costs of setting up a plan equal to the lesser of 50% of the cost or $500. For tax years beginning after December 31, 2019, the new law increases the credit by changing the credit to the greater of: (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan, or (b) $5,000. The credit is allowed for three years.

Automatic Enrollment Credit: This credit is in addition to the Start-up credit. It provides a $500 credit for employers who convert an existing plan into one that has an automatic enrollment feature. The credit can be taken over three years. Effective for tax years beginning after December 31, 2019.

Repeal of maximum age for making IRA contributions: Under pre-Act law taxpayers were not allowed to make IRA contributions once they reached age 70 ½. The age restriction has been repealed for contributions made for tax years beginning after 2019. Taxpayers over 70 ½ can make qualified charitable distributions (QCD) of up to $100,000 each year directly from their IRA to the charity. Under the new law, taxpayers who have reached age 70 ½ must reduce their QCD to the extent of their IRA contributions.

Fellowships and stipends: Non-tuition fellowships and stipends which are taxable are now treated as taxable compensation for the purpose of making IRA contributions. Effective for tax years after 2019.

More part-time employees can participate in 401(k) plans: Under previous law, an employer could exclude employees who did not work more than 1,000 each year. The new law allows employees to participate who have worked for the employer for at least 500 hours for three consecutive years and who are at least 21 years of age.

Births and Adoptions: Penalty-free distributions can be made for qualified births and adoptions. The distribution must be made after December 31, 2019, and within one year of the birth or adoption. The maximum amount is $5,000 per taxpayer or $10,000 for joint filers.

Required Beginning Date for distributions: The Required Beginning Date (RBD) has been age 70 ½. Under the new law, the RBD for IRA owners is age 72. Effective for distributions required to be made after December 31, 2019.

Kiddie Tax: The Kiddie tax applies to children under the age of 19 or under the age of 24 who are full-time students. Before the Tax Cuts and Jobs Act (TCJA), unearned income above certain thresholds were taxed at the rate of the parents. The TCJA imposed tax at the rates of trusts and estates which are much higher. The new law repeals the Kiddie Tax provisions that were part of the TCJA. This repeal is effective for tax years beginning after 2019, however, taxpayers can elect to apply the new law for 2018, 2019, or both years.

In addition to the passage of the SECURE Act, tax practitioners need to be aware of two other important events that also occurred in December. First, the Extenders bill was passed which retroactively extends many expired provisions. Second, the Treasury issued final regulations on Qualified Opportunity Zones. Together all these new laws give accountants plenty to talk about with clients this busy season.