The Setting Every Community Up for Retirement Enhancement Act (the “Act” or the “SECURE Act”), part of the Further Consolidated Appropriations Act, 2020 (the “Appropriations Act”) passed and signed into law on December 20, 2019 make significant changes to the Tax Code rules impacting benefit plans. Depending on how one counts the provisions, the Act and the Appropriations Act make well over thirty-five changes to the rules impacting various types of benefit plans. As is often the case with new Tax Code provisions, the full scope and implications of the provisions will not become completely clear until clarifying regulations are issued due to the limited statutory language. This article will focus on a few of the provisions that may be of interest to CPAs.
Provisions to Retirement Savings and Adoption of Retirement Plans
In order to help part-time employees save for retirement, the Act requires a Section 401(k) plan to allow an employee to make elective deferrals if the employee has worked at least 500 hours per year with the employer for at least three consecutive years, and has attained age 21 (a “long-term part-time employee”). The long-term part-time employee must be permitted to make deferrals no later than the earlier of (1) the first day of the first plan year beginning after the date on which the employee satisfied the age and service requirements, or (2) the date 6 months after the date on which the individual satisfied these requirements. The Act does not require long-term part-time employees to be eligible to receive employer contributions nor does time worked before 2020 count towards the required three year period.
Starting in 2020, employers can treat qualified retirement plans adopted after the close of a tax year, but before the due date of its tax return, as having been adopted as of the last day of the prior year. This will allow CPAs to accurately calculate the tax savings a business can achieve by the adoption of a new plan. The Act makes a similar change as part of the relaxation of the safe harbor plan rules that allow plans to automatically pass discrimination testing. Effective for the 2020 plan year, an employer can wait until thirty days before the end of the plan year to adopt a 3% of compensation non-elective safe harbor contribution feature or wait until the end of the succeeding plan year to adopt safe harbor status if the employer makes a 4% contribution.
The Act also increases the Section 45E business tax credits for small employer (less than 100 employees earning $5,000 in the preceding year) retirement plan startup costs 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 or (b) $5,000. The credit applies for up to three years, as does the new $500 tax credit for small employers who add an automatic enrollment feature for new hires. The Act repeals the prohibitions on contributions and deductions to traditional (i.e., non-Roth) IRAs for individuals who have reached age 70½.
Acceleration of Post-Death Required Minimum Distributions
Although the Act raised the age at which distributions are required to commence from retirement plans and IRAs to 72 from 70.5, the Act also requires these accounts to be distributed, and thus fully taxed, within ten years following the death of the participant unless the beneficiary is an exempt eligible designated beneficiary. Eligible designated beneficiaries are the surviving spouses, children who have not reached majority age, and designated beneficiaries who are disabled, chronically ill, or not more than ten years younger than the deceased participant or IRA account owner. Upon the eligible beneficiary’s death, any remaining portion of the original benefit must be distributed within ten years. This provision, effective for deaths after 2019, will substantially alter tax and estate planning for clients who had intended to defer taxation on plan and IRA benefits by arranging for distributions over the life expectancies of young nonspouse beneficiaries.
Penalty Free Withdrawals From Retirement and Other Accounts
The Act adds a new exception to the Tax Code Section 72(t) ten percent excise tax for distributions from retirement plans and IRAs by individuals under age 59.5 for a qualified birth or adoption distribution. A “qualified birth or adoption distribution” is a distribution that is made during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized. The maximum aggregate amount of a qualified birth or adoption distribution is $5,000, applied on an individual basis with respect to any birth or adoption. The Act also permits amounts distributed to be repaid.
The Act allows tax-free distributions from Tax Code Section 529 education plans to pay for fees, books, supplies, and equipment required for the designated beneficiary’s participation in a registered apprenticeship program. The Act also allows tax-free distributions from 529 plans to pay principal or interest on a qualified education loan of the designated beneficiary or a sibling of the designated beneficiary.
Other Tax Provisions
The Act substantially increases (by a factor of ten!) the Tax Code penalties for the late filing of retirement plan tax returns on Form 5500 and IRS Form 8955-SSA used to report and disclose terminated participants’ benefits to the IRS and Social Security Administration. The Appropriations Act repealed the Section 4980I excise tax on high-cost employer health plans, repealed the unrelated business income tax on qualified transportation fringe benefits, repealed the medical device excise tax and extended the paid family leave tax credit through 2020.
This article discusses only a few of the SECURE Act and Appropriations Act provisions. CPAs should review the entire SECURE Act and applicable provisions of the Appropriations Act to determine how clients will be impacted.