SECURE Act Impacts Retirement Plan Provisions
By Ted Ginsburg, Director, Tax & Business Services
On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (HR 1865). This bill includes the terms of the Setting Every Community Up for Retirement Enhancement, otherwise known as the SECURE Act. The SECURE Act impacts many areas of employee benefit program taxation. Following are the highlights of some of the key provisions, with effective dates.
Impact on Individuals
Required minimum distributions from tax-qualified retirement programs can now begin on April 1 of the year after the participant attains age 72, instead of age 70 ½. This applies to participants who attain age 70 ½ after December 31, 2019, and applies to both qualified plans and individual retirement accounts (IRAs).
Individuals can now contribute to an IRA at any age; prior law prohibited individuals from contributing after age 70 ½. The new rule is effective for taxable years beginning after December 31, 2019.
Non-spousal beneficiaries of deceased participants must now completely withdraw account balances by the end of the tenth year following the participant’s death. This applies to both qualified plans and IRAs, and has the effect of ending the “stretch IRA” methodology of deferring distributions to non-spousal beneficiaries. This is effective for deaths after 2019.
Participants can take a penalty-free withdrawal of up to $5000 from a retirement program (including IRAs, 403(b) plans, 457 plans and 401(a) plans) during the one-year period following the birth or adoption of a child. The distribution will not be subject to the 10% excise tax for early distributions. This provision is effective for distributions made after December 31, 2019; plan amendments will be required.
Pension plans, money purchase pension plans and governmental 457(b) plans may now allow participants to take in-service distributions beginning at age 59 ½, instead of the current 70 ½. This will be effective for plan years beginning after December 31, 2019; plan amendments will be required.
Impact on Employers/Plan Sponsors
The tax credit available to small employers who start a tax-qualified retirement plan has been increased from $500 to a maximum of $5,000 (depending on the number of employees). This change will be effective for employer taxable years beginning after December 31, 2019.
Small employer 401(k) plans that begin to use automatic participant enrollment will be entitled to a $500 per year tax credit for three years. This provision will be effective for employer taxable years beginning after December 31, 2019.
For 401(k) or 403(b) plans that use automatic enrollment and escalation, the escalation percentage is increased from 10% to 15% of compensation for years after the first year in which a participant is enrolled; the first year of enrollment percentage cannot exceed 10%. This provision will be effective for employer taxable years beginning after December 31, 2019; plan amendments will be required.
401(k) plans will no longer be required to provide annual “safe harbor notices” to participants, although newly enrolled participants will be required to receive a notice. This will be effective for plan years beginning after December 31, 2019.
Non-collectively bargained 401(k) plans will need to allow employees who have either one year of service (1,000 hours) or three consecutive years of 500 hours of service to participate in the plan. This will be effective for plan years beginning after December 31, 2020; plan amendments will be required.
Penalties for failure to file information returns increase by a factor of 10:
- Failure to file an IRS Form 5500 (annual report)—from $25 per day to $250 per day, with a maximum of $150,000 (increased from $15,000).
- Failure to file the registration statement identifying separated deferred vested participants—from $1 per participant to $10 per participant, with a maximum of $50,000 (increased from $5,000).
- Failure to provide withholding notices—from $10 to $100 per failure with a maximum of $50,000 (increased from $5,000).
- Failure to file required notification of changes in a plan’s registration information increase from $1 per day to $10 per day, with the maximum penalty of $10,000 (increased from $1,000).
These changes are applicable to documents required to be provided after December 31, 2019; therefore, they apply to 2019 calendar year returns.
The above is a brief summary of some of the most important sections of the SECURE Act as pertains to Marcum clients.
Employers may have to make amendments to their plan documents and employee communications to allow participants to take advantage of these changes, many of which take effect in 2020.
As the penalty amounts for non-filing have significantly increased, it is imperative to consult your Marcum tax professional to ensure that all required filings are made.
Marcum’s compensation and benefits advisors will provide you with more detailed information and evolving details arising from the SECURE Act’s enactment.