Legislative Updates, SECURE Act of 2020

Scott Campbell |

The SECURE Act was included in a spending bill that was passed at the deadline to keep the government funded.

The Provisions:

Required Minimum Distribution age increases from 70½ to 72 for participants who turn 70½ in 2020.  unfortunately, participants who turned 70½ in 2019 and have already begun taking minimum distributions should continue.

Distributions from a 401(k) or IRA up to $5,000 per parent, penalty free upon the birth or adoption of a child.  The Act permits an individual to take a “qualified birth or adoption distribution” of up to $5,000 from a 401(k), 403(b) or an IRA.  The IRS 10% early withdrawal penalty is waived, and the distributions can be repaid as a rollover contribution to a 401(k), 403(b) or IRA.

The Act allows workers to make IRA contributions as long as they are working.  Previously IRA contributions could not be made after age 70½. 

College 529 Savings plan funds can be used to pay down student debt, up to $10,000.

Long term, part time workers will be able to join their company’s 401(k) plan.  Previously plans with a one-year eligibility waiting period, require employees to work more than 1,000 hours per year in order to be eligible to join.  The Act requires that employees who work 1,000 hours in one year, or 500 hours over 3 consecutive years become eligible for the plan.

Inherited IRA distributions must generally be taken within 10 years.  Previously if someone inherited an IRA or 401(k), they could “stretch” the required minimum distributions over their life expectancy.  The Act requires that IRAs inherited from original owners who passed away on or after January 1, 2020, beneficiaries must withdraw the entire account within 10 years following the death of the owner.  Exceptions to the 10-year rule include assets left to surviving spouse, minor child, disabled or chronically ill beneficiaries, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.

Small business owns can receive a tax credit for starting a retirement plan, up to $5,000.  The Act provides a start-up retirement plan credit for smaller companies equaling $250 per non-highly compensated employee eligible to join the plan.  The minimum credit is $500, and the maximum is $5,000.  The credit applies to small employers with up to 100 employees over a 3-year period beginning after December 31, 2019 and applies to SEP, SIMPLE, 401(k) and profit sharing plans.  If the plan includes automatic enrollment, an additional credit of up to $500 is now available.

Small business owners will find it easier to join together to offer a retirement plan.  The Act facilities the adoption of open multiple employer plans (MEPs) by allowing completely unrelated employers to participate in a MEP and eliminates the IRS’s “one bad apple” rule, which stipulates that all employers participating in a MEP may face adverse tax consequences if one employer fails to satisfy the tax qualification rules for the MEP.

Savings cap for auto enrollment and auto increase in 401(k) plans has increased from 10% to 15%.

Allows Lifetime Income Investments to be distributed from the 401(k) plan.  The retirement income options would be portable. 

Increases transparency into retirement income with Lifetime Income Disclosure statements.  These statements would show the monthly income payments would potentially be received if an annuity was purchased.