SECURE Act Finally Becomes a Reality

December 23, 2019

After some delay and with great anticipation, the Setting Every Community Up for Retirement Enhancement (SECURE) Act has been signed into law. The bill was approved by the House of Representative earlier this year but stalled in the Senate until it was passed last week as part of the Further Consolidate Appropriates Act 2020, a spending package that funds the federal government. The delay caused some frustration with its proponents; however, practitioners would argue that it was no real delay at all, as retirement legislation typically moves at a snail’s pace.

Media outlets and politicians have declared the SECURE Act sweeping and revolutionary. While such proclamations are debatable, there are certain provisions that could be quite impactful depending on an individual’s or organization’s particular situation. Below are some of the most prominent provisions along with Aronson’s Take on their importance:

  • Final elimination of the Affordable Care Act’s Cadillac Tax.
    Aronson’s Take:
    This is nothing more than window dressing, as these provisions were delayed multiple times and never expected to come to fruition.
  • Increasing the age for required minimum distributions from age 70 ½ to 72.
    Aronson’s Take: This is a long-awaited provision that has ultimately been in the works for many years.
  • Elimination of the age 70 ½ cap on IRA contributions.
    Aronson’s Take: This is arguably the most sensible provision of the entire legislation and clearly reflects an aging population that is working later and later in life.
  • Penalty-free withdrawals up to $5,000 from defined contribution plans for child birth and adoption.
  • Extension of the due date by which qualified retirement plans must be adopted for the tax year. The current, long-standing provision requires that plans be adopted by the last day of the plan year. Plans can now be adopted by the due date of the tax return, including extensions.
    Aronson’s Take: This is a very helpful tool for taxpayers that don’t realize they have significant taxable income until their tax return is nearing completion.
  • Elimination of the “stretch IRA” for beneficiaries, not including surviving spouses and certain other beneficiaries.
    Aronson’s Take: Additional tax revenue was likely to be included somewhere and this provision is one of those places. The “stretch IRA” is a long-standing estate planning tool that will be sorely missed. Estate planners and their clients will be most affected by this provision.
  • Special disaster rules for retirement accounts.
    Aronson’s Take:
    This continues the trend of allowing individuals easier access to their retirement funds in the event of a disaster.
  • Increase in tax credit for newly created employer plans.
    Aronson’s Take: Plan start-up costs are viewed as a barrier to establishing plans, particularly for small employers. Any additional relief is welcomed.
  • Elimination of the “one bad apple rule” for multiple employer plans (MEPs).
    Aronson’s Take: This provision is designed to make it much easier for unrelated organizations, especially smaller ones, to join together in pooled retirement plan arrangements and is viewed by many as the next great thing for retirement plans. It will be very interesting to see if these arrangements take hold as hoped.
  • Changes to the safe harbor 401k plan rules when the safe harbor requirement is satisfied via employer contributions.
    Aronson’s Take:
    This is a practical provision that employers will find very useful when considering a safe harbor 401(k) contributions.
  • Multiple provisions designed to make lifetime income options more attractive to employer sponsors of defined contribution styled plans like 401(k) and 403(b) plans.
    Aronson’s Take: Some in the retirement planning space strongly believe that the lack of lifetime income options in defined contribution styled plans is a significant barrier to participants’ ability to save. Not all of us agree.

This is not an exhaustive list of all of the SECURE Act’s provisions. Additionally, it is expected that the Senate will likely add some provisions from its version of the legislation. The details of the provisions are preliminary and guidance from the Internal Revenue Service (IRS) and Department of Labor (DOL) is expected, hopefully soon.

Taxpayers should take great care in taking action prematurely before greater details are available.

 To learn more about the impact of the SECURE Act, please contact Mark Flanagan of Aronson’s Compensation and Benefits Practice at 301.231.6257.