News & Resources

SECURE Act Changes the Required Minimum Distribution Age from 70-1/2 to 72

On December 20, 2019, President Trump signed the "Setting Every Community Up for Retirement Enhancement Act of 2019" (the SECURE Act). The Act makes numerous changes to the law pertaining to retirement plans and IRAs.

Age 72 Start Date for Required Minimum Distributions. The SECURE Act changes the required beginning date for minimum distributions from retirement plans and IRAs from age 70½ to 72 for plan participants and IRA owners who reach age 70½ after December 31, 2019.

Age Limit For IRA Contributions Repealed. Prior to the Act, contributions (including nondeductible contributions) to "traditional" IRAs were prohibited after age 70½.  Starting with contributions for calendar year 2020, there is no longer an age limit. Note that contributions for 2019 still fall under old law. They can be made as late as April 15, 2020, but the taxpayer must be under age 70½.

Post-Death Required Minimum Distributions. Generally effective for distributions with respect to employees (or IRA owners) who die after December 31, 2019, the Act modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the Act, the general rule is that the remaining account balance must be distributed to designated beneficiaries within 10 years after the date of death. The following are generally exempt from these rules: spouses, children who have not reached majority age, beneficiaries less than 10 years younger than the account holder, and chronically ill or disabled beneficiaries.

401(k) Plan Eligibility Expanded to Part-Timers. Under the Act, non-collectively bargained 401(k) plans will be required to allow elective deferrals by employees who have completed more than 500 hours of service in each of three consecutive 12-month periods, but have not otherwise met the plan's service requirement for participation. This provision generally applies to plan years beginning after December 31, 2020.

Increased Cap on Auto Enrollment. Safe harbor plans with auto enrollment can increase the cap on automatically-rising payroll contributions from 10 percent (the former limit) to 15 percent of an employee's paycheck, while still giving employees an opportunity to opt out of the increase. The step-up is typically made annually and applies to plan years beginning after December 31, 2019.

Start-Up Tax Credit for Small Employers. Under the Act, companies with 100 or fewer employees are eligible for a start-up tax credit, which is 50% of the cost for establishing a qualified plan and communicating it to employees. The tax credit is available for the year of establishment and the following two tax years. Previously, the credit was limited to $500. The credit limit is now expanded to $250 per nonhighly compensated employee covered by the plan, and cannot be less than $500 nor more than $5,000. The increase is effective for tax years beginning after December 31, 2019.

Auto Enrollment Credit. The Act adds a new tax credit for small employers that amend their 401(k) plans to add automatic contribution enrollment, where elective deferrals are made by default unless employees opt out. The credit is $500 for the year in which the arrangement is added to the plan and for each of the following two years. The credit is effective for tax years beginning after December 31, 2019.

401(k) Safe Harbor Rules. The Act provides a few changes to the 401(k) rules which all relate to "safe harbor" plans. In general, safe harbor plans are plans that provide specified levels of matching or nonelective contributions in lieu of complex and costly nondiscrimination testing. The Act generally repeals the annual notification requirement. The Act also adds flexibility to the timing of the employer’s decision to adopt a safe-harbor provision for the year. These provisions are effective for plan years beginning after December 31, 2019.

Childbirth or Adoption Expenses. Under the Act, IRA owners and participants in defined contribution plans will be allowed, beginning in 2020, to make penalty-free withdrawals of up to $5,000 for qualified childbirth or adoption expenses.

Multiple Employer Plans. The Act allows unrelated small employers to band together to offer a single pooled retirement plan to their employees. Technically, this would be accomplished by joining a so-called "open" 401(k) multiple-employer plan (MEP). Historically, the creation and operation of a retirement plan has been somewhat cost-prohibitive for small employers. The new provision solves this problem in that it will result in reduced costs and administrative duties of each employer. The new provision will generally apply to plan years beginning after December 31, 2020.

Extended Deadline for Adopting New Plans. In general, a qualified retirement plan must be adopted no later than the end of the first tax year in which the employer will offer a plan to employees and claim deductions for contributions. The only exception historically has been the SEP, which can be adopted up until the extended due date of the employer’s income tax return for the year in question. The SECURE Act extends the deadline for qualified plans. Effective for plans adopted for tax years beginning after December 31, 2019, a qualified plan may now be adopted by the extended due date of an employer's return for the year in question. This will allow an employer to determine its profits for the year before it decides to adopt a plan and make an employer contribution for the year.

Consolidated Form 5500 Reports and Penalties. The Act directs the IRS and DOL to revise Form 5500 so that groups of defined contribution plans can file a single, consolidated report. Consolidated filing will be permitted for plans that have the same trustee, same named fiduciary, same plan administrator, same plan year, and same investments or investment options. These changes are to be implemented no later than January 1, 2022 and will apply to returns and reports for plan years beginning after December 31, 2021.

Penalties. In addition, penalties have increased for forms and notices due after 2019 as follows:
  • Failing to timely file Form 5500 can be assessed up to $250 per day, not to exceed $150,000 per plan year. Before the SECURE Act, the penalty was $25 a day, not to exceed $15,000.
  • Failing to file Form 8955-SSA can be assessed up to a daily penalty of $10 per participant, not to exceed $50,000, up from a daily penalty of $1 per participant, not to exceed $5,000.
  • Failing to provide income tax withholding notices can be assessed up to $100 for each failure, not to exceed $50,000 for the calendar year, up from $10 for each failure, not to exceed $5,000.
The Department of Labor's Delinquent Filer Voluntary Compliance ("DFVC") Program remains in effect and makes it possible to reduce Form 5500 late filing penalties, so long as the employer takes advantage of the program before the DOL notifies the employer that the report is late.

Use of Credit Cards. The SECURE Act prohibits qualified plans from making loans to participants through credit cards or similar mechanisms. This restriction is effective December 20, 2019.

IRAs and Non-Tuition Fellowships/Stipends. Effective with tax years beginning after December 31, 2019, non-tuition fellowships and stipends are treated as "compensation" for purposes of IRA/retirement plan contributions.

Section 529 Plans. The Act expands 529 plans to allow distributions for registered apprenticeship programs. In addition, the Act allows up to a lifetime maximum of $10,000 to pay certain student loans. This provision applies to distributions made after December 31, 2018.