Understanding the SECURE Act of 2019

E*TRADE Securities


On December 20, 2019, as part of the bi-partisan spending bill, the SECURE Act of 2019 (Secure Act or Act), was signed into law. This was the first major overhaul of retirement-related legislation since 2006. In this article, we’ll summarize some of the key provisions of the law and discuss what they might mean for you.

Every person’s situation is unique, and because E*TRADE from Morgan Stanley is not a tax advisor and does not provide tax advice, we encourage you to talk with your tax advisor about the SECURE Act and how it will affect federal and state income tax reporting for activities related to your retirement accounts.

What is the SECURE Act?

The Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, includes several amendments to the Internal Revenue Code of 1986, as amended (the Code) focusing on Individual Retirement Accounts (IRAs) and qualified retirement plans. The changes to the Code impact the processing and tax reporting of certain transactions in these accounts.

Changes in the SECURE Act for IRA account holders

Here are five of the principal changes potentially impacting IRA account holders:

  1. The required minimum distribution age was raised from 70½ to 72.

    For individuals turning 70½ after December 31, 2019, the age to begin required minimum distributions (RMDs) has increased to 72. This means that these individuals do not have RMD obligations until April 1 of the year after they turn 72.

    The required minimum distribution rules remain unchanged for those who turned 70½ prior to January 1, 2020.
  2. The maximum contribution age has been repealed.

    Individuals with earned income can continue making contributions to any IRA beyond the age of 70½. Individuals who want to continue to make contributions beyond this age should discuss their situation with their tax advisor as this can have an impact on RMD requirements or benefits for qualified charitable donations.
  3. Penalty-free withdrawals for childbirth or adoption related expenses are permitted if certain requirements are met.

    The SECURE Act permits penalty-free withdrawals of up to $5,000 from qualified defined contribution plans, 403(b)s, government 457(b)s, and IRAs for costs related to the birth, or legal adoption, of a child. Distributions must be made within the first year following the birth (or adoption of) the child and are not subject to a penalty so long as: 1) the aggregate distributions from all eligible accounts do not exceed $5,000; and 2) the account holder satisfies the applicable reporting requirements. For example, to claim exemption from the 10% early-withdrawal penalty, the account holder must report the child’s name, age, and taxpayer identification number on the tax return.

    If the distribution is made from a qualified retirement plan like a 401(k), it is not subject to the mandatory 20% withholding. Furthermore, the account holder can repay the distribution to the plan on a later date and have the repayment treated as a 60-day rollover. The 60-day rollover treatment also applies to repayments for distributions taken from an IRA. This applies for distributions after 2019.
  4. The definition of earned income for students has been expanded.

    To make deductible contributions to a traditional IRA, an individual must have earned income. The SECURE Act expands the definition of earned income to cover stipends to aid the individual in the pursuit of graduate or postdoctoral study.

    This means that starting in 2020, individuals who receive taxable fellowships or grants in pursuit of higher education can make deductible contributions to a traditional IRA.
  5. Required distribution rules have been modified for beneficiaries.

    The SECURE Act modifies distribution requirements for beneficiaries of retirement account holders who die after December 31, 2019. These accounts must now be distributed within 10 years following the account holder’s death unless the account holder is an eligible designated beneficiary (EDB). An EDB includes:

    • The account holder's surviving spouse
    • The account holder's child who has not reached the legal adult age
    • A chronically ill individual
    • A disabled individual
    • Any other individual who is not more than 10 years younger than the account holder

    Benefits payable to EDBs must be distributed over the life or life expectancy of the EDB. If an EDB is a child, once that child reaches the age of majority, the 10-year distribution applies to the child’s benefit. Similarly, when an EDB dies, the EDB distribution rules do not apply; that is, the EDB’s beneficiary is subject to the 10-year distribution rules.

Changes in the SECURE Act for employers and plan sponsors

The SECURE Act also amends the Code as it relates to employers and sponsors who offer qualified retirement plans, including 401(k)s. Here are a few of the changes:

  1. The Act amends the deadline to establish qualified retirement plans.

    For plans established after December 31, 2019, the SECURE Act allows an employer to adopt a qualified plan effective in the current year (after the close of the taxable year), as long as it is adopted before the deadline for filing the employer’s tax return for the effective taxable year.

    This means that an employer who establishes a plan in 2021, prior to the due date of the employer’s 2020 tax return (including extensions), can elect to treat 2020 as the adoption year of that plan. However, an employer cannot elect to treat a plan established in 2020 as adopted in 2019 because this was not permitted for plan years prior to 2020.
  2. The start-up cost credit for small employer retirement plans has increased.

    The tax credit available for small employers who establish a retirement plan is increased starting with the 2020 tax year. The credit is available for small employers who incur qualified expenses to establish a qualified retirement plan that covers at least one non–highly compensated employee. Qualified start-up costs include expenses connected with the establishment or administration of a plan or with retirement-related education for employees.

    A small employer who qualifies can claim a credit up to $5,000 (the credit is the greater of $500 in total or $250 for each eligible employee up to $5,000) in total for the first three years the plan is in effect.
  3. Small employers can get an increased tax credit for setting up or adding automatic enrollment to a plan.

    Starting with 2020, employers with no more than 100 employees, receiving annual compensation of $5,000 or more, can claim a tax credit of $500 a year (for up to three years) provided they include automatic contributions to participants’ retirement accounts for each eligible year.
  4. 401(k) plans must cover long-term part-time employees.

    A 401(k) plan must allow an employee to make elective deferrals if the employee has worked at least 500 hours per year for the employer for at least three consecutive years and is at least 21 years old by the end of the third consecutive year. Once these requirements are met, the employer must allow the eligible employee to participate in the plan by the earlier of the first day of the following plan year or six months after the date which the eligibility requirements are satisfied. Employers do not have to make employer contributions for part-time employees qualifying for inclusion.

    This rule is effective for years beginning after December 31, 2020, but service prior to then does not need to be considered. This delay is intended to provide time for employers to make the necessary adjustments.
  5. The maximum default rate for automatic contributions has been increased.

    Effective after December 31, 2019, the maximum default rate for automatic employee contributions to 401(k) plans has increased from 10% to 15% for years after the plan’s first year (10% cap on the participant’s first year in the plan).
  6. The Act updates the penalties for failure to complete annual plan reporting or required notifications.

    The penalties for plan administrators who do not complete certain reporting requirements were modified as follows:

    Penalty type Penalty amount
    Failure to file Form 5500 (Annual Return/Report of Employee Benefit Plan) $250 for each day late (maximum $150,000)
    Failure to file registration statement for deferred vested benefits $10 per participant for each day late (maximum $50,000)
    Failure to file notification of change $10 for each day late (maximum $10,000)
    Failure to send withholding notice $100 for each failure (maximum $50,000)
  7. New rules have been established for pooled employer plans.

    For plan years beginning after December 31, 2020, the SECURE Act will permit unaffiliated employers to adopt and participate in open multiple employer plans. There will be implementing guidance issued by the IRS in the future.

Have questions?

Want to know more about the SECURE Act and your accounts? Call us anytime at 800-ETRADE-1 (800-387-2331) or contact your dedicated Financial Consultant directly. We’ll be glad to help.

What to read next...

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