Retirement Plan Changes and Updates
The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was recently included in the Further Consolidated Appropriations Act, 2020 (HR 1865). This Act was signed by the President on December 20, 2019. The SECURE Act addresses several retirement plan changes and updates, many of which are effective in 2020. Below is a summary of some of the key changes.
Age for Required Minimum Distributions (RMDs):
Prior to 2020, an individual had to take RMDs by April 1 following the year the individual turned 70 ½. The SECURE Act bumps up this minimum age to 72. This rule is effective for individuals turning 70 ½ after December 31, 2019.
The act eliminates the 70 ½ age limit for contributions to an IRA account. It also increases the cap for auto enrollment contributions in an employer-sponsored retirement plan from 10% to 15%.
The SECURE Act has put a cap on the amount of time a beneficiary has to make distributions out of a non-spouse inherited IRA. Before the Act, distributions could be paid out over the beneficiary’s lifetime. This is often referred to as a “Stretch-IRA.” The beneficiary will now be required to have all distributions completed by the end of the 10th calendar year after death. This provision is effective for inherited IRA’s after December 31, 2019.
Under prior law, part-time employees who do not provide at least 1,000 hours of service in a year could be excluded from being able to make plan contributions under current law. Under the SECURE Act, even if the part-time worker does not satisfy the plan’s regular eligibility rules, the long-term part-time worker must be permitted to make contributions to the plan if they have completed three consecutive 12-month periods of employment and have at least 500 hours of credited service in each of those periods. This rule is effective for plan years beginning after December 31, 2020.
Tax Credits for Small Employers:
A tax credit has been established for small employers who set up retirement plans. The credit can be as much as $5,000 per year for the first three years. Additional credits are available for up to three years for new plans that include auto-enrollment. These changes are effective for tax years beginning after December 31, 2019.
Plan participants of defined contribution plans will now receive an estimate of the amount of monthly income the participant’s account balance would provide in retirement if paid as an annuity. This provision is effective for benefit statements furnished more than one year after applicable DOL guidance is issued.
Form 5500 Penalties:
Filing Form 5500, Annual Return/Report of Employee Benefit Plan, late will be a little more costly under the SECURE Act. The Act increases the potential penalty to $250 per day if filed late, not to exceed $150,000. If the Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, is filed late, a $10 per participant per day penalty could be assessed up to $50,000. This increase is effective for returns required to be filed after December 31, 2019.
Qualified Birth or Adoption Distributions:
The SECURE Act allows for withdrawals from a retirement plan up to $5,000 per parent for use in a qualified birth or adoption penalty-free. The 10% early withdrawal penalty will not apply to these types of withdrawals.
529 Savings Plans:
Under the new law, a 529 plan may be used to pay up to $10,000 in certain student loan debt over the course of the student’s lifetime. The student loan cannot be from a related party (for example, a loan from a parent to a student). A 529 plan may also be used to pay for certain apprenticeship programs.
Want more information on how these new changes could impact you? Our trusted advisors at Melanson Heath are always available to assist you with any of your tax needs or questions.
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