Everything We Know About the SECURE Act of 2019

As we all know, 401(k) plans have replaced nearly all pension plans. A 401(k) plan is a type of profit-sharing or stock bonus plan to which participants can choose to have part of their compensation contributed on a pre-tax basis. This year we are going to see a change in laws and regulations for 401(k) plans. The House has already passed the SECURE Act of 2019 (Setting Every Community Up for Retirement Enhancement), which is geared towards enhancing retirement security. As we anticipate the Senate to get on board, we will focus on the potential modifications from the SECURE Act that we know.

One of the updates is the potential eligibility of part-time employees who have served for at least three years. Part-time employees working over 500 hours a year could be eligible for your company’s 401(k) plan. There is also an expectation that the SECURE Act will lessen the burden of setting up a 401(k) plan for smaller businesses.

With the approval of the SECURE Act, we may also see a rise in the required minimum distribution age limit. Currently, when you reach the age of 70 ½ you are required to take a distribution from your retirement account. Due to study’s showing longer life spans and careers, the age limit would rise to 72 starting in 2020. Another change if the Act is passed is the allowance of a qualified birth or adoption distribution without the ten percent penalty.

The SECURE Act creates opportunities for 401(k) plans with the option of purchasing annuities. Annuities are investments that provide regular disbursements over a period of time in exchange for an upfront, lump-sum payment. With people living longer, this can be an alternative to help prevent outliving your savings.

Perhaps one of the biggest effects of the SECURE Act will involve accelerated distributions from an inherited IRA other than surviving spouse, disabled or chronically ill, or child of the owner. As the law stands now, when you inherit an IRA you can take a lump sum amount or draw on the IRA over your expected lifetime. Under the SECURE Act, you will be required to withdraw the entire amount over the next ten years. This means a person, other than the ones mentioned above, who inherits an IRA will be paying taxes on larger sums of money a lot sooner while simultaneously having to decide how to use/reinvest the distributions received.

A few other potential changes are increased penalties for failure to file Form 5500 (Employee Benefit Plan Annual Report), simplification of safe harbor 401(k) rules, small employer automatic enrollment credit, and prohibiting 401(k) plans from making loans through credit cards and other similar arrangements.

We will be keeping a close eye on what the Senate has in store for the SECURE Act. For help understanding this and its potential impact on you or your business, please contact your HORNE tax advisor.