January 15, 2020

The SECURE Act is effective January 1, 2020

Here are the most important changes for employers sponsoring 401(k) plans and owners of IRAs:

No more “Stretch IRA” (with a few exceptions):

The Act changed the rules for how an IRA must be distributed after its owner dies. IRA owners with a date of death before January 1, 2020 could name a young person (e.g. a grandchild) as an IRA beneficiary and significantly extend the period in which IRA investments remain tax deferred. This is because required distributions from the IRA were based on the life expectancy of the grandchild beneficiary rather than the IRA owner.

Effective January 1, 2020, a named IRA beneficiary will be required to take taxable distributions by the end of a ten year period following the death of the IRA owner. The above rule does not apply to spouses, disabled beneficiaries, beneficiaries while they are minors or beneficiaries that are less than ten years younger than the IRA owner.

This rule change represents a dramatic shift in the taxation of IRAs and is a significant revenue generator for the U.S. Treasury (estimated at 16 billion dollars over the next ten years). A significant amount of time and thought has gone into estate planning involving IRAs, including “conduit” and other trusts to manage and preserve IRA assets for the benefit of young (and perhaps less disciplined) beneficiaries. Much of this planning may go out with the noisemakers and party favors of New Years Eve 2019. Anyone owning an IRA on January 1 should review their estate planning documents and contact legal counsel to discuss what changes need to be made.

IRA contribution age cap eliminate mandatory distribution age increased to 72:

The Act eliminates the cap on how long an IRA owner can make tax deductible contributions to an IRA. A taxpayer previously could not contribute after age 70 ½. The change is motivated by the fact that people are working longer (allowing continued contributions) and also by changes in life expectancy (requiring greater retirement savings). The Act also increases the age at which IRA owners are required to begin taking taxable mandatory distributions from age 70 ½ to age 72.

Employers can adopt 401(k) plans after end of year and still deduct:

Employers often sign 401(k) plans at the 11th hour before year-end in order to be able to contribute expected profits to the new plan and take a tax deduction for that year. The Act allows an employer to adopt a plan for a given year by the due date of the employer’s tax return for the year. Tax returns for partnerships and corporations are due on the 15th day of the third month following the end of the tax year and can be extended for an additional six months. This allows for a determination of company profits and a more reasoned decision to establish a 401(k) plan and take a deduction.

“Safe harbor” 401(k) plans simplified:

“Safe harbor” 401(k) plans allow employers to avoid complicated annual discrimination testing by making a flat percentage contribution or match for each eligible plan participant. The rules previously required employers give participants written notice 30 days before the beginning of a plan year in which an employer intended to make a safe harbor contribution. Under the Act, an employer can decide to make a safe harbor contribution anytime during the year up to 30 days before the end of the year. Additional time is afforded (up to the end of the following year) if the employer provides a higher flat percentage contribution (four percent instead of the three percent typically required). The new rule provides an employer more time and flexibility in the use of safe harbor contributions which will likely benefit both employers and employee participants.

Long-term part time employees required to be included:

Prior to the Act, an employer could exclude from plan eligibility any employee that worked less than 1000 “hours of service” in a year. Employers must now also include employees that work 500 or more hours of service in three consecutive years. Employers can still exclude the part time employees for various testing purposes, preserving certain plan design flexibility. The new rule provides retirement benefits to a class of employees that could be excluded.

Use of annuities by plan sponsor:

The Act provides a safe harbor for employers that include annuities as plan investments. The safe harbor protects employers from liability if an annuity provider fails and cannot provide promised annual payments to plan participants. The selection of an annuity by an employer is a fiduciary act that could give rise to liability absent the safe harbor. A separate provision within the Act allows a “plan to plan” transfer of annuities by departing participants, allowing qualified tax-free transfers of annuity contracts among plans.

Changes affecting 403(b) Plans:

The Act directs the Secretary of the Treasury to produce guidance relating to the distribution of 403(b) accounts from terminated plans. Under the guidance to be issued, a 403(b) account can be distributed in kind to a participant but maintained by a custodian on a tax-deferred basis until amounts are actually paid to the participant or beneficiary. The Act requires guidance be provided by the Treasury within six months of the date of the Act.

Required disclosure relating to lifetime income:

The Act requires that benefit statements provide what annual amount will be payable to a participant if the participant’s account balance is used to purchase an annuity. The statement must include the values for various forms of annuities including single life and joint and survivor annuities. The DOL is expected to provide model disclosure statements and assumptions that will protect employers from liability if used. Notices that require the lifetime income information must be distributed to participants at least once in a twelve-month period.

Multi-Employer Plans:

Effective in 2021, unrelated employers can join a pooled employer retirement plan. The Act eliminated the “one bad apple” rule that disqualified an entire plan if one employer did not take required actions. The Act also eliminated the requirement that employers be part of the same industry to participate in a pooled plan. Each employer remains responsible for choosing the pooled plan and for monitoring the plan’s fiduciary. The delayed effective date is likely related to on-going litigation involving Association Health Plans which are based on similar criteria. Employers contemplating the use of a pooled plan should contact legal counsel to discuss the risks and benefits of adopting such a plan.

Other changes:

The Act allows participants to make penalty-free withdrawals from retirement plans in the case of a birth or adoption.The Act expands 529 plans to cover costs associated with elementary, secondary, religious schools and homeschooling. The act increases penalties for an employer’s failure to timely file Form 5500.


The SECURE Act makes significant changes to the way in which 401(k) plans and IRAs are administered, held and distributed. If you are an employer that sponsors a 401(k) plan or you own an IRA, we encourage you to speak to your attorney about what changes to your plan or IRA will need to be made.

Contact Liam Healy at Kerr Russell at 313-961-0200 for questions or assistance on these regulatory changes or other business needs.

Liam K. Healy of Kerr Russell practice clients maintain compliance with state and federal tax laws that govern individuals and businessesLiam Healy focuses his practice on helping clients maintain compliance with the myriad of state and federal tax laws and regulations that govern individuals and businesses. He has a broad range of experience in business law and business tax matters including choice and formation of business entities, partnership and shareholder agreements, buy sell agreements, franchise agreements, mergers and acquisitions, business succession planning, real estate, tax free exchanges, non-profit organizations and tax audits. Liam has counseled business owner clients through every stage, from formation to the sale of the business.


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