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The SECURE Act provisions and related FAQs

The Setting Every Community Up for Retirement Enhancement Act, commonly known as the SECURE Act (Act), is a historic piece of retirement legislation approved by Congress. It’s part of a funding bill approved by the House and Senate and subsequently signed into law by the president on Dec. 20, 2019.

This important retirement legislation reflects policy changes for employer-sponsored retirement plans, individual retirement accounts (IRAs), and 529 college savings accounts.

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Group retirement plans

For changes related to the SECURE Act provisions, the deadline to make amendments to plans is the end of the 2022 plan year, or 2024 for government and collectively bargained plans. However, many of the provisions were effective January 1, 2020.

Defined contribution plans

New provisions What it means Timing
Fiduciary safe harbor for selecting a lifetime income (annuity) provider

Fiduciaries are offered an optional safe harbor to satisfy the prudence requirement when selecting insurers for a guaranteed retirement income contract.

The safe harbor protects plan fiduciaries from liability for any losses that may result to the participant or beneficiary if the insurer is unable to satisfy its financial obligations under the terms of the contract.

Portability of lifetime income options Plans can make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan, IRA of lifetime income investments, or qualified plan distribution annuity if a lifetime income investment is no longer offered under the plan. Plan years after Dec. 31, 2019.
Plans prohibited from making loans through credit cards Distribution of plan loans through credit cards or similar arrangements are no longer allowed. Immediately
Small employer start-up tax credit increased

The tax credit for small employers starting up a plan is increased by changing the calculation of the dollar amount limit. For each of the first three years, it’s the greater of:

  • $500 or
  • The lesser of
    • $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan or
    • $5,000
Plan years after Dec. 31, 2019
Small employer tax credit for adopting automatic enrollment feature A new tax credit for small employers implementing automatic enrollment. This is in addition to the plan start-up credit. It’s $500 annually for 3 years. Plan years after Dec. 31, 2019

FAQ: What are the finer points of the tax credits?

The Act encourages small employers to start new plans and also encourages new or existing plan sponsors to adopt an automatic enrollment feature.

  • The start-up tax credit could be up to $5,000 for up to 3 years.
  • The addition and use of the auto-enrollment feature allows a credit of up to $500 for the earliest 3-year period that begins when the employer first adopts it (and can be combined with the start-up credit for new plans).

A small employer typically means one with no more than 100 employees who received at least $5,000 in compensation. The tax credit cannot exceed 50% of the qualified start-up costs paid or incurred by the small employer. Qualified start-up costs means expenses associated with the establishment or administration of a plan or the retirement-related education of employees with respect to such plan. Each employer in a multiple employer plan (MEP) may use the 3-year EACA credit separately from the other employer plans.

New provisions What it means Timing
Increases the automatic escalation cap from 10% to 15% For certain safe harbor QACA 401(k) plans, the 10% auto-escalation cap applies for the first year the employee is automatically enrolled and then increases to 15% after that year. Plan years after Dec. 31, 2019
Combined Form 5500 reporting permitted for defined contribution (DC) plans of controlled groups Consolidated 5500 filings are allowed for DC plans with the same trustee, named fiduciary (or fiduciaries), and plan administrator, using the same plan year, and providing the same investments or investment options. Plan years after Dec. 31, 2021
Allows for a new type of multiple employer plan (MEP) known as a pooled employer plan (PEP) Relaxes multiple employer plan rules to permit the pooling of two or more unrelated employers. Also eliminates the rule that disqualifies the entire MEP if one employer violates the qualification rules (also known as the "one bad apple" rule). Plan years after Dec. 31, 2020

FAQ: What is a PEP?

A pooled employer plan (PEP) provides an opportunity for two or more unrelated employers to band together and offer a single retirement plan to their employees. A PEP is expected to be an easy way for businesses to start a retirement plan, and maybe most importantly, help small businesses manage fiduciary liability while looking to reduce administrative burden.

Until the SECURE Act’s enactment, only employers that shared an affiliation with each other could participate in the same multiple employer plan (MEP). The SECURE Act removes this requirement, allowing employers with no affiliation or relationship to participate in a PEP.

New provisions What it means Timing
Required eligibility for long-term, part-time employees

Employers maintaining a 401(k) plan (excluding collectively bargained plans) will be required to have two sets of eligibility requirements for purposes of elective deferrals where employees must complete either:

  • One year of service working 1,000 hours or more, or
  • Three consecutive years of service working at least 500 hours each year.

The employer may elect to exclude the latter employees from testing under both the nondiscrimination and the coverage rules.

Years of service beginning before January 1, 2021 may be excluded for eligibility purposes.

For vesting purposes, per current guidance (Notice 2020-68) if an employee enters the plan using three years of consecutive service with at least 500 hours each year, then all vesting computation periods accrued before and after January 1, 2021 are considered for vesting using 500 hours as a year of vesting service.

Plan years after Dec. 31, 2020
Lifetime income disclosure on annual DC statements Benefit statements to DC plan participants to include a lifetime income disclosure at least once during any 12-month period. It will show the monthly income the participant could receive if the total account balance were used to provide lifetime income streams through (1) a qualified joint and survivor annuity and (2) a single life annuity. 12 months after Department of Labor (DOL)-issued regulations
Changes for nonelective 401(k) safe harbor contributions

Eliminates the safe harbor notice requirement for plans that satisfy safe harbor through the use of nonelective contributions, but still allows employers to make or change an election at least once per year. The goal is to provide greater flexibility, improve employee protection, and facilitate plan adoption.

Allows amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that are allowed if the amendment provides:

  1. A nonelective contribution of at least 4% (vs. 3%) of compensation for all eligible employees for that plan year, and
  2. The plan is amended by the last day for distributing excess contributions or, in other words, by the close of the following plan year
Plan years after Dec. 31, 2019
Nondiscrimination relief would be available under certain conditions for defined benefits plans closed to new hires For plans closed to new participants, as the plan population ages, it can become more difficult to satisfy nondiscrimination requirements. This provision is intended to protect the benefits of older, longer service employees still earning benefits in the plan. Immediately with certain exceptions back to plan years after Dec. 31, 2013
Community newspapers pension funding relief Provides pension funding relief for community newspaper plan sponsors by increasing the interest rate to calculate funding obligations to 8% and increase the amortization period from 7 years to 30. Plan years after Dec. 31, 2017
Reduces PBGC premiums for Cooperative and Small Employer Charity (CSEC) plans PBGC premiums for cooperative or small employer charity plans would be set at $19 per participant and $9 for each $1,000 of unfunded vested benefits. Plan years after Dec. 31, 2018


New provisions What it means Timing
Increase in penalty for not filing retirement plan returns timely

The penalties have increased for failing to file the following retirement plan returns:

  • Form 5500 penalty — $250/day up to $150,000
  • Registration statement — $10/day per participant, up to $50,000
  • Notification of change — $10/day per participant, up to $10,000
  • Withholding notice — $100 for each failure up to $50,000
Applies to returns, statements, and notifications required to be filed/provided after Dec. 31, 2019
Extended time to adopt a retirement plan The deadline for an employer to adopt a retirement plan changes from the end of the employer’s taxable year to the employer’s tax return deadline or that taxable year Plans adopted for tax years after Dec. 31, 2019
Benefits for volunteer firefighters and emergency medical responders Reinstates for one year the exclusions for qualified state or local tax benefits and qualified reimbursement payments provided to members of qualified volunteer emergency response organizations and increases the exclusion for qualified reimbursement payments to $50 for each month during which a volunteer performs services. Plan years after Dec. 31, 2019
Simplifies termination of 403(b) custodial plans/accounts The distribution to end a 403(b) custodial account may be to an individual custodial account in-kind to a participant or beneficiary. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until paid out. The Act directs the Treasury to issue guidance no later than June 2020
Clarification of retirement income account rules for church plans

Covered individuals under a church-controlled plan include:

  • Duly ordained, commissioned, or licensed ministers;
  • Employees of a tax-exempt organization that’s controlled by or associated with a church or a convention or association of churches;
  • Certain employees after separation from service with a church, convention, association of churches, or an organization described above
Applies to years beginning before, on, and after date of enactment


New provisions What it means Timing
Difficulty of care (foster care) payments are now treated as compensation Tax exempt difficulty-of-care payments can be treated as compensation when calculating the contribution limits to DC plans and IRAs. Applies to plan years after Dec. 31, 2015
Waives the 10% additional tax on qualified disaster relief distributions Permits participants affected by presidentially declared disasters to take temporary withdrawals or loans up to $100,000. Such withdrawals or loans would not be subject to tax penalties for early withdrawals from retirement plan accounts. Applies during the period beginning Jan. 1, 2018, and ending on the date which is 60 days after the date of enactment. Relief doesn’t cover disasters that already received relief as part of the Bipartisan Budget Act of 2018.
Expands allowable distribution options from 529 college savings plans

Expands 529 plan coverage for higher education costs associated with:

  • Registered apprenticeship programs
  • Up to $10,000 of qualified student loan repayments
Applies to distributions made after Dec. 31, 2018

FAQ: I heard you can use your 529 education savings account to cover student loans—is that true? How much?

Yes. You can withdraw up to $10,000 from a 529 plan for the purpose of paying principal and interest on any qualified education loan of the beneficiary or their sibling. This is a lifetime cap and applies per beneficiary.

New provisions What it means Timing
Reduces payout period for certain non-spousal beneficiaries of DC plans and IRAs plans and IRAs to 10 years (eliminates “Stretch IRA" option for certain beneficiaries) Generally, upon the death of a DC plan or IRA account owner, balances are required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death. This does not apply to the surviving spouse, a disabled or chronically ill individual, individuals not more than 10 years younger than the employee or IRA owner, or minor child of the owner/employee until they reach the age of majority. This change is required. Jan. 1, 2020 (applies to deaths occurring after Dec. 31, 2019)

FAQ: Can my client take Qualified Charitable Distribution (QCD) if age 70½? Will this satisfy an RMD?

Yes, 70½ remains the age for QCDs. And, yes, it can satisfy the RMD for that year.

Withdrawals for birth or adoption expenses There’s now an exemption to the 10% penalty for early withdrawals from qualified retirement plans and IRAs for birth/adoption expenses (up to $5,000 for each birth/adoption per individual); distribution may be repaid and is not subject to the typical 60-day rollover rules. Jan. 1, 2020 for individuals
Increase in age for required minimum distributions (RMDs) The required minimum distribution age increases from 70½ to 72 for qualified retirement plans and IRAs. Jan. 1, 2020

FAQ: So, tell me more about the increase in age for required minimum distributions (RMDs)? And, if someone just turned age 70½ do they have to take it now?

  • Starting in 2020, the age for required minimum distributions increased from 70½ to 72.
  • If you turned 70½ before Dec 31, 2019, then, yes, you must take the RMD distribution for 2019 … and again in 2020 (even though not yet 72).
  • For anyone who turns 70½ in 2020 or later, they will not have to take a distribution until the later of reaching age 72 or retiring (subject to certain exceptions for greater than 5% owner-employee owners).

FAQ: What if I set up a stretch IRA prior to this rule change?

Any existing stretch IRA established on or before Dec. 31, 2019, will be grandfathered in under the previous rules.

New provisions What it means Timing
Eliminates the maximum age (70½) for contributing to a traditional IRA There’s no longer a maximum age at which an individual still working (receiving earned income) can make a contribution to a traditional IRA. Under the Act a person age 72 and above could be contributing to a traditional IRA and be taking required minimum distributions for the same year Jan. 1, 2020

FAQ: With no age limit to contributions to a traditional IRA, how are RMDs handled?

If the person is still working/receiving earned income, they can contribute to their IRA, regardless of age, though they’ll also have to take a required minimum distribution once they reach age 72 (or if they reached age 70½ before Dec 31, 2019).

Non-tuition fellowship payments and stipends can count as compensation for IRA contribution purposes Stipends and non-tuition fellowship payments received by graduate and postdoctoral students can now count as income for IRA contribution purposes. Taxable years after Dec. 31, 2019

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Intended for financial professional and plan sponsor use.

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The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

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PQ12748B-03 | 1411439-112020 | 11/2020

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