Key Provisions of the SECURE Act

We have been asked recently about the most significant changes to the tax laws governing retirement made by the recently passed SECURE Act. Our colleague and strategic partner, Nick Dupre, has provided our clients an excellent summary for review. Nick is Board Certified in Estate Planning and Probate Law and has helped many of our clients with their wills, trusts and powers of attorney. If you need specific guidance on anything related to estate planning we highly recommend contacting Nick directly at the contact information below:

Nick Dupre (pronounced Du-Pray)
Stanfied and Dupre, PLLC

The SECURE legislation — which stands for “Setting Every Community Up for Retirement Enhancement” — puts into place numerous provisions intended to strengthen retirement security across the country. Like any bill written by lawyers, it’s not a thrilling read. For the detail oriented, I have attached a table providing descriptions and effective dates for the provisions contained in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, along with additional retirement-based revenue provisions that were incorporated into the Further Consolidated Appropriations Act, 2020 (H.R. 1865).


For those who do not enjoy reading condensed legalese, I have summarized key provisions to consider going forward for clients below.


(1) Stretch’ Retirement Account Replaced with 10-Year Rule

One of the most significant changes made by the SECURE Act is the elimination of the ‘Stretch’ provisions for most non-spouse beneficiaries of defined contribution plans and IRA accounts. Under current law for those who have already passed away (or do by the end of 2019), designated beneficiaries (generally, living human beings, and certain qualifying trusts) are eligible to stretch distributions over their life expectancy (or in the case of a qualifying trust, over the oldest applicable trust beneficiary’s life expectancy).

However, for most designated beneficiaries who inherit in 2020 (i.e., where the retirement account owner themselves dies in 2020 and beyond), the new standard under the SECURE Act will be the ‘10-Year Rule’. Under this 10-Year Rule, the entire inherited retirement account must be emptied by the end of the 10th year following the year of inheritance. Similar to the existing 5-year rule for non-designated beneficiaries, though, within the 10-year period, there are no distribution requirements. Thus, designated beneficiaries will have some flexibility when it comes to timing distributions from the inherited account(s) for maximum tax efficiency… as long as the entire account balance has been taken by the end of the 10th year after death.

Note that, the SECURE Act identifies the following “Eligible Designated Beneficiaries” to which the 10-year rule will not apply and the same rules previously in place take precedence:

  • Spousal beneficiaries;
  • Disabled beneficiaries;
  • Chronically ill beneficiaries;
  • Individuals who are not more than 10 years younger than the decedent
  • Certain minor children (of the original retirement account owner), but only until they reach the age of majority.

In the estate planning world, this means that all estate plans and beneficiary designations need to be reviewed and possibly updated. The current “Conduit Trust” provisions in estate plans may not affect the desired result in terms of distributions under the SECURE Act.


(2) Required Minimum Distributions (RMDs) To Begin At 72

The other most talked about change under the SECURE Act is the onset of RMDs from age 70 ½ to age 72. Important to note that this change only applies to those individuals who turn 70 ½ in 2020 or later. So even though an individual turning 70 ½ on December 20, 2019 will not yet be 72 in 2020, they will still be required to continue RMDs under the existing rules, and to take an RMD for 2020 (and each year thereafter).

Another important quirk related to the 70 ½ to 72 chance is that even though RMDs are pushed back to 72, Qualified Charitable Distributions are NOT, meaning one can still start QCDs at age 70 ½ . Thus, even though an individual turning 70 ½ in 2020 will not have to take an RMD for 2020, they may still use their IRA to make a QCD of up to $100,000 for the year (after actually turning 70 ½ or later). Beginning in the year an individual turns 72, any amounts given to charity via a QCD will reduce the then-necessary RMD as well (while in the prior 1-2 years, it will simply allow the pre-tax IRA to be used for charitable contributions directly on a pre-tax basis).


(3) 10% Early Distribution Penalty Relief For Childbirth And Adoption

The SECURE Act provides for some small penalty relief (up to $5,000) to be distributed penalty-free from an IRA or plan for qualified births or adoptions. To meet the requirements of a Qualified Birth or Adoption Distribution, an individual must take a distribution from their retirement account at any point during the one-year period beginning on either the date of birth, or the date on which the adoption of an individual under the age of 18 is finalized.


(4) Traditional IRA Contributions At Age 70 ½ and After

The SECURE Act lifts the prohibition on Traditional IRA contributions once an individual reaches the year in which they turn 70 ½. Thus, beginning in 2020, individuals of any age will be allowed to contribute to a Traditional IRA. The requirement that such individuals have “compensation” – which is generally earned income from either wages or self-employment – to make such a contribution remains, though.


(5) Life Annuity Safe Harbor

The SECURE Act creates new Section 404(e) of ERISA. This new Section essentially makes it easier to provide a life annuity within a 401k. Many planners shied away from this in the past due to fiduciary concerns, but this provision makes it easier to satisfy those requirements.

The SECURE Act also makes it easier to transfer annuities between plans – so called “portability of lifetime annuity option.”


(6) Small Businesses and Retirement Plans

The SECURE ACT allows small businesses a credit of up to $500 for up to three years for startup costs related to establishing a small business-sponsored retirement plan, such as a 401(k), 403(b), SEP IRA or SIMPLE IRA. Such businesses are defined as businesses with 100 or fewer employees receiving $5,000 or more of compensation. For tax years beginning January 1, 2020, the maximum credit available under IRC Section 45E (for up to three years) will be increased to the greater of:

  • $500; or
  • The lesser of: (1) $250 × the number of non-highly-compensated employees eligible to participate in the plan; or (2) $5,000.


The SECURE Act allows another $500 credit for employing an auto-enrollment option on such plans. In order to qualify for the credit, a small business must adopt an “Eligible Automatic Enrollment Arrangement”.


(7) 401k Contributions

Currently, the maximum percentage of compensation that an employer can set as the plan “default” for automatic enrollment is 10%. Beginning in 2020, however, the SECURE Act will allow plans to increase the default percentage to as high as 15% in any year after the first full plan year in which the employee’s compensation is automatically deferred into the plan.


(8) Part Time Workers

The SECURE Act grants some partial relief to “part time” workers and their eligibility for employer retirement plans. Employee who work 500 hours in at least three (3) consecutive years for an employer, are eligible to participate in an employer retirement plan. Notably, part-time workers are not likely to earn as much as full-time workers, and therefore, may not be able to contribute as much to their 401(k)s as such persons. These changes apply to plan years beginning in 2021, however the SECURE Act does not require an employer to start ‘counting’ a 500-hour year as a 500-hour year for the purposes of this new rule until 2021.


(9) 529 Plans and Student Loans

The SECURE Act expands the list of qualified education expenses for which 529 plan funds First, the SECURE Act provides that Qualified Higher Education Expenses include expenses for Apprenticeship Programs that include fees, books, supplies and required equipment, provided the program is appropriately registered and certified with the Department of Labor. In addition is the introduction of distributions for “Qualified Education Loan Repayments” as a qualified higher education expense. Such distributions may be used to pay the principal and/or interest of qualified education loans and are limited to a lifetime amount of $10,000 (not adjusted for inflation). The $10,000 lifetime limit is a per-person limit, and in addition to using the funds in a 529 plan to pay for the 529 plan beneficiary’s debt, an additional $10,000 may be distributed as a qualified education loan repayment to satisfy outstanding student debt for each of a 529 plan beneficiary’s siblings.


(10) Kiddie Tax Reversion

In a complete and total reversal, the SECURE Act makes any income subject to the Kiddie Tax taxable at the child’s parents’ marginal tax rate. The change is effective for 2020 and taxpayers can elect to apply the old (or is it new?) rules to the current 2019 tax year, and back to 2018 as well! As such, advisors with clients who have children that had substantial unearned income in 2019 can simply choose to use the new rules (unless the ‘old’ rules at trust tax rates actually were more favorable in the case of extremely affluent parents), and for 2018 advisors should carefully evaluate the potential tax savings that may be achieved by filing an amended return and electing to apply the new/old rules back to that prior year.


We hope this summary is helpful. If you have any questions after reading this, please feel free to call or also ask your CPA or financial advisor. If you do not have a CPA or financial advisor or need a referral, we can certainly help with a referral.


Nicholas A. Dupre

Stanfied and Dupre, PLLC