As you may have heard, Congress recently passed — and the President signed into law — the SECURE Act, which is landmark legislation that affects the rules for creating and maintaining employer sponsored retirement plans. SECURE stands for the Setting Every Community Up for Retirement Enhancement Act. The SECURE Act is generally effective January 1, 2020.
Here is a brief synopsis of the important parts of the SECURE Act that may affect your retirement plan. Not all of the changes may be viewed as favorable, but there may be steps you could take to minimize their impact.
Modification to the Required Beginning Date for the Required Minimum Distributions:
For required minimum distributions (RMDs) required to be made after December 31, 2019, with respect to individuals who attain age 70.5 after such date, the SECURE Act defers the required starting date of the RMDs until the calendar year in which the individual attains age 72 (instead of age 70.5 under pre-SECURE Act law). This gives an extra year-and-a-half for individuals to leave their funds in the plan (or IRA) before they are required to start receiving their retirement income. This new rule only applies to individuals who attain age 70.5 after December 31, 2019. If you attained age 70.5 prior to January 1, 2020, then you are required to use the rules in effect prior to the SECURE Act.
Allow long-term part-time employees to participate in 401(k) plans:
Currently, employers are allowed to exclude part-time employees (i.e., employees who work less than 1,000 hours per year) when providing certain types of retirement plans — like a 401(k) plan — to their employees.
However, starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule), or three consecutive years of service where the employee completes at least 500 hours of service per year. For employees who are eligible solely by reason of the new 500-hour rule, the employer will be allowed to exclude those employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.
Post-Death Required Minimum Distribution Rules:
With respect to participants or IRA owners (referred to as participants) who die after December 31, 2019 the RMD rules are modified to require, generally, that upon the death of the participant the remaining account balance must be distributed to designated beneficiaries within 10 years after the date of death. This rule applies regardless of whether the participant dies before, on, or after the required beginning date, unless the designated beneficiary is an “eligible designated beneficiary.”
An eligible designated beneficiary is an individual who on the date of death of the participant is one of the following:
- the surviving spouse of the participant;
- a child of the participant who has not reached majority;
- a chronically ill individual as specially defined in the Internal Revenue Code, and
- any other individual who is not more than ten years younger than the participant.
Under the eligible designated beneficiary exception, following the death of the participant, the remaining account balance generally may be distributed over the life or life expectancy of the eligible designated beneficiary beginning in the year following the year of death — this is similar to the pre-SECURE Act law.
Following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years after the death of the eligible designated beneficiary. If the eligible designated beneficiary is the child of the Participant and he/she reaches the age of majority, then the balance in the account must be distributed within 10 years after such date.
