December 27, 2019

SECURE Act Changes Rules for Required Minimum Distributions

The newly passed Setting Every Community Up for Retirement Enhancement Act of 2019, known as the SECURE Act, was signed into law on December 20 by President Trump as part of H.R. 1158 in the spending bill package (see "Division O" in H.R. 1158). It makes a number of changes to retirement plans, mostly 401(k) plans. One provision that applies to all plans, including ESOPs, is that required minimum distributions (RMDs) for former plan participants who still have accounts now do not have to start until those participants reach age 72. Before the SECURE Act, former participants would need to begin receiving RMDs after reaching age 70½. The change only applies to those not aged 70½ by the end of 2019.

The law also increases the tax credit employers can claim for the costs of setting up new retirement plans. The credit applies only if the plan does not cover substantially the same people covered by an existing retirement plan. The legislation increases the credit to the greater of $500 or the lesser of $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan, up to a maximum credit of $5,000. The credit applies for up to three years. The credit applies only to employers with 100 or fewer employees.

The bill makes a number of other changes to 401(k) plans, including requiring increased eligibility for part-time workers who work 500 or more hours in three consecutive years, setting rules on selecting safe harbor investment options, permitting penalty-free withdrawals for adoption or childbirth, altering safe harbor notice rules, increasing the cap on safe harbor automatic contribution rates, and allowing consolidated filings for certain companies with multiple retirement plans.

The House Ways and Means Committee has issued a summary of the provisions.