Self-directed QRP, Solo 401k, & SDIRA investors that use tax-sheltered retirement accounts to invest in real estate, private lending, crypto, tax liens, syndications and additional alternatives need to know about regulatory changes affecting their accounts. In this post, we’ll outline details of the SECURE Act impacting self-directed investors using QRPs, Solo 401(k), & SDIRA to invest off Wall Street.
The SECURE Act – Setting Every Community Up for Retirement Enhancement Act of 2019 was included in the Further Consolidated Appropriations Act, 2020, which became law. The Act is the most impactful retirement plan legislation since the Pension Protection Act of 2006 (PPA). The intent of the Act is to amend the Internal Revenue Code (IRC) to encourage retirement savings. Some provisions of the act affect all tax-favored retirement accounts, while others impact only Qualified Retirement Plans (“QRP”) and Solo 401k plans.
This educational article is structured as follows:
- SECURE Act Highlights For Self-Directed Investors: 1st segment of the article provides bulleted overview of key sections of the act affecting self-directed QRP, Solo 401k, & SDIRA investors. Ordering of the bullet points follows that of the numbered sections of the act. Sections deemed more relevant than others are bolded.
- SECURE Act Details For Self-Directed Investors: The 2nd segment of the articles provides more comprehensive coverage of the highlighted sections of the act previously referenced, following the same order for easy navigation.
SECURE Act Highlights For Self-Directed Investors: QRP, Solo 401k, SDIRA
- Sec. 102: The act increases the cap for automatic contributions to pension plans from 10% to 15% of employee compensation, beginning after 2019.
- Sec. 103: The act limits the annual safe harbor notice to matching contribution plans and permits amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments may be made after that date if the amendment provides for a nonelective contribution of at least 4% of compensation for all eligible employees and the plan is amended no later that the last day for distributing excess contributions for the plan year.
- Sec. 104: The act increases the tax credit for small employer pension plan startup costs.
- Sec. 105: The act creates a new three-year tax credit for small employers for startup costs for new pension plans that include automatic enrollment.
- Sec. 106: The act treats stipends and non-tuition fellowships as compensation for purposes of the retirement savings tax deduction.
- Sec. 107: The prohibition on contributions to a traditional Individual Retirement Account (IRA) by an individual who has reached age 70-1/2 is repealed.
- Sec. 108: The act prohibits the distribution of plan loans through credit cards or similar arrangements.
- Sec. 109: The act permits certain tax-preferred pension plans to make a direct trustee-to-trustee transfer to another employer plan or an IRA of lifetime income investments in the form of a qualified plan distribution annuity if a lifetime income investment is no longer authorized to be held as an investment option under the plan.
- Sec. 111: The act specifies those individuals who may be covered by pension plans maintained by church-controlled organizations.
- Sec. 112: The act allows certain long-term employees who work at least 500 hours in 3 consecutive 12-month periods and have reached age 21 to participate in qualified cash or deferred arrangements, otherwise known as 401k plans.
- Sec. 113: The act permits penalty-free withdrawals from retirement plans for expenses related to the birth of a child or adoption.
- Sec. 114: The act increases from 70-1/2 to 72 the age for mandatory distributions (RMDs) from retirement plans.
- Sec. 201: The act allows employers to treat retirement plans adopted before the due date of the tax return as adopted as of the last day of the taxable year.
- Sec. 202: The act allows for the filing of a consolidated Form 5500 for similar retirement plans.
- Sec. 203: The act requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at lease once during any 12-month period.
- Sec. 204: The act provides a safe harbor for fiduciaries in the selection of an insurer for a guaranteed retirement income contract.
- Sec. 302: The act expands 529 education savings accounts to cover costs associated with registered apprenticeships, student loan repayments, and certain costs associated with elementary and secondary education.
- Sec. 401: The act modifies required minimum distribution (RMD) rules with respect to defined contribution plans (e.g., 401k plans) and IRA balances upon the death of the account holder. All distributions must be made by the end of the 10th year after death, except for distributions made to certain eligible designated beneficiaries.
- Sec. 402: The penalty for failure to file certain tax returns is increased to the lesser of $400 or 100% of the amount of the tax due.
- Sec. 403: The penalties for failure to file retirement plan returns are increased.
- Sec. 601: Provisions relating to plan amendments. A remedial amendment period is included in the act, allows plans to operate in accordance with the new law without having to immediately amend the plan document.
SECURE Act Details For Self-Directed Investors: QRP, Solo 401k, SDIRA
Sec. 102: Increase In Auto Enrollment Cap
Sec. 102 of the act increases the cap for automatic contributions to pension plans from 10% to 15% of employee compensation, effective for plan years beginning after December 31, 2019.
- The automatic escalation cap increases from 10% to 15%.
- Effective Date: Plan years beginning after Dec. 31, 2019
Sec. 103: Safe Harbor Plans – Nonelective Contributions & Notice Requirement
Section 103 of the Act amends the IRC, impacting the deadline for an employer to elect safe harbor plan status and eliminating the requirement for a safe harbor nonelective notice.
- Prior law required employers adopting a safe harbor 401k plan to amend the plan document before the beginning of the applicable plan year to include the safe harbor contribution.
- There were exceptions, allowing for the election to be made mid-year for the first year of the plan’s existence or the first year in which 401(k) deferrals are added to an existing profit sharing plan.
- Safe harbor contribution were made in the form of either:
- a nonelective contribution, equal to at least 3% of compensation, allocable to participants regardless of whether or not they made any contributions to the plan from their pay, OR
- in the form of an employer matching contribution, up to a defined level of employee deferrals.
- Under the SECURE Act, employers are provided additional flexibility regarding the timing for electing a safe harbor nonelective contribution.
- The act does not provide for any new flexibility with regard to adopting a safe harbor matching contribution.
- If the plan sponsor intends to satisfy testing requirements through a safe harbor match, the plan must still be amended before the beginning of the applicable plan year.
- Retaining the more restrictive requirements for adopting a safe harbor match ensures that employees are aware of the match before it becomes effective, providing them time to adjust their 401(k) deferral elections accordingly.
- Under the act, an employer may amend a plan to provide for a safe harbor nonelective contribution of at least 3% of compensation any time any time before the 30th day before the close of the plan year.
- This means, in practice, that a calendar year plan will have until December 1st of the plan year to elect a 3% nonelective safe harbor contribution for such year.
- An employer may amend a plan to provide for a safe harbor nonelective contribution of at least 4% of compensation at any time before the last day by which the employer could distribute any excess contributions for the plan year.
- This is generally the last day of the plan year following the plan year for which the contribution applies.
- This means, in practice, that a 2020 calendar year plan may be amended as late as December 31, 2021 for a safe harbor nonelective contribution of 4% for the 2020 plan year. See IRC 401(k)(12).
- The act does not provide for any new flexibility with regard to adopting a safe harbor matching contribution.
- Note: The new rules do NOT enable an employer wait until November 30 to adopt a new calendar year safe harbor 401(k) plan using a 3% safe harbor nonelective contribution.
- Similarly, it does NOT enable an employer to wait until the end of the following year too adopt a safe harbor plan, using a 4% safe harbor nonelective contribution.
- The SECURE Act does not modify the rule that the initial plan year for a new safe harbor 401(k) plan must be least as three months. (The only time it could be shorter is with a newly established employer.)
- The SECURE Act just changes the time required to elect safe harbor non-elective contributions for a traditional (non-safe harbor) 401k plan that has been previously adopted.
- New Safe Harbor Notice Rules:
- Under prior rules, any plan providing for a safe harbor contribution – safe harbor nonelective contribution or a safe harbor matching contribution – was required to provide a notice to employees describing the safe harbor contribution and containing information about the plan.
- The notice was required to be provided within a reasonable time prior to the beginning of the plan year – typically between 30 and 90 days, with limited exceptions.
- Under the SECURE Act, plans that provide for a safe harbor nonelective contribution or a QACA that uses a safe harbor nonelective contribution are no longer required to provide employees with a notice. See IRC 401(k)(12).
- EFFECTIVE DATE: These rules apply for plan years beginning after December 31, 2019.
- Note: For late adoption of a 4% safe harbor nonelective contribution for the 2020 plan year, the election must be made no later than the end of the 2021 plan year.
Sec. 104: Small Employer Start-Up Credit
Section 104 of the Act increases the tax credit for small employer pension plan startup costs.
- Prior to the SECURE Act, the tax credit for starting a small employer pension plan was 50% of the qualified startup costs paid or incurred, but limited to no more than $500 for the first credit year and each of the 2 taxable years immediately following.
- Under the act, the credit limit for small employer plans is 50% of the qualified startup costs paid or incurred, but limited to the greater of:
- $500, OR
- The lesser of:
- $250 for each employee who is not a Highly Compensated Employee (See IRC 414(q)) and who is eligible to participate in the plan, or
- Note: While the maximum credit allowed has increased, there is still an overriding limit of 50% of total costs.
Effective Date: The new limit applies to taxable years beginning after December 31, 2019.
Sec. 105: Credit for Auto Enrollment
Sections 105 of the Act adds a new section to the tax code (IRC 45T), providing an additional tax credit for small employer plans that incorporate an auto-enrollment provision.
- The credit is available for both auto-enrollment added to a new plan or to an existing plan.
- Plans that are eligible for the credit include 401(a) plans, 401(k) plans, and SIMPLEs.
- 403(b) plans and 457(b) plans are NOT eligible for the credit.
- Eligible employers can receive a tax credit of $500 for each year of the 3-taxable-year period, beginning with the first taxable year for which the employer includes an eligible automatic contribution arrangement.
- The eligible automatic contribution arrangement is an arrangement under:
- which the participant is auto enrolled in the plan at some uniform percentage of compensation, unless he specifically opts out or elects a different percentage and
- under which the participant receives an automatic enrollment notice.
- Unlike the startup credit, the credit for adding auto-enrollment is not tied to plan expenses.
- The credit for adding auto-enrollment is in addition to the startup credit.
- Effective Date: The credit is available for taxable years beginning after December 31, 2019.
Sec. 106: Compensation for Basis of IRA Contributions
Sec. 106 of the act treats stipends and non-tuition fellowships as compensation for purposes of the retirement savings tax deduction.
- Stipends and non-tuition fellowship payments paid to graduate and post-doctoral students are treated as compensation for IRA contribution purposes.
- Effective Date: Taxable years beginning after December 31, 2019.
Sec. 107: IRA Age Limit
Section 107 of the Act removes the age 70½ restriction for traditional IRA contributions and reduces the amount of Qualified Charitable Distributions not includible in gross income.
- The maximum age limit for traditional IRA contributions is repealed.
- Prior to the SECURE Act, IRC Section 219(d)(1) disallowed Traditional IRA contributions for individuals attaining age 70½ by the end of the taxable year.
- Under the SECURE Act, individuals who are 70½ or older can contribute to a traditional IRA.
- Traditional IRAs are now accessible to older individuals in same manner as 401k plans and Roth IRAs have been available to such individuals.
- Under the SECURE Act, the amount of assets that may be withdrawn tax-free as Qualified Charitable Distributions is reduced for individuals over the age of 70½.
- The total excludable amount distributable as Qualified Charitable Distributions is determined by reducing $100,000 by the excess of:
- the amount of tax deductions allowed to the taxpayer under section 219 for all taxable years ending on or after the date the taxpayer attains age 70½, over
- the aggregate amount of reductions under this new rule for all taxable years preceding the current taxable year. See IRC 408(d)(8)(A).
- The total excludable amount distributable as Qualified Charitable Distributions is determined by reducing $100,000 by the excess of:
- Note: Although the SECURE Act changes the age at which RMDs must begin for those turning 70 ½ after 2019) the law made no change to the age at which Qualified Charitable Distributions (QCDs) may begin (which is age 70 ½).
- EFFECTIVE DATE: These changes apply to contributions and distributions made for taxable years beginning after December 31, 2019.
Sec. 108: Plan Loans via Credit Cards
Sec. 108 of the act prohibits the distribution of plan loans through credit cards or similar arrangements.
- Plan loans are no longer allowed through credit cards or similar arrangements.
- EFFECTIVE DATE: Immediate
Sec. 109: Lifetime Income Options
Sec. 109 of the act permits certain tax-preferred pension plans to make a direct trustee-to-trustee transfer to another employer plan or an IRA of lifetime income investments in the form of a qualified plan distribution annuity if a lifetime income investment is no longer authorized to be held as an investment option under the plan.
- Lifetime income investments may be directly transferred from one employer-sponsored retirement plan to another, or to an IRA.
- Effective Date: Plan years beginning after December 31, 2019.
Sec. 111: 403(b)(9) Church Plans
Sec. 111 of the act specifies those individuals who may be covered by pension plans maintained by church-controlled organizations.
- Church-controlled organizations may cover:
- duly ordained, commissioned or licensed ministers, regardless of source of compensation;
- employees of tax-exempt organization controlled by church or convention or association of churches; and
- certain employees after separation from service with church.
Effective Date: Retroactive
Sec. 112: Allowing Participation of Long-Term Part-time Workers
Sec. 112: Summary
Section 112 of the Act requires that long-term employees who work at least 500 hours in each of 3 consecutive years be allowed to make elective deferrals to a 401(k) plan sponsored by their employer.
- Under prior law, an employee who never worked 1,000 hours or more in a 12-month eligibility computation period could be excluded from an employer sponsored plan for all purposes. IRC 401(k)(2)(D)
- Under the act, an employee must be allowed to make elective deferral contributions to a 401(k) plan at the close of the first period of 3 consecutive 12-month periods during each of which the employee has at least 500 hours of service.
- The plan can still impose an age requirement for participation and such age requirement must be met before the employee can participate, even if the employee has already met the 3-years/500 hours per year requirement.
- Employees who are eligible for the plan solely as a result of having met the 3-years/500 hours requirement do NOT have to be given an employer matching or nonelective contribution.
Sec. 112: Details
- The 12-month eligibility periods may be computed based on:
- employment years and each anniversary thereafter OR
- the employer may switch to a 12-month plan year after the first 12-month period of employment. See IRC 410(a)(3)(A), referenced in The SECURE ACT.
- The entry date for an employee who becomes eligible solely because of the 3-years/500 hours requirement shall be no later than the earlier of:
- the first day of the plan year after satisfying the requirements or
- the date 6 months after satisfying the requirements. See IRC 410(a)(4), referenced in The SECURE ACT.
- If an employee is eligible for the plan solely because of the 3-years/500 hours rule, and later meets the plan’s eligibility requirements, then as of the first plan year beginning after the year in which he meets the requirements, they shall be treated as a “regular” plan participant as far as employer contributions, inclusion in testing, etc.
- The employer may elect to exclude employees who are eligible for the plan solely as a result of having met the 3-years/500 hours requirement from:
- nondiscrimination testing,
- ADP/ACP testing,
- coverage testing
- top-heavy vesting rules
- the top-heavy minimum contribution and
- any safe harbor contribution, including a QACA arrangement.
- This is an optional exclusion, and there may be some situations in which the employer might find it beneficial to include these individuals in testing.
Sec. 112: Questions
- For Form 5500 purposes and small plan audit exemption, will employees who are included in the plan solely because of meeting the 3-years/500 hours rule be counted as participants?
Sec. 112: Effective Date
- These rules apply for plan years beginning after December 31, 2020.
- 12-month periods beginning before January 1, 2021 do not have to be taken into account.
Sec. 113: Withdrawals for Birth or Adoption
Section 113 of the Act amends the IRC to permit penalty-free withdrawals from retirement plans for expenses related to the birth of a child or adoption.
- Penalty free withdrawals from qualified retirement plans or IRA of up to $5,000 are allowed for Qualified Birth Or Adoption Distributions.
- Section 72(t) of the IRC provides that withdrawals from tax-favored retirement plans are subject to a 10% tax on early distributions, with certain exceptions. Included in the list of exceptions are:
- distributions made after attainment of age 59 ½;
- distributions on account of disability;
- distributions after separation from service after age 55;
- distributions for certain medical expenses; and
- distributions made to an individual called to active military duty.
- The SECURE Act amends the tax code to add an additional exception to the 10% early distribution tax for any qualified birth or adoption distribution.
- These distributions are not subject to mandatory withholding.
- The distribution may subsequently be repaid.
- $5,000 limit – The aggregate amount which can be treated as qualified birth or adoption distributions by any individual with respect to any birth or adoption may not exceed $5,000.
- This limit is per individual, making it possible for each spouse to receive a $5,000 distribution from his/her respective plan or IRA for each birth or adoption.
- Applicable plans: The distribution may be taken from an IRA or QRP, including 401(k), 403(b) and governmental 457(b) plans, but NOT defined benefit plans.
- 1-year window: The distribution must be made during the 1-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.
- Eligible Adoptee: Any individual (other than a child of the taxpayer’s spouse) who has not attained age 18 or is physically or mentally incapable of self-support.
- “Eligible Adoptee” does NOT include the child of the taxpayer’s spouse; i.e., legally adopting a step-child does not qualify.
- Repayment available: The distribution amount may be repaid to an eligible retirement plan or IRA to which the individual is eligible to contribute a rollover contribution.
- The repayment can be accomplished via one payment or multiple payments, not to exceed the amount of the distribution.
- The taxpayer is treated as having received the distribution as an eligible rollover distribution and if it is repaid, the repayment is treated as a direct rollover made within 60 days of distribution.
- No time limit is prescribed for making the repayment, so the taxpayer could repay the distribution at any time in the future.
- The Act does not specify how the repayment will be handled on the tax return for the year(s) in which it is repaid.
- Separate distributable event: Distribution under this provision may be allowed regardless of whether other in-service distributions are allowed.
- No 20% mandatory withholding: The distribution is not rollover eligible so the automatic 20% withholding does not apply>
- 10% optional tax withholding applies: Taxpayer will have 10% federal tax withholding taken, unless they opt out or elect a different percentage.
- It is important to note that the distribution is not tax-free, it will be taxed when the individual files his/her annual tax return.
- Special tax reporting: The taxpayer will be required to report information about the child on the tax return filed for the year of the distribution (name, age and TIN).
- The 2020 Instructions for Forms 1099-R and 5498 address the tax reporting requirements for distributions and repayments for qualified birth or adoption.
- The 1099-R code to report the distribution for a taxpayer under age 59 ½ is code “1”.
- The taxpayer will then have to further indicate that the distribution qualifies for the birth or adoption exception.
- Repayment of a birth or adoption distribution will be reported on Form 5498 with a code “BA”.
- EFFECTIVE DATE: The exception to the 10% tax applies to distributions made after December 31, 2019.
Sec. 114: Age Requirement for RMDs
Section 114 of the Act increases the age for Required Minimum Distributions (RMDs) from 70½ to 72.
- The RMD age is now 72.
- The Required Beginning Date (RBD) for IRA owners is changed from April 1st of the year following the year in which they reach age 70 ½, to April 1st of the year following the year in which they reach age 72.
- RMDs from QRPs, including 403(b) and 457(b) plans, are now due no later than April 1 of the calendar year following the later of:
- the calendar year in which the employee attains age 72, and
- the year in which the employee retires.
- The exception for 5% owners of the QRP-sponsoring business remains and they now must begin taking RMDs by April 1 of the calendar year following the calendar year in which they attain age 72, regardless of employment status.
- Regarding the timing of distributions for an employee who dies before their entire interest is distributed is amended, such that if the designated beneficiary is a spouse, the spouse is required to begin taking distributions no earlier than the date on which the employee would have attained age 72 (instead of age 70½ ). See IRC 401(a)(9).
- EFFECTIVE DATE: Applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date.
- Individuals who attained age 70½ on or before December 31, 2019 must take their RMDs under the prior rules and must continue to take them each year (they will not stop and then restart).
- It is important to note that an employee who attained age 70½ prior to December 31, 2019, but has not been taking an RMD because they are still employed, will need to start the first RMD by April 1 of the year after they terminate employment, even if they are not yet age 72, as application of the new rules is contingent on when an individual turns age 70½.
Sec. 201: Due Date for Adopting a New Plan
Sec. 201 of the act allows employers to treat QRPs adopted before the due date of the tax return as adopted as of the last day of the taxable year.
- A QRP will be considered adopted for a particular year as long as it is adopted before the due date of the business tax return (including extensions).
- Note: The new extended deadline only applies to QRPs that are entirely employer funded, such as profit sharing plans and pension plans.
- Because of the timing rules for 401(k) deferral elections, it does NOT apply to 401(k) plans.
- A new 401(k) plan adopted in a subsequent year CANNOT be retroactively effective for the prior year.
- 401(k) refers to the CODA, the employee deferral component of QRP.
- Note: Self-employed individuals, including sole proprietors, partners, and a member of a disregarded entity must make their deferral elections before the last day of the partnership or sole proprietor’s tax year, even though the contribution can be deposited later.
- It would appear that it’s impossible to elect a deferral to a plan that does not exist!
- This follows the rule that employees may not make elective deferrals nor make deferrals from previously earned compensation any earlier than the date the 401(k) feature was actually adopted. Compensation of sole proprietors & partners is deemed earned and available as of 12/31.
- Effective Date: Applies to plans adopted for taxable years beginning after December 31, 2019.
Sec. 202: Combined Annual 5500 Reporting for unrelated employers using same platform
Sec. 202 of the act allows the filing of a consolidated Form 5500 for a group of plans that share certain attributes.
- All members of a group of individual account plans or defined contribution plans (e.g., 401k plans) may file a single aggregated Form 5500 if:
- the plans all have the same trustee(s);
- the same one or more named fiduciaries;
- the same administrator;
- plan years beginning on the same date and
- provide the same investments or investment options to participants and beneficiaries.
- Plan not subject to title I of the Employee Retirement Income Security Act of 1974 (e.g., “Solo 401k plan” or “Solo QRP”) if the same person that performs each of the functions described above for all other plans in such group performs each of such functions for such plan.
- Effective Date: Not later than January 1, 2022, and shall apply to returns and reports for plan years beginning after December 31, 2021.
Sec. 203: Lifetime Income Disclosure and Provider
Sec. 203 of the act requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at lease once during any 12-month period.
- Defined contribution plan statements must include a lifetime disclosure at least once every 12-months, illustrating monthly payments.
- The DOL is instructed to develop a model disclosure and determine assumptions to use for converting the plan balance into an income stream.
Sec. 204: Plan Annuity Option Safe Harbor
Sec. 204 of the act provides a safe harbor for fiduciaries in the selection of an insurer for a guaranteed retirement income contract.
- Fiduciaries are given a safe harbor with respect to selecting guaranteed retirement income contracts offering lifetime income benefit options.
Sec. 302: Expansion of Section 529 Plans
Sec. 302 of the act expands 529 education savings accounts to cover costs associated with registered apprenticeships, student loan repayments, and certain costs associated with elementary and secondary education.
- Section 302 expands the use of 529 qualified tuition program accounts to cover costs for apprenticeships and up to $10,000 of student loan debt.
- Effective Date: Distributions made after December 31, 2018
Sec. 401: Modification of Required Minimum Distributions (RMDs)
Section 401 of the Act modifies the required minimum distribution rules with respect to Defined Contribution plans and IRA balances upon the death of the account owner.
- IRC 401(a)(9) is amended. The rules of such section are applied to IRAs and other retirement accounts under applicable sections of the IRC.
- The new 10-Year Rule for designated beneficiaries applies equally to both Roth accounts and pre-tax accounts.
- The SECURE Act expands the original two basic groups of retirement account beneficiaries, Designated Beneficiaries and Non-Designated Beneficiaries, by splitting Designated Beneficiaries into:
- Eligible Designated Beneficiaries and
- Designated Beneficiaries who were not Eligible Designated Beneficiaries.
- There are now 3 groups of beneficiaries for RMD purposes:
- Non-Designated Beneficiaries – Remain subject to the 5-Year Rule when death occurs prior to the decedent’s RBD, or to the decedent’s life-expectancy rule when death occurs on or after the RBD that already applied
- Designated Beneficiaries – Subject to the new 10-Year RMD Rule, eliminating the “stretch IRA” for this group
- Eligible Designated Beneficiaries – The pre-SECURE Act RMD rules for Designated Beneficiaries apply, allowing for “stretch IRA”
- Under prior law, after the death of a plan participant or IRA owner, a designated beneficiary was permitted to stretch the RMDs over the beneficiary’s life based on their life expectancy.
- Under the act, when the beneficiary of the account is a Non-Eligible Designated Beneficiary, all amounts held by the plan or IRA must be distributed within 10 years of the plan participant’s or IRA owner’s death.
- Note: While distributions before the 10th year after death may be taken by beneficiaries at any time, and in any amount they wish, such distributions are not required.
- Rather, the sole requirement is that whatever money is left in the inherited account in the 10th year after death be distributed by the end of that year.
- An exception to the 10-year distribution rule is provided for any “eligible designated beneficiary,” which includes:
- the surviving spouse,
- a child of the employee who has not reached majority (minor child),
- The 10-year maximum distribution period is extended to 10 years after the end of the year in which the minor child attains age 18.
- a disabled individual,
- a chronically ill individual, or
- an individual beneficiary who is not more than 10 years younger than the participant or IRA owner.
- The provision does not apply to defined benefit plans, so the typical 10 and 15-year certain and continuous alternative distribution forms remain in place.
- EFFECTIVE DATE: These new distribution rules will generally apply with respect to participants or IRA owners who die after December 31, 2019.
- However, government plans will apply the new rules to employees dying after December 31, 2021. and
- Collectively bargained plans will apply them to employees dying in calendar years beginning after the expiration of the current collective bargaining agreement or December 31, 2021, if earlier.
Sec. 402: Penalty for Failure to File Tax Return
Sec. 402 of the act increases the penalty for failure to file tax returns to the lesser of $400 or 100% of the amount of the tax due.
- Increased penalty is lesser of $400 or 100% of the amount of the tax due.
- Effective Date: Applies to returns the due date for which (including extensions) is after December 31, 2019
Sec. 403: Increased Penalties For Failure to File Retirement Plan Returns
Sec. 403 of the act provides for increased penalties for failure to file retirement plan returns.
- Failing to timely file Form 5500 or 5500-EZ can be assessed up to $250 per day, not to exceed $150,000.
- Before the SECURE Act, the penalty was $25 a day, not to exceed $15,000.
- Failing to file Form 8955-SSA can be assessed up to $10 per day, not to exceed $50,000.
- Before the SECURE Act, the penalty was $1 per participant, not to exceed $5,000
- Failure to provide income tax withholding notices can be assessed a penalty of up to $100 for each failure, not to exceed $50,000
- Before the SECURE Act, the penalty was $10 for each failure, not to exceed $5,000.
- Effective Date: Plan years beginning after December 31, 2019
Sec. 601: Plan Amendments
- Sec. 601. includes provisions relating to plan amendments, allowing plans to operate in accordance with the new law without having to immediately amend the plan document.
- Most plans will have until the end of the 2022 plan year to adopt conforming amendments.
- Government plans and collectively bargained plans will have an extended amendment period lasting until the end of the 2024 plan year.
IRS SECURE Act Resources
The SECURE Act is an impactful piece of legislation affecting all self-directed & checkbook control investors, whether they’re using a QRP, SDIRA, or Solo 401k. Savvy taxpayers will find planning opportunities & challenges in the new law.