The SECURE Act was signed into law in December 2019. (See our May 2019 newsletter for a discussion of the Act.) Like most legislation, there will be uncertainties about the specific application of the law’s provisions and additional guidance will be needed. Plan sponsors and service providers will need to deal with the provisions prior to further guidance since many of them went into effect on January 1, 2020. In a January 8, 2020 post, PLANSPONSOR, a publication devoted to insight on plan design and investment strategy, highlighted three such provisions:
- An increase in the age when required minimum distributions (RMD) become mandatory from 70 ½ to 72. For participants turning 70 ½ after December 31, 2019, RMDs will not need to take their initial RMD until they turn 72, while those who turned 70 ½ in 2019 fall under the previous rule and, therefore, will need to take their initial RMD no later than April 1, 2020. While plan service providers will need to handle these new requirements, plan sponsors will need to understand the requirements in order to explain them to affected participants.
- The elimination of the “stretch IRA.” This provision requires most non-spouse beneficiaries to withdraw the entire inherited account within ten years. Previously, most non-spouse beneficiaries could “stretch” the withdrawals over a longer period, such as over their life expectancy. This is arguably the most controversial aspect of the new law in that it can have a big negative tax impact on estate plans established under the old rules. Plan sponsors will need to be prepared to explain this change to participants, and service providers will need to modify their systems to handle it.
- Penalty-free distributions up to $5,000 within one year following the birth or adoption of a child. While the prior two provisions discussed are mandatory, the current understanding about this provision is that it is optional. If this is the case, then a plan amendment may be required by plans wanting to provide this benefit. Additionally, this provision allows for the repayment of the withdrawals. However, until guidance on the details of the repayments is forthcoming, both service providers and plan sponsors will necessarily struggle to apply or explain the provisions adequately.
Plan sponsors should make sure they have a good understanding of this new law. Undoubtedly, there will be uncertainties to deal with and questions from participants. Your record keeper and advisor should be contacting you about the law and its impact, as well as suggesting: a communication strategy for your participants; a plan amendment; and design matters. If you haven’t heard from you providers, you should reach out to them before too much time passes, exposing you to unnecessary risk.