While the nation as a whole was focused on the holiday season and the ongoing impachment punditry, the Senate quietly passed, and President Trump signed, into law, the SECURE Act, which was met with overwhelming, bi-partisan support from Congress.

As seems to be the case with much legislation, the SECURE Act is an acronym that stands for Setting Every Community Up for Retirement Enhancement. The purpose of this bill is clear in the name - to help Americans, particularly those under-saving, or not saving at all, build up more savings for their retirement years.

While the SECURE Act does make some marginal improvements in the laws governing retirement plans and retirement savings, it is far from the vast, sweeping improvement politicians would have you believe.

In total there are twenty-nine different sections in the bill, most of which address different facets of retirement investing. Many of the sections are very specific and will likely apply to only a small number of people or plans.

The act is broken up into five sections or titles, based on focus.

A short summary of each of the changes is listed below, in plain English. All commentary, clarification and opinion of Scale Investment Group, LLC is below each section, where appropriate, and is in italics.

The SECURE Act was signed into law on December 20, 2019. Most of the provisions outlined below go into effect on January 1, 2020.

The full text, summary, related bills and other information regarding the legislation can be found here.

The SECURE Act is considered the first major legislative change in the retirement plan space since the Pension Protection Act of 2006. While some of the sections are oddly specific, many of the sections may apply to millions of Americans.

TITLE I - Expanding and Preserving Retirement Savings

Sec 101 - The first section of the SECURE Act specifically addresses MEPs or Multiple Employer Plans. MEPs may be less expensive than stand-alone plans and may be an option for small plans that would otherwise be too expensive for a plan sponsor to justify. This section loosens the rules on MEPs such that if one employer in an MEP doesn’t meet plan requirements it doesn’t force the whole plan to fail. Instead it allows for the transfer of that employers plan out of the MEP.

MEPs are not necessarily less expensive than stand-alone plans, though they certainly can be. Because of more moving parts they may be more complicated than stand-alone plans, which may pose a risk for unsophisticated plan sponsors. Since no one plan sponsor is responsible, it can be an opportunity for dishonest advisors to take advantage. One example of such mis-management and fraud can be found here. It is our understanding that those employers effected by his fraud still have not been made whole on their losses, and possibly never will be.

Sec 102 - Beginning in 2020 the cap for automatic contributions to pension plans is raised from 10% to 15% of employee compensation.

This provision allows savers to set aside more of their paychecks automatically, which is a victory for diligent savers.

Sec 103 - Section 103 of the SECURE Act limits the annual safe harbor notice to matching contribution plans and permits amendments to non-elective 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 non elective 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 tax credit for small employer pension plan start-up costs is increased.

Consult your tax advisor for specific amounts of the tax credit as it will vary by plan.

Sec 105 - New small business pension plans that include automatic enrollment get a new 3-year tax credit for start-up costs.

Consult your tax advisor for specific amounts of the tax credit as it will vary by plan.

Sec 106 - Stipends and fellowships are treated as compensation for the purpose of the retirement savings tax deduction.

Students who receive stipends or fellowships can now potentially contribute more to an IRA as this money is counted towards earned income. Consult your tax advisor for questions specific to your situation.

Sec 107 - People who have reached age 70.5 may now contribute to an IRA.

Previous rules prohibited such contributions. Congress has identified that many people are working longer and many have also under-saved for their retirement. This rule change seeks to remedy some of that concern.

Sec 108 - Loans via employer sponsored plans may not be made via credit or debit cards or similar means.

Plan loans are typically not done in this manner so this prohibition may be in anticipation of future loan innovations. Frankly, the means by which plan loans are made should be of much less concern than the fact that they are needed in the first place.

Sec 109 - It is now permissible for certain tax-preferred pension plans to make a direct trustee-to-trustee transfer to another employer plan or IRA of lifetime income investments in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer allowed as an investment option in a plan.

With certain exceptions and under certain circumstances, annuity options in retirement plans become portable under this section of law.

Sec 110 - Treasury must issue guidance on the treatment of custodial accounts for employer terminated 403(b) plans within 6 months of the passage of the SECURE Act..

Sec 111 - Employees who may be covered by pension plans maintained by church-controlled organizations are more clearly identified.

Sec 112 - Certain long-term, but part-time employees become eligible for retirement plan participation.

Employees who fall into this category have worked at least 500 hours, but not more than 1000 hours per year for 3 consecutive 12-month periods (not necessarily 3 calendar years). Certain employees whose pay has been collectively bargained are excluded. Regular plan age requirements must still be met by the employee.

”...an employer shall not be required to make non-elective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the arrangement.”

Sec 113 - Penalty-free early withdrawals from retirement plans for expenses related to the qualified birth or adoption of a child.

This section has a limit of $5000 and expenses must meet certain qualifications, including being within the first year of birth or adoption. The amount distributed may be repaid to the plan, but is not required to be repaid.

Sec 114 - The age for required minimum distributions is raised from 70.5 to 72.

This rule change effects people who turn 70.5 on or after January 1, 2020.

Sec 115 - Annual contributions to employee pension plans may be decreased for community newspapers.

A new set of rules allow community newspapers, specifically, to decrease their pension liabilities. Refer to Section 430 of the Amendment of the Internal Revenue Code of 1986 for the complete text of the special rules for community newspaper plans.

Sec 116 - For retirement account purposes, difficulty of care payments made to healthcare workers are treated as earned income.

TITLE II - Administrative Improvements

Sec 201 - Employers who adopt plans before the due date of their tax returns may treat the plan as if it were adopted on the last day of their taxable year.

Sec 202 - The bill requires the filing of a consolidated Form 5500 for group plans.

Consult your plan investment advisor for whether this section of the SECURE Act applies to your specific situation.

Sec 203 - The bill requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at least once during any 12-month period.

For retirement plan participants this statement will be generated by the record keeper/custodian.

Sec 204 - Fiduciaries to plans now have a safe harbor when selecting a guaranteed lifetime income contract AKA an annuity.

Annuities are insurance products and are typically quite expensive. In many cases the cash flows in an annuity can be replicated at much lower costs but without the guarantee, obviously. Selecting an annuity should be done with great care and the proper due diligence, ensuring that the fine print is understood. An insurance contract is only as good as the issuer, so care should be taken to choose only the most well capitalized insurance providers.

Just because annuities are available and somewhat insulated via safe harbor, it does not mean that any insurer will suffice. Rules still dictate a framework for selection that should be followed. Just because an annuity can be added, does not necessarily mean that it should be. Consult your plan advisor to discuss whether annuities make sense in your situation.

 There is no requirement to select the lowest cost contract.

Sec 205 - The bill modifies pension plan nondiscrimination rules with respect to closed plans to permit existing participants to continue to accrue benefits.

This section of the SECURE Act is designed to specifically protect older, longer serving plan participants and/or those who may have been grandfathered in the plan. See the complete text of Section 205 for definitions, requirements and other rules or limitations.

Sec 206 - The bill reduces Pension Benefit Guaranty Corporation (PBGC) premium rates for Cooperative and Small Employer Charity (CSEC) plans for plan years beginning after 2018.

TITLE III - Other Benefits

Sec 301 - The exclusion of benefits paid to volunteer firefighters and emergency first responders from gross income is increased.

The actual amount increases from $30 to $50.

Sec 302 - 529 educational savings accounts are expanded.

529 plans can now be used to cover registered apprenticeship programs, student loan repayments and even some costs associated with elementary and secondary education.

TITLE IV - Other Benefits

Sec 401 - Rules regarding required minimum distributions (RMDs) are amended for cases where the account holder is deceased.

All distributions are now required to be completed by the end of the 10th year after the original account holders death. Certain beneficiaries are excluded.

Sec 402 - Penalties for failure to file are increased.

New penalties are the lesser of $400 or 100% of the amount of tax due.

Sec 403 - Penalties for failing to comply with retirement plan filings are increased.

More than ever it is necessary to file all plan documentation accurately and within the time frame allotted. Penalties for missed or late filings are increased ten fold.

Sec 404 - The Internal Revenue Service (IRS) is authorized to share tax returns and tax return information with US Customs and Border Protection for the purpose of collecting the heavy vehicle use tax.

This section is irrelevant to retirement investors and is likely to impact a very small number of individuals.

TITLE V - Tax Relief for Certain Children

Sec 501 - Section 501, the final section of the SECURE Act, eliminates taxation of unearned income of children at tax rates applicable to trusts and estates. This income will now be taxed at the marginal tax rates of the child’s parent or guardian.

This rule will change the tax rates paid on unearned income of minors. Consult your tax advisor for how this will impact your situation specifically.