How will the SECURE Act & the Cadillac Tax Repeal affect you?

The recently enacted 2020 Further Consolidated Appropriations Act brings with it significant changes for retirement plans, IRAs, and sponsors of very generous group medical plans. Many of the changes became effective at the beginning of the year. Read on for details about:

- The SECURE Act

- Repeal of the “Cadillac Tax”

New retirement plan/IRA legislation: the SECURE Act

Generally becoming applicable in 2020 or 2021, the provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”), part of the larger appropriations act, will impact a wide variety of retirement plans and IRAs.

What to expect

No maximum age for making tax-deductible traditional IRA contributions. Effective for 2020, the current law setting 70½ as the maximum age for making tax-deductible contributions to a traditional IRA no longer applies. (Prior to 2020, deductions were not available for contributions made by an individual for any year in which the individual had attained age 70½.)

Later age to begin required minimum distributions. Effective for individuals who attain age 70½ after 2019, required minimum distributions from tax-qualified retirement plans and IRAs is to be based upon the attainment of age 72, rather than age 70½. 

Significant limitations on the use of “Stretch IRAs.” Prior to 2020, beneficiaries of IRA and tax-qualified defined contribution retirement plans had the ability to “stretch” their distributions over their life expectancies, resulting in greater income deferral. Under the SECURE Act, generally effective for distributions from the IRA or plan account of an individual who dies after 2019, distributions must be made to the beneficiary by the end of the tenth calendar year following the year of the individual’s death for any beneficiary other than the individual’s spouse; the individual’s child who has not attained majority age; an individual who is disabled or chronically ill; or an individual who is not more than 10 years younger than the deceased.

Extended deadline to adopt a tax-qualified retirement plan. Effective for an employer’s tax year beginning after Dec. 31, 2019, the end-of-the-tax-year requirement for adopting a tax-qualified retirement plan has been extended to the due date of the employer’s tax return, including extensions for that year.

401(k) plans will be required to cover certain long-service part-time employees. Effective for plan years beginning after Dec. 31, 2020, in addition to the existing requirement that employees who complete a year of service with at least 1,000 hours must be covered under the plan (i.e., permitting the exclusion of part-time employees who do not meet this service requirement), 401(k) plans will also be required to cover employees who have provided at least 500 hours of service in each of three consecutive 12-month periods. (However, part-time employees covered under this new requirement will be excludible from the plan’s coverage, nondiscrimination, and top-heavy plan testing. The requirement also does not apply to employees whose retirement benefits are collectively bargained.)

No 10% early distribution penalty on up to $5,000 of early distributions from IRAs and tax-qualified retirement plans to meet expenses of a qualified birth or adoption. Effective for distributions made after 2019, up to $5,000 of distributions may be made within one year of the birth of the IRA owner’s/ plan participant’s child or his or her legal adoption of a child who is younger than age 18 or who “is physically or mentally incapable of self-support,” without being subject to the otherwise applicable 10% penalty on early distributions.

Increased limit for automatic enrollment 401(k) plan safe harbor. Effective for plan years beginning after Dec. 31, 2019, the 10% limit on default automatic enrollment compensation deferrals has been increased to 15% (with a 10% limit for a participant’s first year of participation).

Increase of existing income tax credit limit for small employer pension plan start-up costs. Effective for employer tax years beginning after Dec. 31, 2019, the flat dollar income tax credit available for employers with 100 or fewer employees in connection with the costs incurred to establish a retirement plan has been increased to the greater of 1) $500, or 2) the lesser of a) $250 multiplied by the number of non-highly compensated employees eligible for the plan, or b) $5,000. The credit continues to be available for up to three years.

New income tax credit for small employer automatic enrollment retirement plans. Effective for employer tax years beginning after Dec. 31, 2019, a new $500-per-year income tax credit is now available (for up to three years) for employers with fewer than 100 employees that adopt an automatic enrollment retirement plan or amend their existing retirement plan to become an automatic enrollment plan. 

Enhanced portability of lifetime income options. Effective for plan years beginning after 2019, participants of tax-qualified defined contribution plans, Section 403(b) plans, and governmental Section 457(b) plans are now able to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or contracts if they become unavailable as options under the plan, without regard to in-service restrictions otherwise in place under the plan.

New required annual lifetime income disclosure requirements. At least once during any 12-month period, defined contribution plan participants must be provided with a lifetime income disclosure that gives an estimate of the amount of monthly annuity income that the participant’s plan account balance would provide under a straight life annuity for the participant and under a joint and survivor life annuity for the participant and the participant’s spouse. This will be effective for benefit statements furnished more than 12 months after the U.S. Department of Labor issues interim regulations and issues a model lifetime income disclosure and related actuarial assumptions. 

New fiduciary safe harbor for annuity contract selection. Under a new safe harbor, employers that include a lifetime income investment option under their plans (i.e., through the purchase of an annuity contract from an insurance company) can satisfy their fiduciary duties as to the selection of the insurance company issuing the annuity contract.

Steps taken to expand availability of certain multiple employer retirement plans. In the past, the operation of certain retirement plans covering employees of unrelated employers was largely road-blocked by positions taken by the Internal Revenue Service and the U.S. Department of Labor. The SECURE Act directs the Secretary of the Treasury and the Secretary of Labor to take steps to permit a tax-qualified defined contribution plan to be maintained as a single plan by unrelated employers; to provide procedures by which a qualification problem of one employer under the plan (e.g., failure to satisfy applicable nondiscrimination requirements with respect to its employees) would not cause the entire plan to be disqualified for all of the participating employers; and to effectuate the filing of a consolidated Annual Report (IRS Form 5500) for the plan.

Repeal of the ‘Cadillac Tax’

Enacted as part of the Affordable Care Act, and initially to have been effective for 2018, the “Cadillac Tax” was to be a 40% excise tax imposed on the insurer under a fully insured plan (with the resulting costs expected to have been shifted to the employer/covered employees) or on the plan administrator for a self-insured plan. Scheduled to go into effect commencing in 2022, the Cadillac Tax has been fully repealed.

What does CohnReznick think?

The SECURE Act is quite broad in scope. In particular, due to the popularity of IRAs, the SECURE Act’s IRA-related provisions will likely have the widest impact. Specifically, the significant revenue-raiser embodied within the SECURE Act, the elimination of “stretch IRAs,” will impact many existing estate plans and will likely result in changes to current broadly utilized estate planning strategies. On the other hand, individuals working into and beyond their 70s are now, for the first time, able to make deductible traditional IRA contributions. Further, the additional time that will be available before required minimum distributions must commence (under IRAs and tax-qualified retirement plans) is a positive, although it should be kept in mind that the annual payment amounts will increase (i.e., an individual’s life expectancy at age 72 will be less than that at age 70½, such that larger annual distributions will be required once they do commence). The repeal of the Cadillac Tax was not unexpected and represents a significant victory for trade unions and their members, where as a part of the collective bargaining process, richer health benefits may have been obtained for members at the cost of cash compensation.


Dana Fried, Managing Director, National Tax


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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.