What Financial Advisors Need to Know About the SECURE Act

What Financial Advisors Need to Know About the SECURE Act

On Dec. 17, the House of Representatives approved the current appropriations bill which contains the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The Senate is expected to approve the bill and send it to President Trump for his signature by Dec. 20 to prevent a government shutdown.
Some provisions will take effect as early as Jan. 1, 2020.

This is a significant piece of legislation that makes numerous changes to the retirement system. The goal is to make it easier for businesses to offer retirement plans and for individuals to save for retirement.

Among those changes are:


Multiple employer plans or pooled employer plans

  • Allows two or more unrelated employers to join a pooled employer plan
  • Elimination of “one bad apple rule” and nexus requirement should encourage adoption
  • Effective for plan years after Dec. 31, 2020

Employer-based plans are easier to adopt and more tax friendly

  • Tax credits for small employer plan startups
  • Easing of requirements for pooled employer plans
  • Deadline for plan adoption moves to the due date of the tax return – versus (current) end of calendar year. This effectively allows employers to retroactively start a plan if they recognize the advantages prior to filing tax returns.

Part-time employees included in 401(k) plans

  • 401(k) plans are required include employees with either one year of service of 1,000 hours, or three consecutive years of service with 500 hours
  • The employer may exclude such employees from nondiscrimination testing
  • Effective for plan years after Dec. 31, 2020.

Encourages annuity products inside employer-based plans

  • Provides a safe harbor for selecting an annuity provider – effectively, some basic due diligence upfront eliminates an employer’s liability for a carrier’s subsequent failure.
  • Rules to ease portability of lifetime income products between plans or to IRAs.
  • Plan participants must annually receive a lifetime income disclosure. The disclosure would illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity.

§72(t) distributions

  • Waives §72(t) penalty for pre-59½ plan distributions used for childbirth or adoption expenses up to $5,000.
  • Waives §72(t) penalty for pre-59½ plan on qualified disaster distributions up to $100,000. Income tax on a qualified disaster distribution can be spread over three years.

529 Plans

  • Up to $10,000 of 529 plan money can be used to pay off student debt. An additional $10,000 can be used to pay student debt for each of the plan beneficiary’s siblings.
  • 529 plan money can be used to cover costs associated with registered apprenticeships.

RMD start age

  • The required minimum withdrawal start age is raised from age 70½ to age 72
  • Applies only to individuals who have not attained age 70½ by Dec. 31, 2019.

Maximum contribution age

  • The age cap for contribution to an IRA, which used to be age 70½, has been eliminated


Inherited IRAs

  • For other than “eligible beneficiaries” of DC plans and IRAs, balances must be distributed in full to must be distributed by the end of the 10th calendar year following the year of death.
  • There will be no required minimum distribution during the first 9 years.
  • Eligible beneficiaries are surviving spouse, disabled, chronically ill, not more than 10 years younger than owner, and minor children.

This last item, the change to inherited IRAs, is significant in that it essentially eliminates the “stretch IRA” strategy. Under current law, if an IRA or DC plan owner names a child or grandchild as beneficiary, once they inherit the plan, they can use their own life expectancy to calculate the required minimum distributions. For those with significant QRP assets, the “stretch” keeps RMDs low and thus maximizes the opportunity for tax-free growth.

Now, instead of a young beneficiary taking distributions over several decades, all the assets will be distributed (and taxed) within 10 years. In cases where the inherited IRA has a six-figure balance, the beneficiary may well be pushed into a higher income tax bracket as a result of the distribution.

In many cases, a more tax-efficient wealth transfer strategy will be for the IRA owner to use the after-tax proceeds of lifetime distributions to fund a life insurance policy. The life insurance death benefit is received by the beneficiary income-tax free and can partially or fully offset the IRD (income with respect to a decedent) tax liability on the remaining IRA balance. To eliminate the IRD tax, distributions could be increased to fund a policy giving the beneficiary the desired inheritance, and any remaining IRA balance can be left to a charity.

Note: Loss of “stretch distributions” also impacts those families who had planned to leave QRP assets in so-called conduit trusts. The language of such trusts will likely need to be revised.

Ash Answers

As with any legislation, it will take time to fully understand the impact on our industry. Changes to the industry are part of why we exist. We're committed to providing you with multiple solutions, concepts and products through a consultative approach to case design. We help guide you, so you can effectively guide your clients.

If you have questions specific to your clients, please reach out to our Advanced Markets team. Whatever the question, whatever the need. Ash Answers.

About the Author

As Senior Advanced Markets Consultant at Ash Brokerage, Steven Gates uses his analytical expertise to support advisors who serve high-net-worth clients, including business owners. Using customized modeling options, he helps create life insurance-driven strategies for wealth transfer, business protection and charitable leverage. In his consultant capacity, he will also identify other strategies that may be beneficial for the client while meeting the advisor’s objectives.