On December 20th, a significant piece of retirement planning legislation was quietly passed into law, incorporated into the spending and tax extenders bill. The Setting Every Community Up for Retirement (SECURE) Act is focused on aiding Americans’ ability to save for retirement. It seeks to address flaws in the system which have contributed to the fact that one-fourth of working Americans have no retirement savings at all. The bill has significant implications across a number of areas. The main provisions are summarized below, followed by a more in-depth discussion:
- Age at which Required Minimum Distributions must begin increased from 70.5 to 72
- IRA contributions allowed beyond age 70.5
- Loss of the Stretch IRA – non-spouse beneficiaries must distribute inherited IRAs within 10 years of the passing of the original account owner
- Increased Plan Start-up Credit for new employer retirement plans
- Administrative relief for employers with Safe Harbor 401(k) Plans
- Employers will be required to allow long-term, part-time employees to participate in salary deferral plans
- Kiddie Tax again subject to parent’s marginal tax rate
Individuals:
One major change introduced in the Act is the increase in the age at which Required Minimum Distributions from qualified accounts must begin. Pre-tax contributions to traditional retirement plans are allowed to grow tax-free until withdrawal. However, once individuals reach a certain age, they are required to withdraw a percentage of the account each year, in what’s referred to as a Required Minimum Distribution (RMD).
This age was raised from 70.5 to 72, allowing additional tax-deferrals before forced distributions begin. Anyone turning 70.5 after December 31, 2019 will be able to defer their first RMD until the year in which they turn 72. Anyone who turned 70.5 on or before December 31, 2019 will be required to continue taking RMDs.
Individuals subject to RMDs are able to offset their tax liability with a Qualified Charitable Distribution. Qualified Charitable Distributions (QCDs) are gifts made directly from an IRA, which reduce an individuals’ Required Minimum Distribution. Despite the RMD age increasing to 72, QCDs are still allowed for individuals 70.5 and older. This allows individuals to distribute funds tax-free from an IRA to charity, without the corresponding requirement to recognize income from an RMD.
Individuals are working longer. In recognition of this, the age limit on contributions to traditional IRAs, previously 70.5, was removed. This allows individuals with earned income beyond age 70.5 to continue contributing to a retirement plan.
To pay for these changes, one valuable retirement and estate planning benefit was cut short; the Stretch IRA. Previously, non-spouse beneficiaries of inherited IRAs could stretch required minimum distributions over their lifetime. This proportionately small distribution allowed the account to continue growing on a tax-deferred basis, resulting in a valuable retirement asset for the beneficiary.
Under the SECURE Act, non-spouse beneficiaries must fully distribute inherited IRAs within ten years of the passing of the original account owner. There are no minimum distributions within this time frame; the non-spouse beneficiary could withdraw nothing for the first nine years but would be required to remove the entire balance in the tenth year.
These new rules apply only for IRAs inherited in or after 2020. Those who inherited an IRA in 2019 or prior are grandfathered and can continue distributing according to the “old” stretch IRA rules. Certain eligible designated beneficiaries, including spousal beneficiaries, disabled or chronically ill individuals, those not more than 10 years younger than the decedent and minor children of the original account owner, will still be permitted to stretch distributions.
Employers:
The Act aims to help small businesses set up retirement plans for their employees by increasing the Plan Start-up Credit. This tax credit applies for three years and may be as high as $5,000 depending on the number of non-highly compensated employees who are eligible to participate. An additional $500 tax credit is available for three years for new plans with an Eligible Automatic Contribution Arrangement.
Also, effective for plan years beginning after December 31, 2019, employers will have until the filing date of their tax return to adopt a new retirement plan. This applies to plans funded solely with employer contributions, since plans with salary deferral provisions must be adopted before accepting deferrals.
There’s administrative relief for employers with Safe Harbor 401(k) Plans in the SECURE Act that take effect for plan years beginning after December 31, 2019:
- Safe harbor notices are no longer required for plans with only nonelective contributions.
- A plan may be amended to add safe harbor nonelective contributions anytime up to 30 days before the plan year end.
- If an employer increases the safe harbor nonelective contribution from the typical 3% of compensation to 4%, then the plan may be amended up until the deadline for ADP Test refunds.
- A Qualified Automatic Contribution Arrangement (a specific type of automatic enrollment plan with a safe harbor matching contribution) may increase the cap on the automatic escalation feature from 10% to 15%.
The Act also requires that employers allow long-term, part-time employees to participate in salary deferral plans. Employees at least age 21, who have worked for at least three consecutive 12-month periods with at least 500 hours in those periods will be eligible to make salary deferrals. As long as these employees work under 1,000 hours, they can be excluded from employer contributions as well as coverage and nondiscrimination testing. Since this portion of the Act is not effective until January 1, 2021, the earliest a long-term, part-time employee would be eligible to defer is January 1, 2024.
For plan years beginning in 2021, unrelated employers will be able to participate in Pooled Employer Plans (PEPs) to leverage economies of scale, reduce administrative costs and reduce fiduciary liability. However, an adopting employer retains fiduciary liability for selecting and monitoring the Pooled Plan Provider. The PEP rules do not apply to association and PEO Multiple Employer Plans.
To aid employees in evaluating retirement readiness, defined contribution plans will be required to provide plan participants with “lifetime income disclosure” at least annually on their benefit statements. These statements will show the monthly benefit a participant would receive if their account balance was used to purchase an annuity. This rule takes effect 12 months after the Department of Labor issues guidance.
The SECURE Act increased penalties late filing of forms and notices due after 2019. Failing to timely file Form 5500 can be assessed up to $250 per day, not to exceed $150,000. Failing to file Form 8955-SSA can be assessed up to $10 per day, not to exceed $10,000. Failing to provide income tax withholding notices can be assessed a penalty of up to $100 for each failure, not to exceed $50,000.
Plans are not required to be amended for SECURE Act provisions until the last day of the plan year beginning on or after 1/1/2022.
Miscellaneous Provisions:
The SECURE Act repealed changes to the Kiddie Tax introduced by the Tax Cuts and Jobs Act, reverting away from the trust tax brackets and back to the parents’ top marginal tax bracket. However, for tax years 2018 and 2019, taxpayers can elect to apply the most favorable of the two sets of rules.
Other miscellaneous provisions were included, aimed at easing hardships and relaxing rules for the benefit of plan participants. Penalty-free withdrawals up to $5,000 will be allowed from a retirement plan or an IRA for the birth or adoption of a child. Penalty-free withdrawals up to $10,000 will be allowed from 529 education-savings plans for the repayment of certain student loans. Stipends received by graduate students and “difficulty of care” payments received by foster care providers will be considered eligible compensation for the purposes of making IRA contributions.
We anticipate these changes will have a positive impact on both the availability and flexibility of retirement plans. As with the recent tax law changes, evolving legislation highlights the importance of continued planning. If you’re directly impacted by these changes, we will be in touch to discuss the implications on your specific situation. Don’t hesitate to reach out to discuss how the SECURE Act might influence your finances or your company’s retirement plan!