The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. The following is meant to highlight some of the key changes that impact individual retirement accounts (IRAs), 529 college savings plans and employer-sponsored retirement plans.
Some of the provisions will be subject to future Internal Revenue Service (IRS) guidance. We will provide more information as it becomes available.
Required Minimum Distributions (RMDs)
Q: How does the act impact Required Minimum Distributions (RMDs)?
A: The act changes the required start date for RMDs from age 70½ to 72. Investors who turn 70½ on or after January 1, 2020, will not be required to begin taking RMD payments until they reach age 72. Note that the act does not provide relief for someone who attained age 70½ prior to January 1, 2020, but who is not yet age 72; required distributions will be mandatory even though paid in 2020.
Q: My client turns 70½ in 2020 and has already sent paperwork to CB&T/American Funds to begin taking RMD payments in 2020. Will the RMD be automatically deferred?
A: No. Investors and/or advisors need to direct us to modify or defer an automatic withdrawal plan. We can take the request verbally or in writing.
Qualified Charitable Distributions (QCDs)
Q: Are there any changes to QCDs?
A: The act did not change the age at which an individual may take QCD. IRA owners are still eligible to take a QCD when they reach age 70½. However, the act does add language that prevents an individual from distributing as QCDs any deductible contributions made to traditional IRAs for the year that the individual reaches age 70½ and for years thereafter.
Inherited IRAs and employer-sponsored retirement accounts
Q: How does the act impact inherited IRAs and employer-sponsored retirement accounts (Stretch RMD)?
A: The act changes the post-death RMD rules that apply to individuals who inherit retirement accounts. Unless the individual is an “eligible designated beneficiary,” the entire account must be distributed by the end of the tenth calendar year following the year of the account owner’s death. The beneficiary can no longer take distributions over his or her lifetime, but the act does extend the current five-year rule to 10 years.
Notably, the 10-year rule will not apply to any portion payable to an “eligible designated beneficiary” which is defined as:
For eligible designated beneficiaries, the same rules that applied to them before the act will continue to apply. They can take distributions over the beneficiary’s life expectancy and spousal beneficiaries may still engage in a spousal rollover (i.e. treat the IRA as their own or roll the employer-sponsored retirement plan assets into their own IRA).
Additionally, there are no changes for non-natural beneficiaries (i.e. estates, charities and trusts that are not “see-through trusts”). Such beneficiaries are still required to distribute all the funds out of the account within five years after the account owner’s death if the account owner died before they were required to begin taking distributions, and otherwise over the account owner’s remaining life expectancy.
Q: To whom do the new rules apply?
A: These changes apply only to deaths after December 31, 2019. Existing inherited IRAs are not affected by the new rules.
Q: An IRA account owner passed away in 2019, and the non-spouse beneficiary hasn’t claimed yet. Do the changes made by the act impact the non-spouse beneficiary’s distribution options?
A: No, these changes do not impact a beneficiary who has yet to claim inherited assets if the account owner passed away prior to January 1, 2020.
Other IRA impacts
Q: Are there impacts to making contributions to an IRA?
A: Yes, the act repeals the restriction on making contributions once the Traditional IRA owner reaches 70½ for contributions made for taxable years beginning after December 31, 2019. As a result, beginning in 2020, IRA owners who have earned income will be allowed to make IRA contributions. Keep in mind if you are making a contribution between January 1 and April 15, 2020, for the 2019 tax year, they are still prohibited if they are 70½ or older.
Q. Can my client make a penalty free withdrawal from his/her IRA for expenses related to the birth or adoption of a child?
A. Yes, beginning with distributions made after December 31, 2019, withdrawals that meet the following criteria will be exempt from the 10% early withdrawal penalty:
Withdrawals are included in taxable income. The $5,000 limit applies on an individual basis, meaning if each spouse has available retirement assets, each spouse could receive a distribution of up to $5,000 per qualifying birth or adoption. Finally, subject to certain requirements including timing, these distributions may be repaid to a plan or IRA; though interested individuals should consider waiting for future IRS guidance that explain the exact timing rules for the repayment.
529 plan impacts
Q: Are there any changes to 529 plans?
A: Yes, under the new act, 529 plans may now be used to pay for certain student loan expenses and apprenticeship program expenses. Qualified expenses include the following:
If withdrawals are used for purposes other than qualified education expenses, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax. Withdrawals for K-12 expenses may not be exempt from state tax in certain states.
These changes will apply retroactively to distributions made after December 31, 2018.
Retirement plan impacts
Q: What are the changes to multiple-employer retirement plans?
A: Multiple-employer retirement plans (MEPs) allow different employers to agree to participate in a single plan under the Employee Retirement Income Security Act (ERISA). Previously, employers could do so only if they shared a common bond, such as belonging to the same trade association. The act removes those restrictions, allowing unrelated smaller employers to form a MEP sponsored by a financial institution, such as a recordkeeper, broker-dealer or third-party administrator. The sponsor would be the named fiduciary and plan administrator, and would be subject to regulation and audits by federal agencies. These changes will apply to plan years beginning after December 31, 2020.
Incentives for small-employer retirement plans
Q: What does the act mean for retirement plans from small businesses?
A: The act substantially raises the tax credit smaller employers can get after starting their first retirement plans. Formerly, such employers could receive up to $500 for each of the three years following the plan’s launch. The act expands that to up to $5,000 per year. This benefit only applies to sponsors who have not operated any retirement plan (either a SIMPLE IRA, SEP or 401(k) plan) in the prior three years. The credit only covers the costs that the employer pays for the plan. It doesn’t cover expenses paid through plan assets, such as 12b-1 fees. The changes apply to taxable years beginning after December 31, 2019.
Q: What’s the formula for the tax credit for first-time plans?
A: The annual cap (for each of three years following launch) is calculated as the lesser of a) $250 for each non-highly compensated employee who is eligible to participate in the plan, or b) $5,000. If the amount calculated for non-highly compensated employees is less than $500, then the max annual tax credit would be $500.
Q: What incentives does the act provide for auto-enrollment in smaller plans?
A: Employers who adopt auto-enrollment in a retirement plan (SIMPLE IRA, SARSEP or 401(k) plan) would receive a credit of $500 annually for three years, beginning with the first taxable year for which the employer includes auto-enrollment. The credit is limited to employers with generally up to 100 employees. The change applies to taxable years beginning after December 31, 2019.
Lifetime income provisions
Q: What new protection does the act provide employers who offer in-plan annuities?
A: Before the act, plan sponsors received safe harbor protections when offering annuities. However, many employers have chosen not to take advantage of it partly because they were still required to research and evaluate the claims-paying ability (solvency) of the insurer. The act eliminates this burden. To satisfy the solvency question, the act allows fiduciaries to rely on written representations from insurers of their status under state insurance law. The act also specifies that a fiduciary is not required to choose the lowest-cost contract but may also consider the value of other features and benefits. The change took effect after the act was signed into law on December 20.
Q: How does the act address portability issues regarding in-plan annuities?
A: If an annuity is dropped from a DC plan, participants can take a distribution of a lifetime income investment without regard to any of the in-service withdrawal restrictions. The distribution generally must be made via a direct rollover to an IRA. The change applies to plan years beginning in 2020.
Q: How will the act encourage participants to think more about lifetime income?
A: DC plan benefit statements will need to include a lifetime income disclosure estimating how much in monthly retirement income would be generated by a participant’s level of savings. The statement will show the amount of monthly income payments the participant would receive if he or she used their account balance to buy a) a qualified joint and survivor annuity and b) a single life annuity. The provision won’t become effective until 12 months after the U.S. Department of Labor provides guidance on disclosures and model assumptions for such calculations, including whether the illustration will consider future employee contributions.
Expanding access to long-term part-time employees
Q: What is a long-term part-time employee?
A: The act requires sponsors of 401(k) plans to expand eligibility to long-term part-time employees who have completed at least 500 hours of service in each of three consecutive years. The change applies to plan years beginning after December 31, 2020.
Q: Is an employer required to make matching or nonelective contributions on behalf of these long-term part-time employees?
A: No. Employees who are solely eligible based on the 500-hour criteria can be excluded from testing under the nondiscrimination and coverage rules, and from the application of top-heavy vesting and benefit rules.