On December 20, 2019 President Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The legislation includes policy changes that will impact defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs) and 529 plans.
What is the SECURE Act?
The Setting Every Community Up for Retirement Enhancement (SECURE) Act is a bipartisan retirement bill that was included in a larger legislative package passed by the House of Representatives on December 17, 2019 and by the Senate on December 19, 2019. The bill was initially introduced in the House of Representatives and championed by Ways & Means Chairman Richard Neal and Ranking Member Kevin Brady. The bill includes reforms to DC Plans, DB plans, IRAs and 529 plans.
When does this law become effective?
Most provisions in the law become effective January 1, 2020. Open MEPs (Multiple Employer Plan) provisions will be effective on January 1, 2021.
I inherited an IRA. How will the SECURE Act affect me?
For anyone who inherited an IRA from an original IRA owner who passed away prior to January 1, 2020, no changes to your current distribution schedule are required. However, for situations where the original IRA account owner passes away after December 31, 2019, fewer beneficiaries will be able to extend distributions from the inherited IRA over their lifetime. Many will instead need to withdraw all assets from the inherited IRA within 10 years following the death of the original account holder. Exceptions to the 10-year distribution requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent.
How will the changes to inherited IRA distributions impact my retirement planning?
This change will require some investors to reevaluate their retirement and/or estate planning strategies. While some beneficiaries may qualify for exemptions to the 10-year rule, others will be required to draw down assets more rapidly than required under the current rules. However, it is important to note that anyone who inherited an IRA from an original account owner who passed away prior to January 1, 2020, can continue their current distribution schedule.
How does the law change Required Minimum Distributions (RMDs)?
The law increases the age at which an individual must begin taking required minimum distributions (RMDs) from 70½ to 72. The Act states that this change applies beginning with IRA account owner who will attain 70½ on or after January 1, 2020. Congress recognizes Americans are increasingly working and living longer and updating RMD rules to reflect changes in life expectancy will allow Americans to continue their retirement savings for an extended period of time.
I reached the age of 70½ in 2019, do I need to take an RMD in 2020?
The Act states that the beginning RMD age is shifted to age 72 for those who reach the age of 70½ starting in year 2020. This would mean that those reaching age 70½ in 2019 would need to continue to take RMDs in 2020. The IRS may provide further guidance on this point so those who reached age 70½ in 2019 may want to speak with their tax advisor about their 2020 distribution approach.
What is the impact to contribution rules for traditional IRAs?
The law removes the age limit at which an individual can contribute to a traditional IRA. Today, an individual cannot contribute after age 70½; the Act allows anyone that is working and has earned income to contribute to a traditional IRA regardless of age.
How will the new law affect distributions upon the birth or adoption of a child?
Upon the birth or adoption of a child, the law permits an individual to take a “qualified birth or adoption distribution” of up to $5,000 from an applicable eligible defined contribution plan or IRA. This distribution is not subject to the 10% early withdrawal penalty.
How does the law impact 529 Accounts?
The law expands the definition of a tax-free or qualified distribution from a 529 savings plan to include repayment of up to $10,000 in qualified student loans, and expenses for certain apprenticeship programs. The SECURE Act makes this change retroactive to distributions made after December 31, 2018.
Long-term part-time employees to participate in their employer’s retirement plan
Employers will be required to offer 401(k) eligibility to these employees once they have completed either one full year of service with more than 1,000 hours worked or three consecutive years of service with at least 500 hours worked per year. Under previous rules, part-time workers were often excluded from participating in their employer’s 401(k) plans.
Allows for open Multiple Employer Plans
Open MEPs permit unrelated small businesses to band together to form one retirement plan, allowing smaller companies to take advantage of economies of scale and features that typically are available only in larger plans. (Closed MEPs only allow — you guessed it — related businesses.) The new retirement act also removes the one bad apple rule for MEPs. Previously, if a single participating employer in an MEP committed a disqualifying violation, it affected all employers participating in the plan. The act eliminates that provision — which had diminished the attractiveness of MEPs.
Increases the automatic safe harbor deferral maximum to 15% from 10%
Safe harbor deferral maximum increases from 10% to 15%.
Provides safe harbor certainty for plan sponsors when selecting a lifetime income provider
Choosing an insurance carrier — just like selecting any retirement plan service provider — is a fiduciary responsibility. The new retirement act includes a provision that removes ambiguity about the vetting process and allows fiduciaries to rely on information provided by the insurer regarding its financial status and products.
Allows portability of lifetime income products if a lifetime income option is no longer available under the plan
Under the act, 401(k), 403(b), and 457(b) plans may make a direct trustee-to-trustee transfer of the lifetime income assets to another eligible retirement plan or IRA.
Requires the inclusion of lifetime income disclosures
The required disclosures should help retirement savers visualize their monthly retirement income by providing a monthly payment projection based on their current savings. Framing future distributions in this manner could be the nudge needed to get clients to start or accelerate their savings journey.
Provides tax credits to businesses that offer auto-enrollment to their employees in 401(k) and SIMPLE IRA plans
When it comes to achieving healthy retirement plan participation, the effectiveness of features like auto-enrollment cannot be overstated. According to research from the Pew Charitable Trusts, plans that auto-enroll have participation rates exceeding 90 percent, compared with participation rates in the 50% range for plans in which workers must opt in. This retirement act provision incentivizes business owners to make enrolling and saving easier for employees.
Do you have questions?
Our advisors are here and happy to answer any questions you have or offer a deeper discussion about how the SECURE Act affects you. We can be reached Monday – Friday 9:00am – 5:00pm. 888.698.6698
Document Sources: https://www.fidelity.com/go/secure-act-faqs https://www.financial-planning.com/opinion/from-401ks-to-stretch-iras-what-the-secure-act-means-for-clients
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed.
Verdence Capital Advisors is neither a law firm nor a certified public accounting firm and no portion of this communication should be construed as legal, tax or accounting advice.