Wide-Ranging Legislation
Art by Peter Ryan
The Setting Every Community Up for Retirement Enhancement (SECURE) Act became law late last year, after being incorporated into a broader 2020 fiscal year appropriations bill.
The legislation is ambitious and includes popular strategies for expanding access to tax-advantaged retirement savings plans. Notably, the majority of the law’s provisions are effective for plan years beginning after December 31, 2019, so preparations should already be underway.
According to attorneys at Sidley Austin LLP, some key provisions of the act that are effective this year include the establishment of permanent nondiscrimination testing relief with respect to closed pension plans; the creation of a new fiduciary safe harbor covering the selection of an insurer to provide a guaranteed retirement income contract to individual participants; and the launch of a new framework for operating open multiple employer plans—or “open MEPs.” Additionally, the SECURE Act requires that plan participants receive an illustration of how much monthly income their retirement savings will provide.
To Jamie Hopkins, director of retirement research at wealth management firm Carson Group, perhaps the most important SECURE Act provision for advisers to keep in mind, near term, is the elimination of so-called “stretch” individual retirement accounts (IRAs). This change has important implications for many wealthy Americans’ trust and inheritance arrangements—especially where conduit/pass-through trusts have been set up to be the beneficiaries of IRAs and to pay out only required minimum distributions (RMDs) to a spouse or heir.
Such conduit/pass-through trusts were designed to take advantage of the stretch-IRA provisions that have—up until now—allowed IRAs to be used as incredibly tax-efficient inheritance vehicles. According to Hopkins, such trusts should be reconsidered as soon as possible, because of certain language in the SECURE Act that could inadvertently lead to major negative tax and illiquidity consequences. In short, Hopkins expects that the new rules for inherited IRAs will have significant tax consequences for some of advisers’ wealthy individuals clients.
Other provisions to be aware of include the elimination of the annual notice requirement for nonelective 401(k) safe harbor plans; the extension of the deadline for employers to adopt new plans for the preceding taxable year; and an increase in the penalties for failure to file a Form 5500.
Regarding plan documents, amendments for any required modifications do not need to be formally incorporated until the IRS mentions the modification on its cumulative list. At that time, the agency will also provide the date by which amendments must be adopted.
| Significant Provisions of the SECURE Act |
| A jump in the required minimum distribution (RMD) age from 70.5 to 72. Americans who turned 70.5 in 2019 would need to withdraw the RMD by April 1, 2020, but those who turn 70.5 in 2020—born between July 1, 1949, and December 31, 1949—and beyond may wait an additional 1.5 years. |
| An auto-escalation increase allows qualified automatic contribution arrangement (QACA) safe harbor plans to raise their automatic deferral cap from 10% to 15% of an employee’s payroll contributions, provided he is given the opportunity to opt out. |
| Incentives for new workplace plans increase a tax credit available to small employers that adopt a new 401(k) or other workplace plan, to a maximum of $5,000 annually for three years. It also offers a $500 tax credit for employers that automatically enroll employees into a plan. |
| Relief for new parents allows an individual to take a “qualified birth or adoption distribution” of up to $5,000 upon the birth or adoption of a child, without being subject to the 10% early withdrawal penalty. |