The Retirement Bill Known as the SECURE Act has Passed
What you should know…
On December 20, 2019 Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. This legislation significantly increases the tax credit for employers with new plans from the current cap of $500 to $5,000. It also allows small employers that are implementing an automatic enrollment feature for retirement plans to be eligible for an additional $500 credit.
The SECURE Act will ease the existing rules that restrict multiple employer plans (MEPs) to allow two or more unrelated employers to join a pooled employer plan. This would help to expand access and lower both employer and plan participant costs.
The SECURE Act will also:
• Simplify the 401(k) safe harbor rules
• Expand the portability and include lifetime income options using annuities for the first time
• Allow certain part-time workers to participate in 401(k) plans
• Provide a fiduciary safe harbor for selection of a lifetime income provider
• Extend the current required minimum distribution requirements to age 72
• Require lifetime income disclosures
• Modify the nondiscrimination rules to protect longer-service participants
• Can contribute to an IRA after age 70½ provided you have earned income
Some of the challenges to the SECURE Act include the removal of the stretch IRA and favorable treatment given to annuities inside of retirement accounts. Under past legislation, distributions could be stretched across a span of 30 years, but that is now limited to 10 years following the account owner’s death. Exceptions are made for certain beneficiaries including surviving spouses, minors, the disabled and individuals who are less than 10 years younger than the account owner.
This shortens the span of time that the tax-advantaged accounts can grow, and it must be distributed faster to heirs and beneficiaries. This change reduces the tax-deferred growth benefits of inheriting an IRA. Additionally, because it must be distributed within 10-years it will be taxed at a higher rate than it would have if the distributions were spread out over 30 years. This occurs because many of the beneficiaries may be in their peak earning years when they receive the distributions, therefore adding large taxable distributions that can occur, may place individuals in a higher tax bracket.
As with any new tax law there may be technical corrections issued as the new Act is implemented. If any changes occur, we will keep you updated. In the meantime, please feel free to contact us if you have any questions.
