Changes Under the SECURE Act Affecting Retirement Savings

December 20, 2019


Major changes are coming that will affect the income and estate tax planning of retirement savings. These changes, under the bipartisan SECURE Act, will become law once the President signs the Consolidated Appropriations Act of 2020. The new law will accelerate taxation of some inherited retirement savings, affecting some estate plans, and facilitate the retirement savings of workers, including part-time employees and persons working past age 70-1/2.

The following outlines some major features of the SECURE Act (“Setting Every Community Up for Retirement Enhancement and Savings Act”) affecting the tax, financial, estate and business planning of individual’s retirement savings: 

• Stretch IRAs Are Gone: The tax-sheltered retirement savings of individual retirement account (IRA) owners and retirement plan participants who die after December 31, 2019 may no longer be distributed over the long life expectancies of most children, grandchildren and other non-spouse beneficiaries. Rather, the distribution period for non-spouse beneficiaries is cut to a maximum of ten years, accelerating the income tax payable and shortening the period of tax deferral on undistributed amounts. This rule applies to plan participants or IRA owners whether they die before or after reaching their required beginning date of retirement distributions. Special estate planning may be necessary to avoid the wasting of retirement assets by beneficiaries who receive large distributions over ten years.

• Stretch Payments for Certain Beneficiaries Preserved: Retirement savings can be distributed over the life of a surviving spouse, minor child, disabled or chronically ill individual, or an individual not more than10 years younger than the plan participant or IRA owner.

• Required Beginning Date at Age 72: The age at which distributions from retirement savings must begin is raised to age 72, from age 70-1/2 for retirees turning age 70-1/2 after 2019. This change is intended to reflect current, longer life expectancies than when the age 70-1/2 requirement was first put into effect.

• Repeal of Maximum Age for Traditional IRA Contributions. Beginning in 2020, persons over the age of 70½ who continue working will be permitted to make and deduct contributions to traditional IRAs for as long as they are earning compensation. The deduction is phased out for workers who can participate in an employer-sponsored retirement plan. This change reflects the greater numbers of individuals working past age 70 and provides a tax-advantaged tool for meeting the financial needs of longer life expectancies.

• No Penalty for Distributions to Defray Cost of Birth or Adoption. Beginning in 2020, the 10% penalty on an early withdrawal from a tax-qualified retirement plan or IRA is eliminated if the withdrawal is $5,000 or less, and is used for the costs of the birth or adoption of a child. The amount withdrawn can be re-contributed at a later time.

• Pooled Employer Plans. Beginning after 2020, unrelated employers may join a multiple employer retirement plan (MEP), treated as a single plan. MEPs allow small, unrelated employers to cut the cost of sponsoring their own retirement plan, and gain the economies of scale by joining a larger arrangement with other small employers. The new law eliminates the risk of tax disqualification now affecting all plans under a MEP if one employer in the group has a disqualified plan. The new law also overrides US Department of Labor regulations that currently prevent unrelated employers from participating in a single, multiple employer plan.

• Raised Cap for Automatic Enrollment in 401(k) Plans. Under a 401(k) plan with automatic enrollment, unless an employee opts out, a portion of the employee’s pay is automatically contributed to the plan for the employee. How much can be contributed is regulated by law. To encourage workers to save more for retirement, beginning in 2020, the new law raises the cap on the percentage of earnings that can be automatically contributed to the employee’s 401(k) plan account to 15% of compensation, up from 10%.

• Long-Term Part-Time Employees. Part-time employees over age 21 who complete at least 500 hours of service but less than 1,000 in each of three consecutive years, will be able to participate in 401(k) plans of their employers beginning in 2021. The current restriction requiring at least 1,000 hours of service in a year to participate will no longer apply to eliminate certain part-time workers from 401k plans.

• Disclosure of Lifetime Income. The new law requires the disclosure of information to retirement plan participants describing how much would be available if the participant’s retirement savings in a defined contribution plan were paid over a lifetime to the participant alone, or the participant and spouse. The provision may encourage a shift toward lifetime payments, replacing the lump sum distributions that are now commonly made from defined contribution plans. In addition, such information is useful to participants’ timing and budgeting for retirement.

• Fiduciary Safe Harbor for Selecting an Insurer. To encourage employers to add annuity options to their defined contribution plans, the new law introduces a safe harbor protecting fiduciaries’ selection of an insurer. To meet the safe harbor, the fiduciaries must engage in an objective search of insurers, considering their financial capability, cost and other factors. A fiduciary can assess the financial footing of an insurer by obtaining from it a written attestation of its financial capacity. By meeting the safe harbor, a fiduciary would not be liable to a participant or beneficiary for any losses resulting from the insurer’s inability to meet its financial obligations under the annuity contract. Annuity options under defined contribution plans would assist retirees in spreading the value of their benefits over a lifetime if the insurer remains financially intact for that period. It is unclear at this time whether and to what extent this provision would actually protect employers from fee litigation over the higher cost to participants of annuities than other plan investments.

• Increased Form 5500 and Other Penalties. Beginning in 2020, the penalties for failing to file Forms 5500, the annual informational return relating to retirement plans will increase to $50,000. Penalties for failure to file registration statements for deferred vested benefits, and required withholding notices also increase beginning in 2020.

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