The Further Consolidated Appropriations Act, 2020 (P.L. 116-94), a government spending bill enacted on December 20, 2019, which funds the government through September 30, 2020, served as the legislative vehicle for several year-end tax measures. Notably, the Act included the bipartisan Setting Every Community Up for Retirement Enhancement Act, known popularly as the SECURE Act. The SECURE Act draws upon the identically named House bill (HR 1994) and Senate's bipartisan Retirement Enhancement and Savings Act (RESA) (S 972). The SECURE Act makes major substantive as well as administrative reforms to retirement security, many of which are already effective.
The SECURE Act is largely considered a "win" for employees as well as the financial services industry. However, many lawmakers, stakeholders and industry leaders are saying that although the reforms are a big step, more needs to be done. To that end, congressional tax writers on Capitol Hill appear unfinished in the realm of retirement security. Top bipartisan, bicameral tax writers have already expressed an appetite for moving forward this year on additional retirement security legislation.
The SECURE Act made reforms to retirement planning and security in a number of areas, including Individual Retirement Accounts (IRAs), 401(k) plans, plan administration, and employer funding.
The new legislation includes major changes for IRAs, including:
· Moving the start date for requirement required minimum distributions (RMDs) to the year the owner turns 72;
· Ending the 701/2 age limit for contribute contributions to an IRA; and
· Shortening the distribution period for nonspouse inherited IRAs to a 10-year maximum.
The 10-year window for distributions to a nonspouse beneficiary applies regardless of when the IRA owner dies. Thus, the change will severely limit the use of "stretch IRAs" as an effective planning tool. Limited exceptions are available.
Some of the most significant 401(k) changes include:
· Requiring plans to offer participation to long-term, part-time employees;
· Encouraging auto-enrollment by increasing the cap; and
· Streamlining the safe harbor for non-elective contributions.
Employers with 401(k) plans must offer employees who work between 500 and 1000 hours year an additional means to participate in the plan. The rule change would only affect 401(k) cash or deferral arrangements, and no other qualified plans.
The new law also provides several other administrative changes:
· Permitting distributions of up to $5,000 for the birth or adoption of a child without incurring the early-withdrawal penalty;
· Count taxable stipends and nontuition fellowships as compensation for making IRA contributions;
· Counting nontaxable difficulty of care payments earned by home healthcare workers as compensation for purposes of retirement contributions;
· Allowing direct trustee-to-trustee transfers between retirement plans of lifetime income investments or annuities; and
· Providing a safe harbor for plan sponsors in the selection of an annuity provider.
Changes For Employers
Small employers are now able to more easily band together to participate in pooled multiple employer plans (MEPs). Additionally, employers are encouraged to steer employees towards lifetime annuities. Other changes include:
· allowing plans administrative flexibility, including relief for "close" plans;
· new annual disclosure requirements; and
· providing a safe harbor for plan sponsors in the selection of an annuity provider.
Further, qualified defined contribution plans, 403(b) plans, and governmental 457(b) plans are now able to make direct trustee-to-trustee transfers to other employer-sponsored retirement plans or IRAs of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held under the plan. Participants are now able to preserve their lifetime income investments and avoid surrender charges or fees.
"There is still more that we can do to help more Americans save for their retirement," Sen. Rob Portman, R-Ohio said. "I believe that passage of the SECURE Act can help pave the way for bolder reforms in legislation I have introduced with Senator Cardin called the Retirement Security and Savings Act. I believe the Senate Finance Committee [(SFC)] should hold hearings and a markup on this legislation, and I will work closely with Senator Cardin to move it forward," Portman added.
A spokesperson for SFC Chairman Chuck Grassley, R-Iowa, told Wolters Kluwer on January 14 that "nothing is planned at the moment," when asked about the potential SFC markup.