Substantial changes in retirement laws appear headed for passage and enactment into law by 2020. The SECURE Act (“Setting Every Community Up For Retirement Enhancement”) passed the House of Representatives by a vote of 417 – 3 and similar legislation is now before the Senate. President Trump has expressed his support for what would be the first major change in retirement laws since 2006.
The bill is a series to strong incentives to encourage savings towards retirements, together with the elimination of so-called Stretch IRAs that tie up wealth for generations. Essentially, the SECURE Act, breaks down into five (5) major reforms and initiatives:
1. Increased Participation in 401(k) Plans for Small Businesses. The SECURE Act looks to substantially increase the availability, access, and investment into 401(k) plans for small businesses. Many small employers have no retirement savings options at all, due to the cost and potential liability of such plans. The SECURE Act expands the use of multiple employer plans, allowing small employers to come together to offer 401(k) plans with less fiduciary liability concerns and less cost.
The bill also provides smaller employers with a new tax credit of $500 if they adopt automatic enrollment into their 401(k) retirement plan. Automatic enrollment has been successful in increasing plan participation by employees, and this credit will offset some of the costs of operating a plan at the initial offering.
2. Encouragement to Life-Time Income Options. There are strong incentives in the SECURE Act for employees to select lifetime income options coming from their 401(k) plans. There is a new safe harbor provision for plan sponsors to offer in-plan annuities. The bill also requires defined contributions plans to deliver a “lifetime income disclosure” to participants at least once every 12 months, to show a beneficiary how much income the lump sum balance in the retirement account could generate.
The clear purpose of these provisions is to encourage plan participants to use their 401(k) plans to create pension like payouts, with life time income provisions, as opposed to withdrawing money quickly upon retirement.
3. Extended Ages for Contributions and RMDs. Those working longer will be able to hold IRAs longer and also continue to contribute later into life. Under present law, participants in IRAs were required to begin Required Minimum Distributions at age 70.5 years. The SECURE Act changes that required start date to age 72, and in the Senate version of the bill, to age 75. Further, participants will be able to make contributions to IRAs after age 70.5 years, which is the current cut-off.
These provisions recognize that people are working longer and retiring later in life, and will help the law to catch up with the changes in the workforce.
4. Family Friendly Provisions. The SECURE Act has several family friendly provisions. $10,000 can be withdrawn from a 529 Plan to pay down student loans. The bill is also allows new parents (by birth or adoption) to withdraw up to $5,000 from an IRA without being penalized.
5. End of the Stretch IRA. A “Stretch IRA” is when the owner of an IRA dies, and his/her children then stretch out the IRA distributions over their lifetimes. It allows very large IRA balances to continue to grow tax free. The SECURE Act will require distribution to beneficiaries other than a spouse (and with few exceptions) over a 10-year period. This change will accelerate the depletion of inherited accounts for many large IRAs and retirement plans.
This provision is seen as both a means to raise tax revenues and to prevent the continued accumulation of wealth in large tax deferred accounts. The Senate version of the bill would end the Stretch IRAs only for those with a value greater than $450,000.
If these provisions become law in 2020, they will affect the benefits offered by employers, and the financial and estate planning of families, and be the most substantial changes in retirement accounts since 2006. Attorneys at Ferguson, Schetelich & Ballew can assist in the review of plans for employers, and retirement/estate planning for beneficiaries.