SECURE Act Changes the Rules for Retirement Planning
On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). The SECURE Act, originally passed by the House last May, was inserted into the Further Consolidated Appropriations Act, 2020, HR 1865, a massive spending bill approved by a vote of 297-120 in the House and 71-23 in the Senate. The SECURE Act makes significant changes to many long-time retirement plan rules. It also repeals the kiddie tax changes implemented by the Tax Cuts and Jobs Act. Highlights of the SECURE Act are detailed below.
Repeal of maximum age for traditional IRA contributions (Section 107)
The new law repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½. [IRC § 219(d)(1)]. Now, individuals of any age may contribute to a traditional IRA.
The change applies to contributions made in taxable years beginning after December 31, 2019.
Penalty-free plan withdrawals from retirement plans for expenses related to the birth or adoption of a child (Section 113)
Distributions from retirement plans are generally subject to a 10 percent early withdrawal tax if received by an individual before age 59½. The new law allows individual taxpayers to withdraw up to $5,000 (per spouse) from an “applicable eligible retirement plan,” without penalty, to pay expenses related to a “qualified birth or adoption of a child.” This includes distributions made during the one-year period beginning on the date on which a child of the individual is born or on which the legal adoption is finalized.
An “applicable eligible retirement plan” includes qualified retirement plans, section 403(b) plans, governmental section 457(b) plans, and IRAs. It does not include a pension or other defined benefit plan.
An eligible adoptee for this law includes any individual (other than a child of the taxpayer’s spouse) who has not reached age 18 or is physically or mentally incapable of self-support. The taxpayer taking an eligible distribution must include the name, age, and taxpayer identification number of the child or eligible adoptee to which the distribution relates on his or her tax return for the year of the distribution.
Generally, any part of a qualified birth or adoption distribution may, after the distribution was received, be re-contributed to an eligible retirement plan to which a rollover can be made. This re-contribution is treated as a rollover, not includible in income.
The provision applies to distributions made after December 31, 2019.
Increase in age for required minimum distributions (RMD) (Section 114)
Required minimum distributions (RMDs) have generally been required by April 1 of the calendar year following the calendar year in which the employee or IRA owner reaches age 70½. The new law changes this requirement to April 1 of the calendar year following the calendar year in which the employee or IRA owner reaches age 72. Prior law continues to apply to employees and IRA owners who reached age 70½ prior to January 1, 2020.
This law applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70½ after such date.
Treating excluded difficulty of care payments as compensation for determining retirement contribution limitations (Section 116)
Gross income does not include amounts received by a foster care provider as qualified foster care payments. A “difficulty of care” payment is compensation for providing the additional care needed for certain qualified foster individuals with physical, mental, or emotional disabilities. Since “difficulty of care” payments are excluded from gross income, taxpayers receiving only these payments have been unable to participate in retirement plans or IRAs. The new law increases the contribution limit to qualified retirement plans and IRAs to include “difficulty of care” payments.
This change applies to contributions to IRAs made after the date of enactment of the Act and to defined contribution plans for plan years beginning after December 31, 2015.
Certain taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes (Section 106)
This change allows taxable stipends and fellowships paid to aid a student in the pursuit of graduate or postdoctoral study or research to be treated as compensation for purposes of IRA contributions.
The revision applies to taxable years beginning after December 31, 2019.
Modifications of required minimum distribution rules for designated beneficiaries (Section 401)
The new law changes the RMD rules for defined contribution plans and IRAs upon the death of the employee or owner. Prior law provided that if the employee or owner died before the beginning of the RMD period, distributions to designated beneficiaries were generally required to begin within one year of the owner’s death and were to be paid over the life or life expectancy of the designated beneficiary. If the designated beneficiary was a surviving spouse, distributions could be delayed until the year that the owner would have reached age 70½. If the surviving spouse died before the employee or owner would have attained age 70½, the after-death rules applied as though the spouse were the employee or the owner. These rules allowed IRA distributions to be stretched out post-death if the owner named a young person, such as a grandchild, as the designated beneficiary. After the death of the owner, the payout to the grandchild could be stretched out over the beneficiary’s life expectancy, thereby reducing tax liability significantly. The new law ends most stretch IRAs.
Under the new law, the remaining balance of retirement account must generally be distributed to designated beneficiaries within 10 years after the date of death. This applies regardless of whether the employee or owner dies before or after RMDs have begun. This new rule does increase the distribution period of a retirement account from five years to 10 years where a beneficiary has not been designated and the employee or owner dies before RMDs have begun. The new law excepts from the 10-year rule distributions to “eligible beneficiaries,” which include:
- Surviving spouses
- Chronically ill or disabled beneficiaries
- Minor children, up to the age of majority (not grandchildren)
- Individuals not more than 10 years younger than the IRA owner (this would apply to many siblings)
This special rule allows distributions to “eligible beneficiaries” to be made over the life or life expectancy of the eligible beneficiary beginning in the year following the year of death. In the case of a child who has not reached the age of majority, calculation of the RMD under the exception is only allowed through the year the child reaches the age of majority. The 10-year rule applies after a child reaches the age of majority or after the death of an eligible beneficiary. Prior law applies to distributions to surviving spouses. Distributions may be delayed until the end of the year that the employee or owner would have turned 70½. If the spouse dies before distributions were required to begin to the spouse, the surviving spouse is treated as the employee or owner in determining the required distributions to beneficiaries of the surviving spouse.
These provisions are generally effective for RMDs with respect to employees or owners with a date of death after December 31, 2019. A delayed effective date applies to governmental and collectively bargained plans.
Expansion of Section 529 Plans (Section 302)
The new law expands Section 529 Plans in several ways. First, the law expands tax-free treatment of higher education expenses to apply to expenses for fees, books, supplies, and equipment required for a beneficiary’s participation in an apprenticeship program. The apprenticeship program must be registered and certified with the Secretary of Labor under the National Apprenticeship Act.
Second, the law allows tax-free treatment to apply to distributions used to make payments on qualified education loans. No individual may receive more than $10,000 of such distributions over the course of a lifetime. A special rule, however, allows distributions to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or stepsister). This rule allows a 529 account holder to make a student loan distribution to a sibling without changing the designated beneficiary. A separate $10,000 limit applies to the sibling.
Although earlier drafts of the Act would have expanded Section 529 Plans to include homeschool expenses, this modification did not make it into the final Act.
The amendments to Section 529 Plan provisions apply to distributions made after December 31, 2018.
Modification of rules relating to the taxation of unearned income to certain children (Section 501)
The Tax Cuts and Jobs Act modified the so-called “kiddie tax” to tax a child’s earned income under the rates for singles and to generally tax unearned income under rates applicable to trusts and estates. Prior to the TCJA, unearned income of children was generally taxed at the rate of their parents. The change made by the TCJA negatively impacted many children, including those with a parent killed while in active duty military service and those who received scholarships covering room and board.
The new law repeals the kiddie tax changes made by the TCJA and reinstates the kiddie tax rules that existed prior to tax years beginning in 2018.
The repeal of the kiddie tax changes is effective for tax years beginning after Dec. 31, 2019, but taxpayers can elect to apply the change to tax years beginning in 2018, 2019, or both.
Multiple employer plans; pooled employer plans (Section 101)
The law makes it easier for small employers to join together to offer retirement plans by easing restrictions placed upon multiple employer retirement plans. First, it repeals the so-called “bad apple” rule, by providing that the failure of one employer to meet plan requirements will not cause all plans to fail. Rather, assets in the failed plan will be transferred to another plan.
The law also allows the pooling of employer plans where the employers do not share common characteristics generally required for a multiple employer plan. A “pooled employer plan” under the new law is treated under ERISA as a single plan that is a multiple employer plan.
These provisions apply to plan years beginning after December 31, 2020.
Increase in penalty for failure to file (Section 402)
The new law increases the penalty for failure to file a tax return for an individual, fiduciary of an estate or trust, or corporation; self-employment tax returns, and estate and gift tax returns. If a return is filed more than 60 days after its due date, the failure to file penalty is the lesser of $435 or 100 percent of the amount required to be shown as tax on the return.
The increase applies to returns with filing due dates (including extensions) after December 31, 2019.
In addition to the above changes, the law makes many other modifications to laws governing retirement plans, including the following:
- Sec. 102. Increase in 10 percent cap for automatic enrollment safe harbor after 1st plan year.
- Sec. 103. Rules relating to election of safe harbor 401(k) status.
- Sec. 104. Increase in credit limitation for small employer pension plan startup costs.
- Sec. 105. Small employer automatic enrollment credit.
- Sec. 108. Qualified employer plans prohibited from making loans through credit cards and other similar arrangements.
- Sec. 109. Portability of lifetime income options.
- Sec. 110. Treatment of custodial accounts on termination of section 403(b) plans.
- Sec. 111. Clarification of retirement income account rules relating to church-controlled organizations.
- Sec. 112. Qualified cash or deferred arrangements must allow long-term employees working more than 500 but less than 1,000 hours per year to participate.
- Sec. 115. Special rules for minimum funding standards for community newspaper plans.
- Sec. 201. Plan adopted by filing due date for year may be treated as in effect as of close of year.
- Sec. 202. Combined annual report for group of plans.
- Sec. 203. Disclosure regarding lifetime income.
- Sec. 204. Fiduciary safe harbor for selection of lifetime income provider.
- Sec. 205. Modification of nondiscrimination rules to protect older, longer service participants.
- Sec. 206. Modification of PBGC premiums for CSEC plans.
- Sec. 301. Benefits provided to volunteer firefighters and emergency medical responders.
- Sec. 403. Increased penalties for failure to file retirement plan returns.
- Sec. 404. Increase information sharing to administer excise taxes.
- Sec. 601. Provisions relating to plan amendments.
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