A new retirement savings law passed as part of the 2019 spending bill and signed by President Trump on December 20 is intended to strengthen and improve qualified plan rules.

Effective on January 1, 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act consists of 29 provisions and includes reforms that increase access to workplace plans and expand retirement savings. The law also includes policy changes that will impact defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs) and 529 plans.

Only time will tell whether Congress acted wisely in passing the SECURE Act. Hopefully in the years to come it will provide at least a measure of added retirement security for plan participants and their beneficiaries.

The following is a summary of key provisions in the law:

Changes relating to age

Prior to 2020, IRA contributions could not be made after the year in which the individual attained age 70½. Beginning in 2020, IRA contributions may be made at any age provided that the individual has received taxable compensation in the year with respect to which the contribution is being made.

Before the SECURE Act, distributions from IRAs and qualified plans needed to commence on the April 1 of the year after the year in which the participant attained age 70½. Effective 2020, distributions must commence on the April 1 of the year after the year the participant attains age 72.

Stretch IRAs

For a participant dying prior to 2020, a participant’s IRA or qualified plan account can be distributed in substantially equal installments over the life expectancy of one or more beneficiaries; payments to a spouse can be delayed until the date on which the employee would have attained age 70½. Effective for participants dying on or after January 1, 2020, an IRA or qualified plan can be distributed to the participant’s spouse over the life expectancy of the spouse; payments to a spouse can be delayed until the date on which the employee would have attained age 72.

More significantly, effective for participants dying on or after January 1, 2020, payments to a non-spouse beneficiary may not be made over a period greater than 10 years, except that payments to a minor child may be made over the child’s life expectancy until the child attains age 21; after that time the remaining balance must be fully paid out over 10 years. This change should be an important consideration for those who named or wish to name a “conduit” or “see through” trust as recipient of benefits, since it would mandate that the trust beneficiary would receive the entire benefits within 10 years, rather than over life expectancy. Consultation with a client’s trust attorney is recommended if retirement benefits are a significant portion of the client’s assets. It is anticipated that these changes will raise approximately $15.7 billion in additional tax revenue.

As a result of the 10-year limitation on distributions to a beneficiary other than a spouse, those with a charitable bent are expected to give serious consideration to leaving qualified plan and IRA assets to a tax-exempt organization after the second-to-die of the husband and wife. These assets are not subject to income tax or estate tax if left to a charitable organization via an IRA or qualified plan beneficiary designation.

Roth IRA conversions will also merit increased consideration. While a participant is taxed at the time his traditional IRA is converted into a Roth IRA, thereafter the assets in the Roth IRA grow tax-free. In many cases a participant and his heirs will be better off converting into a Roth IRA than in continuing to maintain the traditional IRA until its assets must be distributed to the participant or beneficiaries.

Miscellaneous

• Qualified tuition program accounts (IRC sec. 529) may be utilized (up to $10,000 per year) to make qualified student loan repayments.
• Up to $5,000 in 401(k) account assets may be withdrawn without penalty to help cover the costs of having or adopting a child.
• Employers sponsoring 401(k) plans are encouraged to offer annuities as an investment choice by the government reducing the liability that employers face when choosing an annuity provider for the plan.
• A $500 tax credit is offered to qualifying small employers if their 401(k) plans provide for automatic enrollment, thereby encouraging employee plan participation.
• Defined contribution plans must disclose to participants at least once per year the amount of lifetime income which their plan accounts can be expected to generate.

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