Congress has just passed and the President has signed a package of spending bills to fund the government and avoid a shutdown. At the last minute, the House and Senate negotiators attached a bill which substantially impacts on planning for retirement accounts.

In May 2019, the House of Representatives by a 417-3 vote passed the “Setting Every Community Up for Retirement Enhancement Act of 2019” (the “SECURE Act”). The SECURE Act is the first piece of legislation in many years to address retirement planning and is designed to reduce anticipated retirement saving shortfalls.

The SECURE Act’s major changes are to increase the ability of employers to establish retirement plans and reduce administrative requirements, and to provide individuals with increased opportunities to save for retirement. To pay for the increased benefits, the SECURE Act partially removes the “STRETCH” features currently available for certain inherited IRAs.

I

REMOVAL OF MAXIMUM AGE FOR IRA CONTRIBUTIONS

Currently an individual may not contribute to an IRA after attaining age 70½ . The SECURE Act removes the age limitation for contributions to traditional IRAs. This feature will allow a significant number of individuals who have earned income after 70½ to set aside funds for retirement on a tax deductible basis. The SECURE Act is effective January 1, 2020. As such, the removal of the age restriction does not apply to 2019 contributions.

II

REQUIRED MINIMUM DISTRIBUTION (“RMD”) AGE INCREASES TO AGE 72

Current law generally requires that RMDs commence not later than April 1st of the year after an individual attains age 70½, or actual retirement, if later (unless the account holder owns 5% or more of the plan sponsor). The SECURE Act delays the RMD commencement date to age 72. This change will allow individuals who are still working, or who do not need the distribution, to keep such amounts in a tax deferred vehicle for a longer period and postpone the receipt of taxable income. However, a person who attained age 70½ during 2019 is still required to commence withdrawals by April 1, 2020.

III

LIMITATION ON “STRETCH” PROVISIONS FOR INHERITED IRAs

A major planning device relates to the persons named as beneficiaries of 401(k) plans and IRAs. Prior to January 1, 2020, distributions from such accounts could be taken over the beneficiary’s lifetime. This is particularly advantageous where a child or grandchild is named as a beneficiary, so that the distributions can be “stretched” over such beneficiary’s life expectancy. The stretch allows much smaller taxable distributions and a longer period of tax-free accumulation.

The SECURE Act curtails this planning device by requiring that beneficiaries (other than a spouse) receive distribution of the entire account over a 10-year period. The shorter time period would accelerate receipt of taxable income.

There are several important EXCEPTIONS to the mandatory 10-year pay-out period:

1. Surviving spouses.
2. Beneficiaries who are disabled or chronically
3. Minor children (not grandchildren) up to age 18 (or age 21 depending on state law) or up to age 26 while the child is in school. For them, the 10-year period for distribution will not start until the beneficiary attains the age of majority or completion of education, not to exceed age 26. For example, if a 10 year old child becomes a beneficiary, the mandatory 10-year pay-out would not start until age 18 (or completion of college) which could result in deferrals to age 28 or
4. Beneficiaries who are not more than 10 years younger than the participant. Under this exception, a beneficiary who is a sibling or friend could use his or her own life expectancy to calculate RMDs if the participant was not more than 10 years

The new shorter time for distributions and the exceptions to the 10-year rule will have an impact on estate planning. For example, a widow or widower may want to name a sibling for a portion of an IRA to allow for an extended payout. A see-through trust can be utilized to coordinate these exceptions.

The elimination of the STRETCH provisions will necessitate a review of current estate planning documents (specifically IRA and retirement plan beneficiary designations). In addition, there will be a need to evaluate whether a Roth conversion should be utilized in light of reduction of the STRETCH opportunities.

IV

SAFE HARBOR ALLOWING SPONSORS OF 401(k) PLANS TO OFFER ANNUITIES

Previously, sponsors of 401(k) plans were reluctant to offer annuities to plan participants due to ERISA fiduciary prohibitions. The SECURE Act provides a safe harbor permitting annuities as an investment option. This availability of lifetime income will help plan participants to have access to investments which will protect against the risk of outliving their savings.

OTHER PROVISIONS IN THE SECURE ACT

– Expansion of rules for small employers to collectively adopt 401(k) plans

– A $500 tax credit to incentivize small employers to encourage automatic enrollment

– Exemption from 10% penalty for distributions up to $5,000 in the event of a qualified birth or adoption

– Additional disclosures will be required from defined contribution plans (e.g. 401(k) and profit sharing plans) regarding availability of lifetime income as contrasted with a lump sum distribution. The SECURE Act mandates annual information about lifetime income, which will help participants plan for retirement and determine possible shortfalls in income

– Requirement that long-term, part-time employees (with 500 hours of service for 3 years) be included as plan participants