SECURE in Our Thinking

Troy Jensen, QKA, APA | Vice President
Marianne Marvez, RPA | Vice President & Director

In the waning weeks of 2019, a great deal of speculation centered on whether the long-discussed SECURE Act would reach a vote in the Senate before the end of the legislative calendar. The largely nonpartisan bill passed with a 417-3 vote in the House in May, and similarly broad positive regard from those in the Senate pointed to a forgone conclusion to the years of work undertaken to get it there.

As months ticked away and a looming Presidential impeachment trial took focus, however, inevitability began to feel more like impossibility. There was brief hope that SECURE might be passed by unanimous consent, avoiding the time-consuming requirement for floor debate, but that hope was dashed by three Senators who wanted to amend the bill’s language with their own loosely related insertions. Odds of the new retirement rules being passed rapidly faded.

By mid-December, that meandering path changed again: a surprise addition to a $1.4 trillion Congressional appropriations bill incorporated all SECURE’s provisions into a mostly unrelated spending measure that needed to pass to keep our government funded. With that legislative sleight of hand, the Act was thereby ratified and signed into law by the President on December 20th.

Legislative machinations notwithstanding, the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act will affect both retirement plan and individual estate planners alike. Understanding how the new rules affect each of us will be important in the years to come.

Stretched: Out

On the individual side, the most palpable impact will be an end to what has become known as a “stretch IRA” provision. Tax law previously allowed non-spousal beneficiaries of inherited Individual Retirement Accounts to distribute those assets over their lifetimes. The new rule will eliminate that option, now requiring the balance to be distributed within ten years. Spouses and disabled beneficiaries are exempted from the 10-year requirement, but the rest of us will need to comply or alter any plans to use an IRA as a form of mitigating taxes in inheritance. A qualified estate planner or investment advisor can suggest other means to plan for and manage wealth transfer, so it might be a good time to evaluate your strategy in light of the new restrictions.

The SECURE Act also gives a nod to our increased life expectancies by raising the age at which required minimum distributions (RMDs) must begin. Long triggered by a taxpayer reaching age 70 ½, the new RMD begin date is set to age 72 for those who haven’t already begun required distributions by the end of 2019. Applicable to both retirement savings plan accounts and individual retirement accounts, required minimums are determined by your balance as of December 31st of the prior year and your life expectancy as determined by IRS actuarial tables. Most account custodians will help in this calculation each year it applies, and a trusted advisor can help you plan around the income and tax considerations specific to your circumstances.

On the flip side, SECURE also allows retirement savers to continue contributing to their traditional IRA past age 70 ½, so long as you are still working. This change more closely approximates the same provision already in place for employer-sponsored retirement plans and Roth IRA’s.

Additional individual benefits include a new exception to early-withdrawal penalties for new parents who incur adoption or childbirth expenses. Up to $5,000 can be taken from your retirement account – plan or IRA – for these expenses without incurring the usual 10% penalty for doing so before age 59 ½. Less directly related to retirement saving, but nonetheless part of the overall budget picture for many, SECURE also adds a provision to allow up to $10,000 to be withdrawn, tax-free, from qualified 529 plans for repayment of student loans. This one is retroactive to 2019. We recommend you consult with your account provider or tax advisor to determine your eligibility and other implications.

Employer Plan Changes

Plan sponsors and retirement savers who benefit from an employer-sponsored 401(k) and certain other plan types are also affected by the new law. The provisions expand automatic contribution escalation caps from 10% to 15%, allowing employers to proactively prod employees to save more. Rules around adding (and less so, removing) Safe Harbor employer contributions are also adjusted to allow more flexibility. Additional language opens the path to adding in-plan annuity investment options and will (eventually) help make those options more portable. And a new required disclosure in participant statements should help individuals better understand how their retirement account balance might translate into a monthly income in retirement.

Small Businesses and Part-timers Invited to the Party

Part of the Act’s intent was to allow and encourage more individuals to start saving for retirement in a tax-advantaged way. Credits and tax incentives have been added and expanded for small employers to defray the cost of setting up and offering a retirement plan to employees. Further credits are offered for the first three years if the plan includes automatic enrollment.

While not true of all retirement plans, many haven’t previously allowed part-time employees who work less than 1,000 hours to become eligible, leaving a significant portion of workers without a key employment benefit. The new requirement obligates employers sponsoring a 401(k) plan to allow anyone who works at least 500 hours in three consecutive years to participate in their plan. Collectively bargained (union) plans are excluded from this requirement.

Additional flexibility is added for loosely or unrelated employers wanting to share in a joint retirement plan offering. Without getting too far into the details, such Multiple Employer Plan (MEP) and Pooled Employer Plan (PEP) offerings may offer another avenue for employers who might not otherwise be able to provide a retirement plan to their workforce. Details of how these arrangements will operate have yet to be ironed out, but we can expect the Department of Labor to eventually clarify the specifics.

Late Filing Will Sting

While not a new imposition, the existing late- and non-filer daily and maximum penalties that can be assessed by the IRS are increased substantially, some by ten-fold. Form 5500, 8955-SSA, and 1099 requirements now carry a much higher cost when missed or delayed, so plan sponsors should ensure they and their providers remain compliant. The DOL’s penalties for the same infractions remain unchanged.

More to Come-pliance

While the enhancements of the SECURE Act are generally a welcome, pragmatic change for plan sponsors and retirement savers, the rush to get it passed leaves the more practical considerations not completely settled. The IRS and DOL will be providing additional guidance in the months and years to come. As always, Innovest remains committed to guiding you through these and other regulatory changes, and we welcome you to contact us for help in charting your investment path.