On December 20, 2019, Congress enacted the SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement Act of 2019.” P.L. 116-94, Division O. The Act aims to expand and preserve
retirement systems, simplify complex rules, and make retirement plans more accessible to employees. The Act also recognizes that individuals are living longer than in the past and need increased funds in retirement, such as for growing medical costs. As such, the Act removes the age limit on contributions (which used to be prohibited after age 70½), allowing older Americans who continue their employment an opportunity to continue saving. Participants must now be provided, at least annually, a benefit statement illustrating the monthly payments the participant would receive if the entire account balance were used to provide a lifetime income stream.
Among the changes are new and increased tax credits to small employers that set up 401(k) or IRA plans or convert existing plans to an “automatic enrollment” design to increase employee participation. In addition, employees who work part-time (less than 1,000 per year) were often excluded from employer retirement plans. Under the SECURE Act, part-time employees who have worked at least 500 hours per year for at least three years must be allowed to participate in their employer’s 401(k) plan. The Act also enables many home healthcare workers to start saving for retirement even though they do not meet the “taxable income” requirements, by providing that non-taxable “difficulty of care” payments are to be deemed compensation for purposes of calculating the contribution limits to retirement accounts.
Other aspects of the Act change the way plan assets may be used prior to retirement. Individuals may now take penalty-free withdrawals from a retirement plan for any “qualified birth or adoption distributions,” but may not take loans from their retirement plan to pay credit cards or similar arrangements.
Perhaps the most notable change is the increase in the age an individual must begin taking “required minimum distributions” (“RMDs”) from their retirement plan, which has increased from age 70½ to age 72. The Act recognizes that the RMD age was put in place in the 1960s, and should be adjusted to account for increases in life expectancy. Since this change directly affects many individuals between the ages of 70 and 72, the IRS issued guidance in Notice 2020-6. Under prior rules, financial institutions were required to notify by January 31, 2020 all individuals turning 70½ in 2020 of their RMD requirement beginning in 2020. Since such individuals turning 70½ after December 31, 2019 are no longer required to begin taking RMDs until they reach age 72, financial institutions do not need to send such notice to these individuals in 2020. However, if a financial institution sends such a notice to a person turning age 70½ in 2020, the financial institution should thereafter notify the person by no later than April 15, 2020 that no RMD is due for 2020.
Another notable change is for “inherited IRAs.” When an individual dies, the beneficiary of the IRA must distribute the full amount of the inherited IRA within 10 years of the decedent’s death. This drastically limits the beneficiary’s ability to “stretch” receipt of the inherited IRA funds over the life of the beneficiary as under prior rules. The 10-year limit does not apply to a beneficiary who is the decedent’s surviving spouse, a disabled individual, an individual not more than 10 years younger than the decedent, or a minor child of the decedent.
All individuals who participate in or receive distributions from a retirement plan should be aware of these changes and consult with their plan provider or attorney for questions or concerns they may have. In the interim, tax advisors and plan sponsors should watch for more IRS guidance as the changes to existing retirement laws are implemented.
Sandra Mertens
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