2019 Secure Act

After several Congressional delays, the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) set to finally become law.

For the first time in more than a decade, Congress has pushed through important measures to help millions of Americans save more towards retirement. This bill, as signed into law by President Donald Trump on December 20, 2019, provides many changes to ensure accessibility for all, and will become effective on January 1, 2020.

MAJOR CHANGES TO INDIVIDUAL RETIREMENT ACCOUNTS (IRAS)

One of the more notable changes enacted by the SECURE Act is the removal of the age cap on making a contribution to a Traditional IRA. Currently, individuals are prohibited from making contributions to a Traditional IRA starting in the year they turn 70 1⁄ . Starting in 2020 and similar to the current contribution rules for a Roth IRA, an individual with earned income can make a contribution to a Traditional IRA. This is a huge step for retirement savers, especially as people, on average, are working longer.

Not only are more individuals working longer, Congress has also recognized that people are living longer too. As a result of the increase in life expectancy, the required beginning date for taking distributions from a Traditional IRA has now increased from 70 1⁄ to 72. However, it should be noted that the required minimum distribution start date change only applies to those individuals that have not attained age 70 1⁄ in 2019 or before. Individuals who have attained age 70 1⁄ in 2019, or before, cannot defer future required minimum distributions until reaching age 72. Rather these individuals must continue the course of taking their required minimum distributions (RMDs), annually.

WEALTH TRANSFER PLANNING IMPLICATIONS

Since 2012, Congress has made various attempts to limit a non-spouse beneficiary from stretching out an Inherited IRA over their lifetime while continuing to allow the Inherited IRA to grow on a tax deferred basis. This benefit is magnified with younger beneficiaries. By accelerating the taxation of the Inherited IRA, individuals would not only pay taxes faster, but the increased distribution amounts could lead the individual to owe a greater amount of taxes in that year. Moreover, once the money was outside of the Inherited IRA, the individual would either spend the after tax amount in the economy or invest in the economy. By investing in the economy the IRS would again be set to tax the increase in value upon sale of the asset. In fact, the IRS has projected that removing the stretch-out provision for non-spouse beneficiary would generate over $2 billion in tax revenue within 10 years. After seven years of failed attempts to change the stretch-out rules, Congress has finally achieved its goal to eliminate the stretch-out of an Inherited IRA. Instead, most beneficiaries must fully withdraw the balance, and thus recognize the income, by the end of the 10th year starting in the year after the original IRA owner’s death. These new rules apply to all IRA owners that die after December 31, 2019.

However, there are exceptions that allow certain “Eligible Beneficiaries” to avoid the 10-year, anti- stretch, rule. The following individuals may elect to stretch their Inherited IRA within applicable limits, each determined as of the date of the decedent/owner’s death:

2019 Secure Act and why you must know it!

1. (i) Spouses: A spouse may continue to elect to roll a deceased spouse’s IRA into their own, or they may elect to receive an Inherited IRA to be distributed over the course of their life expectancy;

2. (ii) Minor children: A minor bene ciary may stretch the Inherited IRA over their life expectancy until they reach the age of majority. However, the 10-year clock starts running upon the attainment of such age, and they must fully withdraw the funds from the Inherited IRA within the 10 year window starting in the year in which the child attains the age of majority;

3. (iii) Disabled Persons: Certain individuals with disabilities de ned under I.R.C. 72(m)(7) may stretch the Inherited IRA over their life expectancy;

4. (iv) Chronically ill Persons: Certain individuals with chronic illness as de ned under I.R.C. 7702B(c)(2) with certain required certi cations made may stretch the Inherited IRA over their life expectancy; and

5. (v) Persons Close in Age: A person who is not more than 10 years younger than original IRA owner may stretch the Inherited IRA over their life expectancy.

The anti-stretch provision drastically changes how your advisors will view IRAs as a wealth transfer vehicle. Strategies have changed and it is imperative that you work with your advisors to thoughtfully consider your options when naming beneficiaries and, perhaps, taking steps during your lifetime to change the tax status of a portion of your Traditional IRAs.

In the past, a common estate planning technique for IRA owners with sizable IRA values has been to establish long- term trusts for their children and naming the trust as the beneficiary of their retirement accounts. These trusts could include “conduit provisions,” to allow for the Inherited IRA payments to be stretched over the lifetime of the trust’s beneficiary (child), by requiring that all retirement account distributions to the trust (the required minimum distribution amount and any other distribution from the Inherited IRA), be further distributed outright to the beneficiary. This offered the best of both worlds: tax deferral for the beneficiaries, and protection of the principal. However, now that the SECURE Act requires a 10-year payout, conduit provisions may cause the rapid depletion of an important trust asset, while negating the spendthrift and creditor protection over substantial trust funds. It will become important for retirement account owners to consider their primary goals in estate planning with their accounts.

Regardless of your goals, it is imperative that you review the beneficiary designations on all of your accounts, with your advisors, to identify new planning opportunities and minimize unintended consequences.

SAVINGS FOR STUDENTS & HOME CARE WORKERS

Prior to the passage of the SECURE Act, students who were the recipients of stipends and non-tuition fellowship payments were not able to count those funds as earned income. Under the new law, these dollars will now count as earned income, and subsequently, can make one eligible for contributions into an IRA.

Similarly, individuals who provide in-home health care had previously been unable to count income that would otherwise be considered a “difficulty of care” payment. These payments will now be considered compensation for purposes of calculating contributions to retirement plans and IRAs.

529 RELATED PROVISIONS

While most updates to the law centered on retirement savings, there were a few additions to the bill in other areas. For families, there have been two major changes. Up to $10,000 of 529 plan assets can now be used to pay off student debt of a 529 plan beneficiary during an individual’s lifetime. Up to $10,000 can also be used for any siblings of the plan beneficiary. Eligible loan expenses include any payments made to principal or interest. This change is effective at the

2019 Secure Act and why you must know it!

federal level, but plan owners and/or beneficiaries ought to check with their specific state plan, as this tax free treatment at the federal level may not carry over at the state level.

The definition of a qualified education expense for which 529 proceeds can be used has also been expanded. Qualified education expenses now include expenses related to apprenticeship programs registered and certified with the Secretary of Labor.

EARLY WITHDRAWAL PENALTY EXCEPTION FROM QUALIFIED PLANS AND IRAS

The SECURE Act adds a new exception to the 10% early distribution penalty from retirement accounts for qualified childbirth or adoption expenses. An IRA owner is allowed to withdraw up to $5,000 during their lifetime for this exclusion. A qualified birth or adoption distribution refers to any distribution that was made during the one-year period beginning on the date on which a child of the individual was born or on the date during which a legal adoption is finalized.

To qualify for the adoption portion of the provision, an “eligible adoptee” means the adopted individual has not attained the age of 18 or is mentally incapable of self-support at the time the adoption occurs. The distribution cannot be taken before the child is born or adopted, even if it’s for costs related to a planned birth or adoption.

If the distribution is taken from a qualified plan, it is exempt from the mandatory 20% withholding requirement.

Two other non-retirement related provisions that were included in the SECURE Act include:

For volunteer firefighters and emergency medical responders, a special exclusion has been reinstated allowing for reimbursement payments to qualifying individuals. The exclusion for these payments has gone up to $50 per month in those months where the individual has participated in volunteer services.

The other change increases the penalty for failure to file taxes, aimed at reducing the number of taxpayers that miss filing deadlines or skip filing altogether.

For taxpayers, this figure is now the lesser of $400 or 100% of the tax due. There was also an increase in the penalty for failing to file for retirement plan returns, which can promote timely filing and adherence to the rules.

CHANGES TO EMPLOYER RETIREMENT PLANS

Many of the changes resulting from SECURE Act focus specifically on employer retirement plans and increasing accessibility for retirement savers abound. In some cases, the changes seem slight in nature, but for participants in retirement plans, both large and small, these can have a big impact over time. Employer retirement plans must go through vigorous testing each year to ensure they are in compliance and some of the changes enacted through the new bill increase plan scrutiny, including increased plan access for new employees.

Previously, it was challenging for a part- time employee to get access because employers could stipulate that they had to work at least 1,000 hours during the year to become eligible. Now, the rules are more flexible, and a participant can be admitted if they meet the 1,000-hour minimum in a single year, or if they have at least 500 hours of service annually in three consecutive years.

Additionally, employers can elect to have an auto-enrollment feature in the plan whereby new additions get enrolled at a starting percentage of the individual’s salary and each year that percentage goes up. Previously, employers had a maximum of 10% that this percentage could go up to, but the SECURE Act has changed that to 15%. For those employees with a ‘set it and forget it’ mindset, this feature can amount to greater savings without much effort.

Along those same lines, stricter rules have been enacted around plan notices, which allow for greater flexibility and more seamless plan administration, so employers can focus on what matters most, such as providing fair disclosures on what an individual’s potential balance could generate in annual income. To encourage more small businesses to set up plans, the bill offers increased credit opportunities to employers to help offset the startup fees of starting a plan, makingthe barriers to entry much lower. Further, depending on the plan type started, employers can get an additional credit for adding an auto-enrollment option to their plan, which has been shown to increase participation across the board.

One of the most notable changes in the retirement plan space from SECURE Act is the additional language it has provided around pooled retirement plans. As previously noted, the barriers and costs to starting a retirement plan are not cheap, and one option now available is to allow multiple small businesses to share in a single plan, helping to add scale and making administration more affordable. The bill further outlines the protection offered to each employer, in the event one of the other employers in the plan does not conform to the rules.

FIXES AND EXTENDER NOTES:

2019 Secure Act and why you must know it!

Congress tied the SECURE Act to the Appropriations Bill, which allowed Congress to add-on various tax extenders, while also fixing a provision from the Tax Cuts and Jobs Act (TCJA) of 2017.Under TCJA, a child’s unearned income (“kiddie tax”) was taxed under Trust & Estate Tax rates. The fix moves the child’s unearned income back to the parents’ tax rates beginning in 2020.

THE SETTING EVERY COMMUNITY UP FOR RETIREMENT ENHANCEMENT ACT OF 2019 (THE SECURE ACT)

TITLE I: Expanding and Preserving Retirement Savings

Section 101. Expand Retirement Savings by Increasing the Auto Enrollment Safe Harbor Cap

The legislation increases the cap from 10 to 15 percent of employee pay that required automatic escalation of employee deferrals go no higher than under an automatic enrollment safe harbor plan.

Section 102. Simplification of Safe Harbor 401(k) Rules

The legislation changes the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection and facilitate plan adoption. The legislation eliminates the safe harbor notice requirement, but maintains the requirement to allow employees to make or change an election at least once per year. The bill also permits amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time would be allowed if the amendment provides (1) a nonelective contribution of at least four percent of compensation (rather than at least three percent) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year.

Sec. 103. Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs

Increasing the credit for plan start-up costs will make it more affordable for small businesses to set up retirement plans. The legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.

2019 Secure Act and why you must know it!

Section 104. Small Employer Automatic Enrollment Credit

Automaticenrollmentisshowntoincreaseemployeeparticipationandhigherretirementsavings. The legislation creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan start-up credit allowed under present law and would be available for three years. The credit would also be available to employers that convert an existing plan to an automatic enrollment design.

Section 105. Treat Certain Taxable Non-Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes

Stipends and non-tuition fellowship payments received by graduate and postdoctoral students are not treated as compensation and cannot be used as the basis for IRA contributions. The legislation removes this obstacle to retirement savings by taking such amounts that are includible in income into account for IRA contribution purposes. The change will enable these students to begin saving for retirement and accumulate tax-favored retirement savings.

Section 106. Repeal of Maximum Age for Traditional IRA Contributions

The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 1⁄ . As Americans live longer, an increasing number continue employment beyond traditional retirement age.

Section 107. Qualified Employer Plans Prohibited from Making Loans through Credit Cards and Other Similar Arrangements

The legislation prohibits the distribution of plan loans through credit cards or similar arrangements. The change will ensure that plan loans are not used for routine or small purchases, thereby preserving retirement savings.

Section 108. Portability of Lifetime Income Options

The legislation permits qualified defined contribution plans, section 403(b) plans, or governmental section 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. The change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees.

Section 109. Treatment of Custodial Accounts on Termination of Section 403(b) Plans

Under the provision, not later than six months after the date of enactment, Treasury will issue guidance under which if an employer terminates a 403(b) custodial account, the distribution needed to effectuate the plan termination may be the distribution of an individual custodial account in kind to a participant or beneficiary. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until paid out, subject to the 403(b) rules in effect at the time that the individual custodial account is distributed. The Treasury guidance shall be retroactively effective for taxable years beginning after December 31, 2008.

Section 110. Clarification of Retirement Income Account Rules Relating to Church-Controlled Organizations

Separation from service with a church, a convention or association of churches, or an organization described above.The legislation clarifies individuals that may be covered by plans maintained by church controlled organizations. Covered individuals include duly ordained, commissioned, or licensed ministers, regardless of the source of compensation; employees of a tax-exempt organization, controlled by or associated with a church or a convention or association of churches; and certain employees after

Section 111. Allowing Long-term Part-time Workers to Participate in 401(k) Plans

2019 Secure Act

Section 115. Treating Excluded Difficulty of Care Payments as Compensation for Determining Retirement Contribution Limitations

Many home healthcare workers do not have a taxable income because their only compensation comes from “difficulty of care” payments exempt from taxation under Code section 131. Because such workers do not have taxable income, they cannot save for retirement in a defined contribution plan or IRA. This provision would allow home healthcare workers to contribute to a plan or IRA by amending Code sections 415(c) and 408(o) to provide that tax exempt difficulty of care payments are treated as compensation for purposes of calculating the contribution limits to defined contribution plans and IRAs.

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TITLE II: Administrative Improvements

Section 201. Plans Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Y ear

The legislation permits businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year to treat the plan as having been adopted as of the last day of the taxable year. The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings.

Section 202. Combined Annual Reports for Group of Plan

The legislation directs the IRS and DOL to effectuate the filing of a consolidated Form 5500 for similar plans. Plans eligible for consolidated filing must be defined contribution plans, with the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries. The change will reduce aggregate administrative costs, making it easier for small employers to sponsor a retirement plan and thus improving retirement savings.

Section 203. Disclosure Regarding Lifetime Income.

2019 Secure Act and why you must know it!

The legislation requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at least once during any 12-month period. The disclosure would illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity. The Secretary of Labor is directed to develop a model disclosure. Disclosure in terms of monthly payments will provide useful information to plan participants in correlating the funds in their defined contribution plan to lifetime income. Plan fiduciaries, plan sponsors, or other persons will have no liability under ERISA solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with the assumptions and guidance under the provision and that include the explanations contained in the model disclosure.

Section 204. Fiduciary Safe Harbor for Selection of Lifetime Income Provider

The legislation provides certainty for plan sponsors in the selection of lifetime income providers, a fiduciary act under ERISA. Under the bill, fiduciaries are afforded an optional safe harbor to satisfy the prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract and are protected from liability for any losses that may result to the participant or beneficiary due to an insurer's inability in the future to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a defined contribution plan.

Section 205. Modification of Nondiscrimination Rules to Protect Older, Longer Service Participation

The legislation modifies the nondiscrimination rules with respect to closed plans to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer- service employees as they near retirement.

TITLE III: Other Benefits Section 301. Benefits for Volunteer Firefighters and Emergency Medical Responders

The legislation reinstates for one year the exclusions for qualified State or local tax benefits and qualified reimbursement payments provided to members of qualified volunteer emergency response organizations and increases the exclusion for qualified reimbursement payments to $50 for each month during which a volunteer performs services.

2019 Secure Act and why you must know it!

Section 302. Expansion of Section 529 Plans

The legislation expands 529 education savings accounts to cover costs associated with registered apprenticeships; homeschooling; up to $10,000 of qualified student loan repayments (including those for siblings); and private elementary, secondary, or religious schools.

TITLE IV: Revenue Provisions Section 401. Modifications to Required Minimum Distribution Rules

The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

Section 402. Increase in Penalty for Failure to File

The legislation increases the failure to file penalty to the lesser of $400 or 100 percent of the amount of the tax due. Increasing the penalties will encourage the filing of timely and accurate returns which, in turn, will improve overall tax administration.

Section 403. Increased Penalties for Failure to File Retirement Plan Returns

The legislation modifies the failure to file penalties for retirement plan returns. The Form 5500 penalty would be modified to $105 per day, not to exceed $50,000. Failure to file a registration statement would incur a penalty of $2 per participant per day, not to exceed $10,000. Failure to file a required notification of change would result in a penalty of $2 per day, not to exceed $5,000 for any failure. Failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year. Increasing the penalties will encourage the filing of timely and accurate information returns and statements and the provision of required notices, which, in turn, will improve overall tax administration.

Section 404. Increase Information Sharing to Administer Excise Taxes

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The legislation allows the IRS to share returns and return information with the U.S. Customs and Border Protection for purposes of administering and collecting the heavy vehicle use tax.

For informational Purposes only.

This Summary is not complete nor the IRS rules are yet final. Not intended for any type of tax advice. 2-1-2020

Please IRS Publication 590 for updates.

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