Take-Away: The House of Representatives passed its version of the SECURE Act last week [H.R. 1994.] The Legislation now moves to the Senate for review and probable modification. A couple of big changes will come with the SECURE Act, if it becomes law. While some of the changes are minor ‘tweaks’ that are designed to help folks save for retirement or pay for education expenses, the Bill is in reality more a revenue generating measure to pay for the deficits caused by the 2017 Tax Act. {That is the cynic in me talking.}

Background: The House of Representatives’ version of the SECURE Act contains the following changes, among many others, with regard to retirement savings and distributions:

  • RMDs: The age at which an individual must begin to take required minimum distributions would be extended from 70 ½ to age 72, beginning after 2019;
  • IRA Contributions: An individual, if he/she still has earned income, may contribute to an IRA after attaining age 70 years- the old rule prevented IRA contributions once the individual attained age 70 years, despite having earned income, beginning after 2019;
  • Inherited IRA RMDs: This is by far the most impactful change. An inherited IRA (or qualified plan account) would be required to be fully distributed within 10 years after its owner’s death. This change would effectively end what is known as the stretch IRA that was exploited by naming a young individual as the retirement account beneficiary, so that taxable distributions from the inherited retirement account could be stretched over the beneficiary’s life expectancy. This new rule would not apply to surviving spouses, to minor children (i.e., a stretch would be permitted until the minor attained age 18, after which the 10 year pay-out rule would apply) and for beneficiaries with specified disabilities or who are chronically ill, applying after 2019.

Other Proposed Changes: What follows are other highlights of the 125 page SECURE Act, that cover a broad range of topics either related to retirement plans or to 529 accounts:

  • Pooled Employer Plans Authorized: Some qualified plans would be permitted to be pooled, treated and reported as a single plan, in order to save expenses incurred in sponsoring qualified retirement plans. An organization could be designated and certified by the Department of Labor as the pooled plan provider.
  • Annual Reporting Simplified: Treasury is directed to come up with new Regulations that would authorize simplified annual reporting for the qualified plan. In addition, some plan sponsors with multiple qualified plans would be able to aggregate the annual reports of the multiple plans are part of this simplification reporting goal.
  • Lifetime Income Options Added: Qualified plans would be permitted to offer lifetime income options for participants, including annuities. Plan sponsors or fiduciaries that permitted the lifetime income ‘investment’ option in their plans would be provided a safe harbor from liability for their selection of the lifetime income provider, e.g. the selection of the annuity company as an investment option. These lifetime income investments would be eligible for portability from one trustee to another trustee. The lifetime income investment option would also be extended to participants in 403(b) and 457 deferred compensation plans.
  • Nondiscrimination Rules Loosened: New rules will be used to ‘test’ defined benefit plans that have an older workforce; these new nondiscrimination rules would be designed to make it easier for the plan to demonstrate that it is not discriminatory in the benefits that it provides to all of its plan participants, despite an older workforce, generally speaking, that is covered by the defined benefit plan.
  • Employer Tax Credits Increased: Small employers will be induced to adopt a qualified retirement plan through the use of a tax credit that is applied against the start-up costs incurred to adopt the qualified plan. The credit is increased from $250 to $500 for each non-highly compensated employee who is covered by the new qualified plan (a credit that is used within the first 3 years of the plan’s adoption.)
  • Automatic Participant Enrollment Incentivized: Qualified plans that provide for automatic enrollment of all new employees are also incentivized under the Tax Code, with a credit available for all automatically enrolled participants. Like the plan start-up credit, this credit for automatically enrolled participants increases to $500 per participant for the first three years of the plan that contains this plan feature. This rule change also includes an expansion of the safe harbor for 401(k) plans that contain a nonelective contribution of 4% of compensation for its participants.
  • Plan Loans Restricted: A qualified plan that permits loans from a retirement account that uses a credit card or similar arrangement are now prohibited.
  • 401(k) Eligibility Expanded: Authorized participation in a 401(k) plan would be expanded to include long-term employees who work more than 500 hours but less than 1,000 hours for the plan sponsor, i.e. part-time employees who work into their retirement years.
  • Retroactive Adoption of Qualified Plans: An employer would be able to adopt retroactively a qualified plan after the close of the prior calendar year, so long as the plan was adopted prior to the employer filing its income tax return for the prior calendar year.
  • Penalty-Free IRA Distributions: Distributions from an IRA for the birth of a child or an adoption of a child would be free from the 10% premature distribution penalty, i.e. a distribution prior to age 59 ½, but the distribution itself would still be taxable. The amount that can be distributed penalty-free (but still subject to income taxation) is $5,000 per year. If the IRA owner makes a re-payment of the withdrawn amount to his/her IRA, it will be treated as an eligible trustee-to-trustee transfer, i.e. without any income tax withholding and not treated as an excess IRA contribution.
  • Definition of Compensation Expanded: The amounts that are received by an individual as a non-tuition fellowship grant or stipend will be treated as earned compensation for purposes of the recipient being eligible to make an IRA contribution.
  • 529 Distributions Expanded: The definition of higher education expenses is dramatically broadened: (i) registered apprenticeship programs that require fees, supplies, books and equipment will all be treated as a higher education expense; (ii) homeschooling expenses (books, on-line computer classes, etc.) will also now be covered; (iii) educational therapies for students with disabilities will be covered; (iv) the repayment of a student loan, up to $10,000 will be covered, for both the designated 529 account beneficiary and that beneficiary’s siblings (the same $10,000 could be used to repay a sibling’s school debt- but the amount is limited, not tied to the number of siblings with school debts); and (v) tuition, books, fees, and other related expenses will be covered with regard to a designated beneficiary’s elementary, secondary, public, private, or religious education.

Conclusion: This is not the law-yet. However, it will be something to watch closely in the next few months as the Senate considers it. A few years back the Senate Finance Committee unanimously adopted legislation that inhibited the stretch IRA to 5 years, with a $450,000 ‘carve out.’ Most of those Senators who previously approved dramatically curtailing stretch IRAs remain on that Finance Committee. As for the other assorted ‘trade-off’ enhancements that would encourage retirement savings, they would be welcome changes, but it is not clear just how many individuals would actually benefit from the multiple changes to existing law.