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SECURE Act: Changes May Be Coming Soon to Retirement Savings

By Bill Schwartz, CPA, CFP®, Managing Director

Believe it or not, there is something that Democrats and Republicans in Congress can agree on, and that is the need for all Americans to increase their retirement savings. Although there is not yet consensus on what any final legislation may look like, there are enough similarities between House and Senate proposals to believe that there could be some movement here. The Senate Finance Committee first reported the Retirement Enhancement and Savings Act (RESA) in November of 2016, followed by a House version known as the Setting Every Community Up for Retirement Act (SECURE), which passed the House Ways & Means Committee in April. Just to give you an idea of what changes are being considered:

The Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act)

  • Section 103. Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs. This provision will increase the tax credit for employers to create a new defined contribution plan (section 401(k) or SIMPLE IRA) with a tax credit up to $5,000 per year. The credit applies for up to three years.
  • Section 104. Small Employer Automatic Enrollment Credit. This provision creates a new tax credit of $500 per year to employers to add an auto enrollment feature to their defined contribution plans (as auto enrollment tends to increase employee participation). This credit is in addition to the plan start-up credit and would be available for three years.
  • 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 70½. As Americans live longer, an increasing number continue employment beyond traditional retirement age.
  • Section 111. Allowing Long-term Part-time Workers to Participate in 401(k) Plans. Under current law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees. The bill will require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service.
  • Section 112. Penalty-free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption. The legislation provides for penalty-free withdrawals from retirement plans for any “qualified birth or adoption.”
  • Section 113. Increase in Age for Required Beginning Date for Mandatory Distributions. Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. However, age 70 ½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy. The bill increases the required minimum distribution age from 70 ½ to 72.
  • Section 203. Disclosure Regarding Lifetime Income. 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.
  • 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.
  • Section 401. Modifications to Required Minimum Distribution Rules. The legislation modifies the Required Minimum Distribution (RMD) rules with respect to defined contribution plans 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) 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 (no more stretch IRAs).

The Retirement Enhancement and Savings Act of 2019 (RESA)

  • Section 105. Increase Credit Limitations for Small Employer Pension Plan Start-Up Costs (Section 45E of the Code). Same as Section 103 above.
  • Section 106. Small Employer Automatic Enrollment Credit (New Section 45S of the Code). Same as Section 104 above.
  • Section 108. Repeal of Maximum Age for Traditional IRA Contributions (Sec. 219 of the Code). Same as Section 106 above.
  • Section 203. Disclosure Regarding Lifetime Income (Sec. 105 of ERISA). Same as Section 203 above.
  • Section 501. Modifications to Required Minimum Distribution Rules (Sec. 401(a)(9) of the Code). Same as Section 401 above.

As you can see, the House added several provisions not considered in the Senate bill. This bill is also currently held up in the Senate, where a handful of Senators are asking that provisions be added that allow 529 accounts to pay for home school expenses. As further information becomes available, or if it looks like any particular legislation is moving forward, we will obviously keep you informed. In the interim, do not hesitate to reach out to your Bronfman Rothschild advisor if you have any questions or concerns.

 

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