Tuesday, July 23, 2019

SECURE Act Would Affect Retirement Planning

By: Joe D. Lieberman, J.D., LL.M., Law Clerk, Morris Law Group - June 27, 2019



On May 23, 2019, the U.S. House of Representatives passed The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). H.R. 1994.The SECURE Act would make significant changes to the U.S. retirement system. The SECURE Act passed with nearly unanimous support across party lines, in a vote of 417-3. The legislation now goes to the U.S. Senate for consideration in
that chamber.

The SECURE Act would make a number of changes to employer-sponsored retirement plans and individual retirement accounts (IRAs), including, among others:

  • Raising the minimum age for required minimum distributions from retirement savings plans from 70½ to 72;
  • Increasing the cap on the default contribution rate for employers with automatic enrollment plans from 10 percent to 15 percent after the first year of an employee’s enrollment;
  • Eliminating a requirement for employers to share a common industry in order to form a multiple employer plan (MEP);
  • Eliminating a provision in current law disqualifying MEPs in which one employer fails to meet requirements;
  • Providing for the distribution of assets from terminated 403(b) plans;
  • Allowing part-time workers to become eligible for enrollment in 401(k) plans following one year of service with at least 1,000 hours worked or at least 3 years of service with at least 500 hours;
  • Allowing participants to withdraw up to $5,000 without penalty from any employer-sponsored plan or IRA, and exempting repayment of the withdrawn funds from taxation;
  • Providing pension funding relief to qualified family-owned, independent newspapers;
  • Allowing home health care workers with tax-exempt "difficulty of care" compensation to contribute to employer-sponsored plans or IRAs; and
  • Requiring designated beneficiaries of IRAs to withdraw all plan assets within 10 years of the death of the account holder (within five years for nondesignated beneficiaries).
  • For purposes of this article, only modifications of required distribution rules for designated beneficiaries under Title IV-Revenue Provisions, Section 401, of the SECURE Act, will be addressed.

The SECURE Act would significantly modify the required distribution rules for designated beneficiaries. In the case of a defined contribution plan, if an employee dies before the distribution of the employee’s entire interest, nonspouse designated beneficiaries of IRAs would be required to withdraw all plan assets within 10 years of the death of the account holder (within five years for nondesignated beneficiaries). This limitation does not apply to: (i) the surviving spouse of the employee; (ii) a child of the employee who has not reached majority (a child will cease to be an eligible designated beneficiary as of the date the child reaches majority and any remainder of the portion of the individual’s interest shall be distributed within 10 years after such date); (iii) disabled (within the meaning of section 72(m)(7)); (iv) a chronically ill individual (within the meaning of section 7702B(c)(2)); or (v) an individual not described in any of the preceding subclauses who is not more than 10 years younger than the employee.

The determination of whether a designated beneficiary is an eligible designated beneficiary will be made as of the date of death of the employee. If an eligible designated beneficiary dies before the portion of the employee’s interest is entirely distributed, the remainder of such portion will be distributed within 10 years after the death of such eligible designated beneficiary.

In general, except as provided below, the above amendments apply to distributions with respect to employees who die after Dec. 31, 2019. In the case of a governmental plan, the above amendments apply to employees who die after Dec. 31, 2021.

The above amendments will not apply to a qualified annuity, which is a binding annuity contract in effect on the date of enactment of the SECURE Act and at all times thereafter.

This rule would essentially eliminate stretch IRAs for certain nonspouse beneficiaries whereby, under prior rules, nonspouse beneficiaries were permitted to grow their inherited IRAs tax deferred for an extended period after the death of the employee. A significant consequence of this new rule would require income tax to be immediately paid by a nonspouse beneficiary upon the 10th withdrawal year.

If you have a retirement account and would like to discuss it with us, or, if you believe that your beneficiaries may be subject to income tax upon your death and are interested in learning more about retirement planning, please do not hesitate to contact the Morris Law Group to discuss how our attorneys may be helpful to achieve such estate planning goals.

** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.

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