Thursday, February 13, 2020

The SECURE Act and Why You Need to Know About It

By Joe D. Lieberman, J.D., LL.M., Law Clerk, Morris Law Group, Feb. 13, 2020

Morris Law Group discussed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) in our newsletter previously but it has now taken effect, so we thought we would go over the main points. As a reminder, the SECURE Act passed the U.S. House of Representatives on May 23, 2019. On Dec. 20, 2019, President Trump signed the SECURE Act into law that took effect January 1, 2020. This article will address several of the changes in the law. Stuart R. Morris, Esq., CPA, B.C.S., the founding partner of Morris Law Group, created a video about the SECURE Act highlighting what you need to know. You can watch it here.
Before the enactment of the SECURE Act, upon the death of a person who established a defined contribution plan, including an Individual Retirement Account (IRA), 401(k) or 403(b) (whether traditional or Roth), for certain designated beneficiaries, the beneficiary of an inherited IRA could “stretch” the distributions over his or her lifetime permitting tax-deferred growth.
The SECURE Act significantly modifies the required distribution rules for designated beneficiaries. In the case of a defined contribution plan, if an account owner dies after December 31, 2019, and before the distribution of their entire interest, the non-spouse designated beneficiaries would be required to withdraw all plan assets within 10 years of the death of the account owner (within five years for non-designated beneficiaries). This limitation does not apply to:
  • The surviving spouse of the employee;
  • 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);
  • A disabled person;
  • A chronically ill individual; or
  • An individual not described in any of the preceding sub-clauses who is not more than 10 years younger than the account owner.
Additionally, with respect to account owners who died prior to 2020, the accelerated distribution rules are imposed upon the beneficiary who steps into the shoes of the original designated beneficiary who dies prior to the end of his or her life expectancy.
While this particular change means beneficiaries of traditional IRAs will have to pay income taxes sooner rather than later, with respect to Roth IRAs, the shorter withdrawal period means a loss of future tax-free growth.
Several other changes, which have been previously addressed while legislation was pending and we believe are important to highlight again as the law is now in effect include, among others:
  1. Raising the minimum age for required minimum distributions from retirement savings plans from 70½ to 72;
  2. 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;
  3. Eliminating a requirement for employers to share a common industry in order to form a multiple employer plan (MEP);
  4. Eliminating a provision in current law disqualifying MEPs in which one employer fails to meet requirements;
  5. Providing for the distribution of assets from terminated 403(b) plans;
  6. 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;
  7. Taking penalty free withdrawals of up to $5,000 with respect to a qualified birth or adoption distribution;
  8. Providing pension funding relief to qualified, family-owned, independent newspapers;
  9. Allowing home health care workers with tax-exempt "difficulty of care" compensation to contribute to employer-sponsored plans or IRAs; and
  10. Prohibiting loans from being made by plans through a credit card.
If you have retirement accounts (or retirement accounts payable to a trust), contact Morris Law Group and schedule a consultation for one of our attorneys to review your accounts, as there may be alternative opportunities to plan around the newly required distribution rules.
For more information about the SECURE Act and how it relates to your personal situation, please contact us today.
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