Congress Passes Sweeping Retirement Legislation, Sends To President's Desk
Congress has passed the Setting Every Community Up for Retirement Enhancement or SECURE Act as part of its 2020 spending package — providing advisors, the financial services industry and investors with the most significant piece of retirement legislation in a decade.
Currently, 40% of private-sector workers do not have access to a workplace retirement plan. “The SECURE Act will increase workers' access to retirement savings and allow them to make contributions for as long as they are working.
The bill now goes to President Trump to sign as part of the overall spending bill. Without his signature, the federal government will shut down tomorrow at 11:59 p.m.
The SECURE Act includes many commonsense reforms that will increase access to workplace retirement plans and expand retirement savings. Of particular importance, the bill eliminates barriers for smaller employers to band together in a multiple employer plan, which will offer a way for millions of small business and self-employed workers to obtain workplace retirement coverage.
The legislation significantly increases the tax credit for employers who create new plans from the current cap of $500 to a more realistic $5,000. Small employers that implement an automatic enrollment feature in their retirement plan design would also be eligible for an additional $500 credit.
The SECURE Act would also ease the existing rules restricting multiple employer plans (MEPs) to allow two or more unrelated employers to join a pooled employer plan, producing economies of scale that can expand access and lower both employer and plan participant cost.
The legislation also expands opportunities for employers to use annuities in retirement plans, increases the age at which required minimum distributions must be taken from retirement accounts and repeals the age limit for IRA contributors – all of which can help ensure that retirees do not outlive their retirement savings.
The legislation will also:
- simplify 401(k) safe harbor rules;
- provide a fiduciary safe harbor for selection of a lifetime income provider;
- modify the nondiscrimination rules to protect longer-service participants;
- extend the current required minimum distribution requirements to age 72;
- expand portability and include lifetime income options using annuities for the first time;
- allow certain part-time workers to participate in 401(k) plans;
- require lifetime income disclosures so that plan participants receive an illustration of how much monthly income their retirement savings will provide.
Two controversial provisions held the bill up in the Senate prior to its attachment to the spending bill: the elimination of the stretch IRA and the favorable treatment given to annuities inside of retirement accounts.
The stretch IRA provision is the big revenue generator of the bill. It would eliminate most — but not all—beneficiaries' ability to stretch distributions from IRAs and defined-contribution plans over their life expectancy — excluding spouses who can still take advantage of stretch strategies. Instead of having nearly 30 years to take distributions, the SECURE Act would require all distributions to be taken by the end of the 10th year following the account owner's death.
That not only shortens the time period tax-advantaged accounts can grow, but money in Roth accounts and traditional IRAs or 401(k)s will have to be distributed faster to heirs and beneficiaries, reducing the tax-deferred growth benefits of inheriting an account.
As important, because the account must be distributed over a 10-year period, it'll be taxed at higher rates than if the distributions were spread out over 30 years. This is because many beneficiaries will be in their peak earning years when taking the distributions and adding large taxable distributions from IRAs onto their current income might bump them into a higher tax bracket.
Source: Financial Advisor Magazine