From the outset, 2019 looked like it might be “The Year Of Retirement Reform” for Congress.
Last year closed out with a number of retirement bills making real headway through DC, committees, think tanks and lobbyists, and we’ve been poised for major legislation to emerge.
And now we have the first real movement of the year: The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) passed in the House with a 417-3 vote on Thursday and is expected to make it through the Senate during this current term.
The SECURE Act would be the first real major retirement legislation since the Pension Protection Act in 2006. This comes after the Tax Cuts and Jobs Act back in 2017 essentially punted on all of the major retirement reform provisions initially discussed in the Trump Administration.
While the bill has essentially 29 new provisions or major changes, I want to focus on just eight areas. One important note: the SECURE Act is not yet finalized. The Senate has a similar bill before it called the Retirement Enhancement Securities Act (RESA), and, as often happens, some of the RESA’s provisions may make their way into the SECURE Act, or parts of the SECURE Act may be modified through committee or other Congressional action before being signed into law.
While the bill does smooth out some minor road blocks to retirement savings – like removing the IRA age limitation, expanding the start date for RMDs, increasing annuity options, and potentially increasing the likelihood of small employers starting retirement plans – there is still a strong argument that these changes, while positive, won’t move the retirement security needle much or at all. Many of the changes can be viewed as only benefiting wealthy IRA owner’s that don’t need their RMDs yet and a clear nod to the product manufacturing lobby.
The major issues facing retirement security for most Americans still come from Social Security funding issues, rising health care costs through skyrocketing drug costs, strains on Medicare and Medicaid, and – with roughly one-third of the American population not really saving for retirement – small modifications to savings plans likely won’t help this group. This is not to say that the SECURE Act provisions aren’t positive changes, just not really going to do much to deal with the real retirement issues facing Americans.
That being said, here are eight major pieces of the current version of the SECURE Act that I think are worth closer examination.
1. Increase Small Employer Access to Retirement Plans
Title 1, Sec. 101 of the bill would make some significant changes to a variety of retirement rules. It would expand the ability to run multi-employer plans and make the process easier overall. It would essentially allow small employers to come together to set up and offer 401(k) plans with less fiduciary liability concern and less cost than exists today.
The goal here is to try to expand small employers’ capability to offer some form of retirement savings to employees. This has generally been a frustration of previous legislative attempts as the SIMPLE and SEP IRAs were developed in part to achieve this outcome, but ultimately have not filled in as a broadly utilized retirement savings plan for small employers. As such, the SECURE Act will take another stab at this huge issue as many small employers offer no retirement savings options at all, leaving the issue solely to the individual.
2. Increase Annuity Options Inside Retirement Plans
Sec. 204 seeks to update the safe harbor provision for plan sponsors to select annuity providers in order to offer in-plan annuities inside of a 401(k). Today, many 401(k)s stay away from annuities, in part because of concerns about liability in picking an annuity provider for the plan. The new rules would essentially ease this liability concern to some degree, potentially opening up the path for more annuities to be offered inside of retirement plans.
3. Increase Required Minimum Distribution Ages
Today the law requires that most individuals take out required minimum distributions (RMDs) from their retirement accounts once you reach age 70.5. The SECURE Act would delay this requirement to age 72. The RESA Act currently in front of the Senate seeks to push RMD requirements even further back to age 75.
However, one criticism of this provision is that it mostly benefits those with significant tax-deferred savings by allowing them to grow this money even longer. Other suggested changes to RMD rules have included allowing smaller accounts, such as those under $100,000, to be exempt from withdrawal requirements for the owner of the account.
4. Removal of Age Limitation on IRA Contributions
For years there has been a rule that essentially discouraged retirement savings in IRAs for people who continued to work later in life. After age 70.5, you could no longer contribute to an IRA, but amazingly, you could still contribute to a Roth IRA. Sec. 114 of the SECURE Act would remove this savings limitation by repealing the age limitation for traditional IRA contributions.
5. Tax Credit for Automatic Enrollment
Sec. 106 introduces a new tax credit of $500 to help some smaller employers encourage automatic enrollment into their retirement plan. This small credit could help offset some of the costs of operating a plan at the beginning. Automatic enrollment has seen great success in increasing plan participation by employees.
6. Penalty-Free Distributions for Birth of Child or Adoption
A really interesting and welcome addition to the bill was a new exemption from the 10 percent penalty tax of 72(t) for early withdrawals from retirement accounts. The new rule, found in Sec. 113, would allow an aggregate amount of $5,000 to be distributed from a retirement plan without the 10 percent penalty in the event of a qualified birth or adoption. The distribution would need to occur within one year of the adoption becoming final or the child being born.
7. Lifetime Income Disclosure for Defined Contribution Plans
The bill would require that defined contributions plans deliver a lifetime income disclosure to participants at least once every 12 months. This lifetime income disclosure would essentially show how much income the lump sum balance in the retirement account could generate.
The methodology for calculating lifetime income is still in the works. Additional disclosures and information on assumptions used would also have to be provided to participants.
8. Removal of “Stretch” Inherited IRA Provisions
The SECURE Act would make significant changes to inherited retirement plans like 401(k)s, traditional IRAs, and Roth IRAs. In the past, beneficiaries of these accounts could typically spread the distributions over their own life expectancy.
However, the new bill includes what is viewed as a tax-generating provision that would require most beneficiaries to distribute the account over a 10-year period. This change would accelerate the depletion of inherited accounts for many large IRAs and retirement plans.
Typically, smaller inherited accounts are liquidated fairly quickly by beneficiaries already. However, the end of the so-called “Stretch” IRA or retirement account makes a lot of sense from a public policy perspective, especially after the Supreme Court has ruled that inherited accounts are not “retirement” accounts.
As such, it does not make policy sense to allow for an extended tax benefit through the beneficiary’s retirement. The RESA bill has a significantly different provision, but would also end the stretch provision for larger inherited IRAs over $450,000.
The potential tax burdens of faster distributions of inherited retirement accounts will increase the need for proper estate planning and potentially more strategic Roth conversions during the life of the account owner, adding additional complexity to retirement and estate planning.
With the SECURE Act headed to the Senate, with nearly across the board support by parties in the House, the likelihood of its eventual passage seems extremely high. However, modifications are likely.
While the SECURE Act makes positive changes, takes a step forward, but doesn’t clearly advance the retirement security of those in most need of a boost.
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