Brian Lawton and Whitney O'Reilly of Cohen Seglias Pallas Greenhall & Furman.

Buried at the end of last year's mundane spending bill was the Setting Every Community Up for Retirement Savings Act (the SECURE Act), which drastically changes the way retirement accounts function. It is important to understand not only the major provisions, such as the devastating elimination of the tax savings strategy the "stretch IRA," but also the history and legislative intent behind it to better guide clients through this new retirement planning and administration landscape.

History

The oldest committee of the U.S. Congress, the Committee on Ways and Means, chaired by U.S. representative for Massachusetts, Richard Neal, was tasked with amending the Internal Revenue Code of 1986 to better encourage retirement savings. In May 2019, with the committee's approval, the SECURE Act, HR 1994, was passed in the U.S. House of Representatives with bipartisan support. The bill was received in the Senate in June 2019, and was attached to the year-end spending bill in December 2019. The spending bill, with the SECURE Act attached, was signed into law Dec. 20, 2019.

The SECURE Act's Important Provisions

The SECURE Act has four parts: provisions that expand benefits for retirement savings, administrative improvements, certain other benefits and revenue provisions. The provisions apply both to employer plans and individual retirement accounts (IRAs). The SECURE Act:

• Makes it easier for small business owners to set up "safe harbor" retirement plans that are inexpensive and easier to administer. They may also use multi-employer plans and annuities.
• Allows many part-time workers to participate in an employer retirement plan.
• Repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½, and increases the age for the required beginning date for required minimum distributions (RMD) to 72.
• Provides for penalty-free withdrawals of up to $5,000 from retirement plans for a qualified birth or adoption distribution.
• Requires distribution of the remaining retirement account balance of a defined contribution plan or IRA to a designated beneficiary by Dec. 31 of the year of the 10th anniversary of the employee or IRA owner's date of death.
• Expands qualified higher education expenses for tax-free distributions from Section 529 plans to include expenses of registered apprenticeships and repayments (up to $10,000) of principal or interest of a qualified education loan for the plan beneficiary or a sibling of the beneficiary.
• Repeals the kiddie tax rules under the Tax Cuts and Jobs Act so that the net unearned income of a child is taxed at the parents' tax rates and not at trust/estate tax rates.

Legislative Intent

The SECURE Act is intended to make it easier for a broad range of individuals to save for retirement so they do not have to rely on over-burdened and underfunded government programs (like Medicaid or Social Security). The U.S. government's budget deficit, that ballooned to nearly $1 trillion at the end of 2019, coupled with the nearly 80-year life expectancy of an American, only increases the amount of money needed for retirement. While the amount an individual needs to save for retirement grows, the average American is not saving enough or even at all. The wealth management giant, Vanguard, revealed early in 2019 that the median 401(k) balance for people aged 65 and older is just $58,035. This amount does not get very far as elderly care can cost upwards of $8,000 a month. Additionally, the U.S. Bureau of Labor Statistics published in 2018 found that only 55% of the adult population even participates in a workplace retirement plan. Social Security was never meant to be the only source of income for people when they retire and it is not enough.

The SECURE Act also contains four revenue-raising proposals that increase revenues by around $16 billion for 2019-2029. Of that revenue, almost all ($15.7 billion) would arise from changes in the treatment of plans referred to as "stretch IRAs," in which assets are left to beneficiaries such as children and grandchildren who can include the income over their lifetime. The proposal would shorten the distribution period for a defined contribution plan for most beneficiaries from the lifetime of the beneficiary to 10 years (with certain beneficiaries excepted, including spouses, those disabled or chronically ill, minor children while still minors, and those no more than 10 years younger than the owner). Other provisions include increases in penalties for failure to file income tax returns and failure to file retirement plan returns, and increased information sharing for the purpose of administering and collecting excise taxes on heavy vehicles.

However, according to the Joint Committee on Taxation, the provisions of the SECURE Act will cost around $16 billion over 2019-2029, with the largest cost due to increasing the age for required minimum distributions to 72. Other provisions include multi-employer plan proposals and the withdrawals for birth and adoption cost.

What Does All of This Mean?

In many ways the SECURE Act encourages people to save for retirement, which seems desperately needed, but it also diminishes some of the benefits of retirement accounts already in place. By reducing the ability to stretch the income tax consequence of an inherited IRA over the lifetime of a beneficiary to a 10-year payout, the act drastically reduces the amount that will go to a beneficiary (e.g., child/grandchild) and increases the amount paid to the government. It is unclear at this time whether this SECURE Act will help people save for retirement or generate revenue.

One important takeaway is that the rules we are governed by are ever-changing and it is important to work with clients to review their retirement plans and the beneficiaries they have in place to ensure that they have the best plans possible under this new retirement era under the SECURE Act.

Brian Lawton is a partner in Cohen Seglias Pallas Greenhall & Furman's wealth preservation and business transactions groups. He can be reached at 412-227-5952 or [email protected].

Whitney Patience O'Reilly is an associate in the firm's wealth preservation and business transactions groups. She can be reached at 267-238-4760 or [email protected].