On Thursday, May 23, the SECURE Act (Setting Every Community up for Retirement Enhancement Act of 2019) passed by a landslide 417-3 vote in the House of Representatives. The Bill made its way to the Senate, which had a similar bill, RESA, (Retirement Enhancement and Savings Act), yet to be voted on. Senate leaders put RESA on the backburner and “hotlined” the SECURE Act in an attempt to pass it through a process called unanimous consent — which means the Senate would vote on the House version of the Act without making any changes and if no senator objects, the bill would pass as is.
However, the removal in the House version of provisions to the 529 savings program have prompted Senator Ted Cruz, and possibly others, to place the bill on hold. Among the provisions removed was that which would have allowed funds in a 529 college savings plan to be used for homeschooling costs and supplies for K-12 students. A seemingly strange provision to be included in retirement legislation to begin with.
Even if the SECURE Act does not forage unanimous consent as is, lawmakers are optimistic of a version of the SECURE Act being passed into law given the bi-partisan support for Retirement Enhancement legislation in both the House and Senate.
Addressing Accessibility and Scant Retirement Savings with the SECURE Act
People are living longer and working later into their lives. As of February, roughly 20% of Americans 65 or older were working or looking for work — double the amount of people 65 or older still in the work force in 1985. However, when it comes to saving for retirement, many Americans are not participating. Of those 55 and older, 48% have $0 saved in a 401(k) or other individual account, and more than one in five working Americans are not saving for retirement. Consequently, Social Security provides most of the income for roughly half of households age 65 and older. While most Americans are not currently saving for retirement, not saving for retirement was among the top financial regret for Americans 55 and older. But us-Americans are not solely to blame. Accessibility is part of the issue. As of March 2018, 43% of private sector workers did not have access to a retirement savings plan, according to the Bureau of Labor and Statistics. And for part-time individuals working 35 hours per week or less, only 35% have access to a 401(k) or pension plane at work. Additionally, only 46% of workers at firms of less than 100 employees had access to a 401(k), only.
The SECURE Act seeks to address accessibility to programs in order to bolster to Retirement Savings. Below is a synopsis of 10 of the most significant changes the SECURE Act seeks to implement.
There are 27 million part-time workers (employees who work less than 1,000 hours per year) throughout the United States, and under current law, employers can exclude them from eligibility in its 401(k) plan. Under the SECURE Act, an employer must allow participation by any employee who either has worked for one full year for at least 1,000 hours, or has worked there for at least 3 consecutive years and worked 500 hours per year – a long-term part-time employee. Such employee would also receive a safe harbor match.
Because opening up a work-based retirement savings plan is costly, one provision of the SECURE Act allows small business to band together to create one large retirement plan and share the cost to each participating firm. In order to have a multi-employer plan, the participating employers must have the same trustee, fiduciary, administrator, plan year and investment option.
The SECURE Act additionally provides a $500 tax credit to an employer who offers automatic enrollment for new 401(k) and Simple IRA plans.
Today, an individual 70 ½ or older is prohibited from contributing to a traditional IRA. The SECURE Act repeals this prohibition, allowing individuals of any age to contribute to a traditional IRA.
Under current law which passed in the early 1960s, individuals are required to start taking required minimum distributions (RMDs) from their retirement plan at age 70 ½. Congress’ intent was to ensure that individuals spend their during their lifetime and not use retirement plans to transfer wealth to beneficiaries. However, because people are living longer, Congress wants to increase the age for RMDs to 72.
Under current law, a non-spouse beneficiary of a retirement account is able to stretch out the required minimum distributions over his or her own life expectancy. Thus, allowing the non-spouse beneficiary to defer tax and minimize his or heir income tax bill. However, the SECURE Act requires that inherited assets be withdrawn within 10 years.
The SECURE Act provides for some exceptions to the 10-year rule deemed “eligible designated beneficiaries”: the surviving spouse, chronically ill, disabled or minor heirs, and heirs less than 10 years younger than the decedent. For minor heirs, the 10-year rule will initiate when they hit the age of majority.
Because beneficiaries of larger accounts will face larger IRA withdrawals and therefore a heavier tax burden and less money in their pocket, individuals should reconsider using retirement plans for transferring wealth to beneficiaries other than their spouse if the bill passes.
Another provision of the bill provides that “difficulty of care” payments, excluded from taxable income in the Internal Revenue Code, are considered compensation for determining retirement contribution limitations. Because many home healthcare workers only receive “difficulty of care” payments and therefore have no have taxable income, they cannot save for retirement in a defined contribution plan or IRA. However, under this provision, all “difficulty of care payments” are treated as compensation for home healthcare workers when contributing to a plan or IRA.
The SECURE Act allows an individual to withdraw up to $5,000 from a retirement savings plan, penalty free, for any “qualified birth or adoption.” To apply, the withdrawal must be made within one year of the birth of an individual or legal adoption of child under 18 or physically or mentally incapable of self-support.
The SEC describes the 529 savings plan as “a tax-advantaged savings plan designed to encourage saving for future education costs.” The SECURE Act, if passed, would allow individuals to use funds in a 529 savings plane for apprenticeships and qualified student loan repayments of up to $10,000.
While only 32% of employees of employees surveyed had retirement plans that providing monthly income in retirement, 62% of employees said they would prefer a monthly payment over a lump sum. The SECURE Act seeks to address access to such plans by offering a safe harbor for employers by eliminating a roadblock to offering lifetime payment options under a defined contribution plan.
The bill additionally requires that benefit statements include a lifetime income disclosure. The disclosure would inform the participant of the monthly payments he or she would receive if the account balance were paid in monthly payments. Disclosing the anticipated lifetime income will be a useful planning tool for the participant in correlating their total retirement savings.
The SECURE Act allows an employee to avoid surrender charges and fees where a lifetime income investment held in a defined contribution plan, section 403(b) plan, or governmental section 457(b) plan, is no longer authorized to be held as an investment option under the plan. The fees are avoided where the lifetime income investments or distributions are transferred, trustee-to-trustee, to another employer-sponsored retirement plan or IRA.
Americans can expect some form of retirement enhancement legislation this year. Talk to your employers about employer-sponsored retirement plans and be prepared for changes to IRAs that could disrupt your current estate plan. Happy retirement saving!