SECURE 2020 New Retirement Legislation

Pinnacle Personnel Services LLC  |  Debbie Hatch

Happy New Year! Happy New Decade!

Speaking of both, one week ago yesterday, the most sweeping piece of retirement legislation to be passed in over a decade was signed into law. The Setting Every Community Up for Retirement Enhancement (SECURE) Act has been in the works for roughly three years.  Most recently the House passed it over the summer but the legislation stalled in the Senate.  Its eventual passage occurred as part of the appropriations bill President Trump signed December 20.

Most of the changes affect private sector retirement plans but several are relevant to federal employees as well.

FOR EVERYONE

The SECURE Act extends the time when retirees need to begin taking required minimum distributions (RMDS) from retirement accounts.  Anyone who turns 70 ½ after January 1, 2020 won’t have to take an RMD until they are 72.  To be clear, this change applies beginning with IRA account owners who will attain 70 ½ on or after January 1, 2020. That means, people reaching age 70 ½ in 2019 would need to continue to take their first RMD by April 1, 2020.

Anyone who is working and has earned income can contribute to an IRA regardless of age, (even if over 70 ½).  As before, there are no age-based restrictions on contributions to a Roth.

The law expands the definition of a tax-free or qualified distribution from a 529 savings plan to include repayment of up to $10,000 in qualified student loans, and expenses for certain apprenticeship programs. The SECURE Act makes this change retroactive to distributions made after December 31, 2018.

Individuals may take a “qualified birth or adoption distribution” of up to $5,000 from an eligible defined contribution plan or IRA, without paying a 10% early withdrawal penalty.   Each parent may take up to $5,000 within one year from the date the child is born or the adoption is finalized.  The money can be put back into the retirement account at a later date. Re-contributed amounts are treated as a rollover and not included in taxable income.

“Stretch IRAs” which have allowed non-spouses inheriting retirement accounts to stretch out disbursements (and therefore, taxes) over their lifetimes are gone. Under the Act there are no required minimum distributions for inherited IRAs but beneficiaries must ensure all of the money is taken out within 10 years of the death of the original account holder. These rules also apply to inherited 401(k) accounts, regardless of whether they are rolled into IRAs, as well as Roth IRAs. The new rule takes effect on Jan. 1, 2020. Exceptions to the 10-year distributions requirement include assets left to a surviving spouse, a minor child, a disabled or chronically ill individual, and beneficiaries who are less than 10 years younger than the decedent. For minors, the exception only applies until the child reaches the age of majority. At that point, the 10-year rule kicks in. If the beneficiary is the IRA owner’s spouse, RMDs are still delayed until end of the year that the deceased IRA owner would have reached age 72. The elimination of the stretch IRA alone has the potential to generate about $15.7 billion in tax revenue over the next decade, according to the Congressional Research Service.

FOR PRIVATE SECTOR EMPLOYEES

Part-time employees who haven’t worked at least 1,000 hours during the year typically aren’t allowed to participate in their employer’s 401(k) plan. Effective 2021, employees who have worked 1,000 hours throughout one year or at least 500 hours per year for three consecutive years will be allowed to participate. The part-timer must also be 21 years old by the end of the three-year period.

Employers set a default contribution rate for employees participating in an auto-enrollment plan.  While employees can choose to contribute at a different rate, default contribution rates start at 3% and could be no more than 10% of annual pay.  SECURE increases the cap from 10% to a max of 15% after the worker’s first year of participation.

The SECURE Act requires 401(k) plan administrators to provide annual “lifetime income discloser statements”. These statements will show how much money the individual could get each month if their total 401(k) account balance was used to purchase an annuity. (Warning: The estimated monthly payment amounts will be for illustrative purposes only).

Under current law, graduate and post-doctoral students often receive stipends or similar payments that aren’t treated as compensation and, therefore, can’t provide the basis for a retirement plan contribution. Similar rules apply to “difficulty of care” payments that foster-care providers receive through state programs to care for disabled people in the caregiver’s home. Under the new law, amounts paid to aid the pursuit of graduate or post-doctoral study or research as well as difficulty of care payments will be treated as compensation for purposes of making IRA contributions.

FOR SMALL BUSINESSES

While most large employers offer retirement plans for their workers, that’s not the case with small businesses. The SECURE Act has three provisions designed to help more small businesses offer retirement plans for their employees.

  • First, the new law increases the tax credit available for 50% of a small business’s retirement plan start-up costs. The credit had been limited to $500 in the past but is now $5,000.
  • A brand new $500 tax credit (available for a period of three years) is created for a small business’s start-up costs for new 401(k) plans and SIMPLE IRAs that include automatic enrollment. This credit is also available to small businesses that convert an existing plan to auto-enrollment and is in addition to the existing credit described in the previous bullet.
  • The SECURE Act makes it easier for small businesses to join together to provide retirement plans for their employees. Starting in 2021 the law allows completely unrelated employers to participate in a multiple-employer plan and have a “pooled plan provider” administer it.

It also encourages plan sponsors to include annuities as an option in workplace plans by reducing their liability if the insurer cannot meet its financial obligations. This will mean employees should do their own due diligence if deciding if the annuity is right for them or not.  Buyer beware.

SOME IMPORTANT 2020 NUMBERS

While I’ve mentioned these previously, and they’re not part of the new law, they are important!

  • Contribution limits for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Program (TSP) increase to $19,500.
  • Catch-up contribution limits for employees who will turn 50 or older in 2020, rise to $6,500.
  • The limit on Simple IRAs increases to $13,500.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $196,000 to $206,000 for married couples filing jointly. For singles and heads of household, the income phase-out range is $124,000 to $139,000. Here’s a link to the IRS.
  • Social Security and Supplemental Security Income benefits see a 1.6% cost of living adjustment. This will be minimized by an increase in Medicare premiums. The standard Part B premium is increasing to $144.60 a month, or more, depending on your income. Here’s a link to the Centers for Medicare and Medicaid Services.   
  • It will take $1,410 to earn one Social Security credit in the coming year and the 6.2% OASDI tax will apply up to a cap of $137,700. The earnings test cap for those drawing Social Security under their full retirement age and/or for those collecting the special annuity supplement under the Federal Employees Retirement System (FERS) increases to $18,240. Here’s a link to the SSA.
  • GS (and GS-derivative) employees see an across the board pay increase of 2.6% with an average locality increase of 0.5%. OPM’s 2020 pay charts are here.

2020 will bring some big changes for our family, my business, and me personally.  I have a lot of big goals – one of which is to help as many people as possible understand their retirement.  I’m here.  Don’t hesitate to reach out if you have questions or need clarification about anything.  Let me know if you’d like me to specifically address a topic in future blog posts.

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