Big Retirement Law Changes for 2020

President Trump signed a new law in December that has taken effect this month called the SECURE Act (Setting Every Community Up for Retirement Enhancement Act). It includes a wide array of changes to retirement accounts that both individuals and business owners should know.

For individuals, here are a few highlights:

• Plan participants who did not already turn 70.5 in 2019 now do not have to take required minimum distributions (RMDs) until age 72.
• 529 accounts may now be use for qualified student loan repayments up to $10,000 total.
• Up to $5,000 may be withdrawn from 401(k) accounts without penalty in order to have or adopt a child. The distribution, which is still subject to tax, can be repaid to a retirement account.
• Plans may offer qualified disaster distributions without penalty to participants who lived in a presidentially declared disaster area if taken before age 59 1/2, and participants are permitted to spread taxes on the distribution or repay it over three years.
• The age limit (70.5) for traditional IRA contributions has been eliminated. However, it appears to require that Qualified Charitable Distributions come from pre-70.5 contributions.
• One potential downside to the law is that inherited IRAs must be spent within 10 years of inheritance (the government wants to hurry up and get those taxes) regardless of the age of the owner at time of death. If the IRA owner died in 2019, the new law does not apply to the beneficiary. We previously wrote about the old law and estate planning here.
  • There are exceptions to this rule: spouses, minors, disabled individuals, chronically ill individuals, or beneficiaries within ten years of age to the decedent.
  • It is unclear yet whether a trust for the benefit of spouse and children is an exempted beneficiary.
  • When a minor child reaches the age of majority (18), the ten-year clock starts. It is unclear how trusts will be treated where there are multiple children of different ages.
  • The definition of a disabled individual is a person who is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” IRC §72(m)(7).
  • The definition of a chronically ill individual relates to the code section dealing with the deductibility of long-term care expenses. That section requires a licensed health care practitioner to certify that the individual’s limitation is indefinite but expected to be lengthy in nature, as well as one of three things:

                        (i) being unable to perform (without substantial assistance from another individual) at least 2 activities of
                        daily living for a period of at least 90 days due to a loss of functional capacity,

                        (ii) having a level of disability similar (as determined under regulations prescribed by the Secretary in
                        consultation with the Secretary of Health and Human Services) to the level of disability described in
                        clause (i), or,

                        (iii) requiring substantial supervision to protect such individual from threats to health and safety due
                        to severe cognitive impairment.
​

Business owners should be aware of the following:

• The business tax credit for plan startup costs will increase from $500 to up to $5,000 in certain circumstances. 

• There’s an additional $500 tax credit for three years for plans that add automatic enrollment of new hires.

• The cap on payroll contributions in automatic-enrollment safe harbor plans has increased from 10% to 15% of wages (employees can opt out of the increase). 

• Employers must now include long-term part-time workers as participants in defined-contribution plans if they have completed at least 500 hours of service each year for three consecutive years and are at least 21 years of age. However, these participants can be excluded from safe harbor contributions, nondiscrimination and top-heavy requirements. 
• Employers and plan sponsors are now more likely to include annuities as an option by reducing their liability if the insurer cannot meet its financial obligations.

A financial adviser would be the best person to contact if you have any questions about how the SECURE Act affects your retirement, and a CPA would be a good person to contact regarding business credits. However, if you want to discuss how eliminating the IRA lifetime stretch might affect your estate plan, give Jesson & Rains a call.