In May, the U.S. House of Representatives, with an almost unanimous vote, passed the bipartisan Setting Every Community Up for Retirement Enhancement, or SECURE, Act of 2019 (HR 1994). The Senate received the bill at the beginning of June, and it was widely expected to quickly pass through the Senate under "unanimous consent." Except, it didn't. It stalled.
As the term implies, there must be unanimous consent for the bill, or it will be subject to the usual process of debate and possible amendment. There are currently several senators who have placed a hold on the bill. A hold is an informal practice by which a senator informs his or her floor leader that the senator does not wish for a bill or other measure to reach the floor for consideration.
Although the bill hasn't been passed as quickly as it was originally thought, it is still expected to get through the Senate with minor changes. As the House vote indicated, most politicians and taxpayers like the bill enough to vote in favor of it.
However, there are some who are opposed to the passage of the SECURE Act, or at least certain aspects of it. Below is a list of some of the major changes that have broad support, as well as the areas that have some people less enthusiastic.
Broad Support Items
Change the age that distributions from certain qualified accounts must begin. Under the SECURE Act, the age that the IRS will require minimum distributions to begin will increase from 70½ to 72. This proposal has broad support since people are living longer than before. Pushing back the RMDs will hopefully reduce the strain on one's retirement income in the future. It will also be helpful to those who choose to work longer, since it will not be additional taxable income.
While we are on the subject of working longer, the SECURE Act would also eliminate the rule that individuals over the age 70½ can no longer make contributions to their traditional or rollover IRAs. Under the SECURE Act, there would be no age restriction for taxpayers who continue to work and would like to contribute to their IRA.
Another big change would be the ability for part-time employees to take advantage of a 401(k) savings plan. The SECURE Act would guarantee eligibility for employees who have worked at least 500 hours per year for at least three consecutive years.
If enacted, the SECURE Act will make it easier for small businesses to band together in a single 401(k) plan. The purpose would be to create a much larger plan that would lower costs and decrease administrative requirements. It would also increase the tax credit from $500 to up to $5,000 for a business starting a retirement plan. The tax credit would be available for 50% of the start-up fee for the first three years. An additional tax credit of $500 per year, for up to three years, would be available for employers who start a 401(k) or SIMPLE IRA plan with automatic enrollment.
Employers offering an auto-enrollment safe-harbor plan will also have the ability to increase the employee's default contribution rate to 15% after the first plan year. Current law does not allow for an employer to set a contribution rate above 10% for a qualified automatic contribution arrangement (QACA). Many of these types of plans will start with a default contribution rate equal to 4% of the employee's annual income and slowly increase by 1% or 2% annually so that the shock of a higher contribution rate is not felt by the employee in any given year. As a result, most employees are not opting out of the plan once they are enrolled. Changing the allowable auto-increase cap from 10% to 15% could help individuals put more money into their retirement account.
Items Lacking Broad Support
While the above items are widely regarded as positive changes to retirement plans, the following have not been embraced by as many.
If enacted, the SECURE Act will ease liability for plan sponsors who offer annuities in their plan's investment options. Currently, plan sponsors could be held accountable if their plan offers an annuity and the annuity provider becomes insolvent. The SECURE Act offers a fiduciary safe harbor for the selection of a lifetime income provider as long as the plan sponsor takes reasonable measures to evaluate the insurance company and product.
Those who oppose this change argue that it enables insurance companies to market complex and expensive financial products to a larger population of unsophisticated investors, and I agree. Our clients often ask us to take a look at their total financial situation and offer an opinion. To date, I cannot think of a single client that I have met with, who purchased an indexed or variable annuity, and was able to correctly explain to me the difference between the income base, cash value and when applicable, the surrender value.
The "stretch IRA" would be eliminated. For years, individuals have utilized a wealth transfer strategy that allows non-spousal beneficiaries of an IRA to continue taking advantage of tax-deferred compound growth and possibly extend distributions over a lifetime, or even multiple generations. The SECURE Act eliminates this strategy by requiring non-spousal beneficiaries, who are not disabled and are more than 10 years younger than the deceased IRA owner, to fully withdraw the inherited IRA assets within 10 years.
Some argue that this change to push assets out of an IRA faster was done by the government to achieve a higher tax rate on the distributions due to the larger withdrawals. There is also the argument that the new distribution requirement could negatively impact the ability for an otherwise deserving family to receive financial aid. If a beneficiary who has two school age children inherits a $300,000 IRA, he/she must withdraw that amount within 10 years, and it could have implications on the children's eligibility for financial aid.
On a positive note, the Retirement Enhancement and Savings Act of 2019 (RESA) bill was introduced in the Senate just prior to the passage of the SECURE Act by the House. It is virtually identical to the SECURE Act. One of the notable differences, however, is RESA would only require amounts above $400,000 (and that will grow with inflation) to be distributed within 5 years.
One of the more controversial pieces of the SECURE Act is what is not in the bill. Republican Sen. Ted Cruz of Texas has objected to the removal of the Student Empowerment Act, which was included in the original bill but removed at the last minute by the Speaker of the House Nancy Pelosi. The Student Empowerment Act allows tax-exempt distributions from 529 plans to be used for additional education expenses at the elementary and secondary school level including home schooling, or other instructional materials, online educational materials and education support for students with disabilities. Currently, tax-exempt distributions in connection with an elementary or secondary school are limited to tuition for a public, private, or religious school.
Cruz does have some support championing the effort to add the provision back to the SECURE Act. House Minority Leader Kevin McCarthy, who voted in favor of the bill in the House, expressed his frustration to reporters. According to a report in the Washington Examiner, McCarthy said, "The ability for parents to have a 529 account to save money for their children's further education or if they have a disabled child, it came out of committee with all the Republicans and the Democrats voting for it, but again it goes to the leadership. The unions did not like the idea that a parent could save money for the books for their children for homeschooling. So politics again won out, and they put a poison pill in it."
While the once sure-thing bill is still held up in the Senate, many believe that it will be attached to an upcoming must-pass appropriations bill. As you can imagine, the insurance industry would love to see the SECURE Act get passed and their lobbyists will be working to make that happen as soon as possible.
Kevin Warman, CIMA®, RMA®
Last Updated (10.9.2019)