December 23, 2019
Stroock Special Bulletin
Austin S. Lilling, Kevin Matz, David C. Olstein, Abbey L. Keppler, Jay J. Scharf
Ushers in Significant Changes to Rules Governing Retirement Plans and IRAs
On December 19, 2019, Congress passed the Further Consolidated Appropriations Act of 2020, which includes the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, and other provisions affecting retirement savings, medical plans and medical insurance providers. The legislation was signed into law on December 20, 2019, and includes significant changes to retirement plan rules, and also to the required minimum distribution rules that apply to an Individual Retirement Account (“IRA”) following the death of the IRA’s owner.
The version of the SECURE Act passed by Congress contains substantially the same provisions included in the version passed by the House on May 23, 2019. As discussed in more detail in the Stroock Special Bulletin “House Passes Retirement Plan Reform Legislation on Bipartisan Vote,” dated May 29, 2019, the SECURE Act includes provisions which:
- Expand opportunities for employers to join Multiple Employer Plans.
- Require employers to permit certain long-term part-time workers to participate in non-collectively bargained 401(k) plans and permit such employees to be excluded for certain testing purposes.
- Require employers to annually provide defined contribution plan participants with annual estimates of the monthly lifetime income value of their retirement accounts.
- Establish a fiduciary liability safe harbor under the Employee Retirement Income Security Act of 1974, as amended (ERISA), for employers who elect to include lifetime income options in their defined contribution plans and provisions increasing portability of annuity options among retirement plans.
- Increase tax credits for startup costs for plans, including costs for automatically enrolling workers in 401(k) plans.
- Simplify the Safe Harbor 401(k) rules.
- Provide relief from nondiscrimination testing for frozen defined benefit plans.
- Afford additional time to establish retirement plans (up until the due date, including extensions, for the employer’s tax return) to be treated as adopted as of the last day of the taxable year to which the return relates.
- Permit consolidated Form 5500 Annual Report filings for certain similar defined contribution plans.
- Increase failure to file penalties for Form 5500 Annual Reports.
The SECURE Act also includes the following provisions affecting retirement savings that are generally effective for plan years beginning after December 31, 2019:
- An increase in the cap on automatic escalation of employee deferrals under automatic enrollment safe harbor plans. The cap was previously 10% of compensation and is increased to 15% of compensation.
- An increase in the age at which an individual must start to take minimum distributions from a qualified retirement plan or IRA. Currently, participants who are not actively employed by the sponsor of the qualified retirement plan and individuals who have IRAs are required to commence minimum distributions from the plan or IRA with respect to the year in which they attain age 70 ½. The legislation increases the commencement age to 72. This change is intended to reflect increases in life expectancy since the early 1960s, when the current rule was adopted.
- The repeal of the 70 ½ maximum age for contributions to traditional IRAs. Employees of any age with earned income will be able to contribute to traditional IRAs. This does not affect Roth IRAs, which currently do not have a maximum age for contributions.
- An expansion of the definition of “income” for IRA contribution purposes to include certain taxable non-tuition fellowship and stipend payments received by graduate and post-doctoral students. This change will enable students to begin saving for retirement.
- A provision allowing home health care workers to contribute to a plan or IRA by providing that “difficulty of care payments,” which are excludible from the gross income of such workers, are treated as compensation for IRA contribution purposes.
- A significant modification of the IRA required minimum distribution rules for most non-spouse beneficiaries following the death of the account owner. If the spouse is not the designated beneficiary of an IRA, the IRA is considered to be an “Inherited IRA” after the account owner’s death. Designated beneficiaries of Inherited IRAs have generally been permitted to take distributions over their own life expectancy as first determined in the year of the account owner’s death. The SECURE Act limits the distribution period for most Inherited IRAs of non-spouse beneficiaries to a maximum of 10 years. Non-spouse beneficiaries of an Inherited IRA who are not disabled or chronically ill and who are more than 10 years younger than the deceased employee (or IRA owner) will be required to receive the distribution of the entire account by the tenth calendar year following the year of the employee’s or IRA owner’s death unless the beneficiary is a child of the account owner who has not reached the age of majority. If the beneficiary is a minor child of the account owner then the beneficiary will be required to receive the distribution of the entire account within ten years after attaining the age of majority. These changes are effective with respect to accounts of individuals who die after December 31, 2019. Beneficiary designation forms should accordingly be reviewed to ensure that they meet the account owner’s objectives in light of these significant changes. (These new rules apply as well to many employer-sponsored defined contribution plans.)
The Further Consolidated Appropriations Act of 2020 also includes provisions affecting fees and taxes related to health plans and health insurers, which:
- Permanently repeal the 40% tax on high-cost employer health plans, known as the “Cadillac Tax,” which was scheduled to go into effect January 1, 2022.
- Permanently repeal the excise tax on medical devices, which was scheduled to become effective for calendar years starting after December 31, 2019.
- Permanently repeal the annual fee on health insurance providers, which was scheduled to become effective for tax years starting after December 31, 2020, by amending the Patient Protection and Affordable Care Act (ACA).
- Reauthorize the Patient-Centered Outcomes Research Institute (PCORI), originally established under the ACA, and the fee used to fund PCORI operations. The fee would have been discontinued, effective for plan years starting after September 30, 2019, but has now been extended until September 30, 2029.
For More Information:
Austin S. Lilling
David C. Olstein
Abbey L. Keppler
Jay J. Scharf
This article is for general information purposes only. It is not intended as legal advice, and you should not consider it as such.