A new bill known as the “Retirement Enhancement and Savings Act of 2019,” or SECURE (Setting Every Community Up for Retirement Enhancement) Act has the potential to overhaul retirement savings options and other tools in the financial industry.
Passed by the House Ways and Means Committee on May 23 by an overwhelming 117-3 margin the bill enjoys broad bipartisan support in the U.S. Senate. If Senators Ted Cruz (R-TX) and Pat Toomey (R-PA) release their legislative holds, the bill stands a very real chance of becoming law on December 31, 2019.
Given the likelihood of being enacted, just how will the Retirement Enhancement act of 2019 impact how you invest for retirement?
Plan Creation and Participation
Title I of the bill focuses on expanding and preserving retirement savings programs through employer incentives and tax credits. Key among these previsions are start-up tax credits for companies that offset new plan costs (Section 104(a)(1), and additional credits for automatically enrolling employees into the plan (Section 105(a)(1).
New aggregation rules will also allow small employers to “band together” in order to be treated as a single firm for administrative purposes. This pooled arrangement or MEP-style plan will help small companies get better pricing on filing and reporting requirements (Section 101,3(c).
In addition to promoting new plans, the Retirement Enhancement and Savings Act of 2019 encourages broader participation among employees. Under the proposed rules, an employee working just 500 hours per year would be eligible for company 401K participation (Section 112,a(2). Safe harbor qualifications also increase the gradual auto-deferral participation feature from 10% to 15% of an employee paycheck (Section 102(a).
The small employer plan provisions are encouraging because they promote self-sufficiency and offset some of the administrative start-up costs employers incur in creating a retirement plan. Filing simplification, expense reductions and increasing plan participation are all positive public policy aims that should be a win-win for legislators.
Several rules and strategies involving IRAs would change under the SECURE Act. First, under the current rule, required minimum distributions (RMDs) must be taken no later than April 1 of the year following when the beneficiary turns 70.5. The bill proposes moving the RMD age to age 72. This would not affect anyone currently taking RMD’s but those who turn 72 after the last day of 2019, would be impacted. Charitable planning and the use of Qualified Charitable Donations (QCD’s), however, would continue to use the current required beginning date for planning.
The act would eliminate age restrictions on IRA contributions (Section 107(a).) This means that all workers could continue to make regular and catch-up contributions to IRA’s after age 70. The age phase-out recognizes that more Americans are working longer. It provides greater control on RMD’s and makes part-time work more attractive for seniors.
A part-time worker may avoid RMDs altogether by using the still-working exception under ERISA or potentially mitigate the impact by making contributions to IRAs at a lower income level. It could also help to mitigate or defer the costs of Roth conversions through well-timed IRA contributions.
Beyond the proposed changes to minimum distributions, the Retirement Enhancement and Savings Act of 2019 would change the “stretch IRA” rule for non-spouse beneficiaries. Under current rules, a designated beneficiary can stretch their IRA distributions over their life expectancy. The new rule modifies the harsh 5-year rule to 10 years ,and makes it the mandatory default distribution option for non-spouse beneficiaries (Section 401(H2)). Minors are not subject to the ten-year rule until the age of majority, but the clock starts for almost everyone else at the death of the account owner.
Elimination of the Stretch IRA will impact the utility of Roth conversions. Along with the delayed RMD requirements, the timing of conversions should be scrutinized. Depending on the scenario, using the economics of life insurance or Charitable Remainder Trusts to address taxation in qualified accounts rather than a Roth conversion might be a better option for non-spouse beneficiaries.
The Retirement Enhancement and Savings Act of 2019 validates annuities as a retirement option for qualified plans by allowing portability for lifetime income options under a qualified plan (109(a)(1)). Income portability allows plan participants to build guaranteed income over time and create their own personal retirement pension. Any job change allows plan participants to retain the guaranteed element of their contracts and to transfer without fees or penalty to another qualified plan or IRA upon a separation of service event.
It would be nice to see further expansion of the lifetime income rules so employers could put safe harbor contributions into a guaranteed income benefit for their employees. It could be a way to create a pension benefit over time for employees without all the costs and regulations that go with offering a traditional defined benefit plan.
Such expansion should also include greater scrutiny of the providers we allow in the defined contribution space. There are not enough protections to limit fees or high-risk contracts. I think legislators have an opportunity here to create a standard before an annuity provider can be an eligible plan option.
The Secure Act further expands the uses of section 529 plans. 529 plans have become a preferred tool for college education savings. Legislators have expanded the scope and definition for qualified education expenses and this legislation continues the trend. Under the Act, registered apprenticeship and trade programs will now be a qualified educational expense (section 302(a)(8). There is also a one-time provision that allows up to $10,000 of student loan repayment (Section 302(b)(9). The student loan repayment option may increase gifting by family members or help some students manage debt over time.
The 529 provisions are also what senators are fighting over in congress. It could be that the final format includes coverage for homeschooling or special needs treatments. I suspect a compromise will occur before year end as there is a long of incentive to pass this bill in an election cycle.
The Retirement Enhancement and Savings Act of 2019 could create a multitude of opportunities and flexibility when it comes to retirement savings. Passage of the bill would be particularly important to distribution planning and should be considered as part of any overall retirement strategy.