President Trump signed into law the Further Consolidated Appropriations Act of 2020 (FCAA). While the FCAA contains a number of important spending provisions necessary to keep the federal government from shutting down, it also contains the most comprehensive retirement reform since the Pension Protection Act of 2006. Included within the provisions of the FCAA is the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act will make a number of changes to the current retirement system.
Below is a summary of the key retirement provisions:
- Repeal the maximum age for traditional IRA contributions, which is currently 70½
- For 2020 and beyond, this immediately eliminates the age 70½ contribution age restriction currently imposed on Traditional IRAs.
- Increase the required minimum distribution age for retirement accounts to 72 (up from 70½)
- Account holders / participants who turn 70½ in 2019 and participants currently receiving RMDs are still required to take RMDs in 2020 (by April 1 for individuals turning 70 ½ in 2019). The new age 72 required beginning date rules do not apply to this population of participants and shareholders.
- Account holders / participants who turn 70½ on or after 1/1/2020 will have their required minimum distributions postponed until the new RMD age of 72. In that case, they must take their first RMD no later than April 1 in the year following the year they turn 72, and then by 12/31 annually thereafter.
- For example, if you reach age 72 in 2021, you need to take your first RMD by April 1, 2022. There will be a transition period for this group until they are required to begin taking an RMD.
- We see the RMD age change as having immediate impacts in areas where a participant or shareholder that turns 70 ½ in 2020 and takes a distribution that under the old rules would require that the distribution be treated as an RMD (e.g., not eligible for rollover, not subject to mandatory withholding, not subject to 402(f) special tax notice requirement, etc.) and therefore, client readiness for these changes are critical:
- Form changes
- Annual RMD mailings
- Procedural changes
- Report Changes
- Document Updates
- Changes to the minimum distribution rules for beneficiaries
- This will have an immediate impact for beneficiaries and their distribution options where the original account owner dies on or after 1/1/2020. For original account owners who were deceased on or before 12/31/2019, the old beneficiary inheritance rules are still in effect.
- Allow long-term part-time workers to participate in 401(k) plans
- These changes will apply to plan years beginning after December 31, 2020.
- Parents can withdraw up to $5,000 from retirement accounts penalty-free within a year of birth or adoption for qualified expenses
- This is believed to be an optional provision and would apply to distributions made after December 31, 2019. We, however, need guidance from the regulators to confirm that this is, in fact, an optional plan provision, and also for direction as to how plans should treat distributions that were not processed as birth or adoption distributions to participants who were otherwise eligible for such a withdrawal.
- Allow for an increase of the 10% cap for automatic contribution enrollment safe harbor
- These changes are optional and will apply to plan years beginning after December 31, 2019. However, plan documents that incorporate the pre-SECURE Act auto-escalation by referencing the Code and not simply listing a percent (%) limit will need some relief, as the change would apply automatically to them on 1/1/2020.
- Multiple employer plans and pooled employer plans expansion
- These changes are optional and will apply to plan years beginning after December 31, 2020.
Impact on Unclaimed Property Rules
While the SECURE Act is primarily focused on improving retirement savings, there are two provisions that will directly impact unclaimed property, as well as Section 529 Plans.
In addition to the changes to the Required Beginning Date rules, the SECURE Act will modify the required minimum distribution (RMD) rules for beneficiaries. The SECURE Act largely eliminates the stretch IRA option that had allowed beneficiaries of an inherited account (IRA or Qualified Plan) to stretch the payment of that account over their life expectancy. Under the SECURE Act, beneficiaries of an inherited IRA account or qualified plan will be required to take a full distribution of that account within ten years after the year the original owner died. However, this new ten-year rule does not apply to an eligible designated beneficiary. The SECURE Act defines eligible designated beneficiary as a spouse or minor child who is disabled or chronically ill or anyone else not more than 10 years younger than the deceased owner. With regard to disabled or chronically ill minor children, the exception only applies until the child reaches the age of majority, at which point the new ten-year rule would go into effect. Eligible designated beneficiaries will be permitted to take distributions over their life expectancy if distributions begin within one year following the original owner’s death. All other beneficiaries will be considered designated beneficiaries and will be required to distribute all the inherited assets within ten years. This will be effective for accounts whose owner’s date of death is after December 31, 2019.
The Revised Uniform Unclaimed Property Act as well as many state abandoned property statutes indicate property held in a retirement account is presumed abandoned after an owner reaches age 70 ½, while other state abandoned property statutes offer more flexibility and indicate a retirement account is presumed abandoned after the Internal Revenue code requires distribution to avoid a tax penalty. This legislation would result in RUPPA and some state statutes being out of sync with the Internal Revenue code. Abandoned property industry groups are monitoring this topic and will be prepared to initiate an education outreach effort with the National Association of Unclaimed Property Administrators and states.
Impact to Section 529 plans
Title III, Sec. 302 will provide for distributions for certain expenses associated with registered apprenticeship programs be treated as qualified higher education expenses. These expenses will
include fees, books, supplies and equipment required for participation in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act.
This section will also provide for distributions for amounts paid as principal or interest on any qualified education loan be treated as qualified higher education expenses. These expenses will be for the designated beneficiary or a sibling of the designated beneficiary. The amount of distributions under this provision, with respect to the loans of any individual, will be limited to a lifetime maximum of $10,000. Sibling is defined as a brother, sister, stepbrother or stepsister (as defined under IRC Section 152(d)(2)(B)).
The section goes on to provide language for coordination with deduction for student loan interest under IRC Section 221(e)(1) regarding Interest on education loans.