Defined contribution plan

Retirement Spotlight: January 2020 Spotlight on Important SECURE Act Provisions For Financial Advisers

The new year promises to provide plentiful opportunities for financial advisers to gain business and to demonstrate expertise to existing clients. As you likely know, the SECURE Act was signed into law on December 20, 2019. Many of the Act’s provisions took effect on January 1, 2020. Most of them offer real benefits to your clients; other provisions may not be as helpful, but you still need to understand them to provide the best service possible. This Retirement Spotlight focuses on a half-dozen SECURE Act provisions that will make the most significant impact on your retirement plan practice.

Let’s start with three provisions that you will most certainly get questions on.

  1. Traditional IRA owners can now contribute after age 70½. Since they were first available in 1998, Roth IRAs could receive contributions from individuals over 70½ provided that they were otherwise eligible. That is, Roth IRA owners had to have earned income—but not too much Now Traditional IRA owners will enjoy the same benefit. Your clients that continue to work—or that have working spouses—will be able to contribute even after they reach age 70½.

    More of your clients may be working well past the “normal retirement age”; now they can also keep contributing to their Traditional IRAs. Even though they may have to take required minimum distributions at the same time that they contribute to their IRAs, there is a good chance that they will be able to contribute more than they have to distribute each year. So this provision is a great way for your clients to ensure that they have sufficient retirement assets once they stop working.

  2. Traditional IRA required minimum distributions (RMDs) will now start at age 72. Not only can your clients make Traditional IRA contributions past age 70½, but now they can begin taking RMDs later. If your clients turn age 70½ in 2020 or later, they now can wait until age 72 to begin taking RMDs. Specifically, they will have until April 1 of the year following the year they turn 72 to take their first RMD. This year-and-a-half delay is not necessarily the big relief that some in the retirement industry had hoped for. But this change certainly provides some benefit.

    Based on increased life expectancies over the past several decades, Congress could have increased the starting age to 75 or later. There are, however, significant revenue implications for any delay in the RMD starting date. So this age-72 requirement was a bit of a compromise. The important thing to remember is this: if your client already turned age 70½ by the end of 2019, then RMDs cannot be delayed under the new rule. In other words, all of your clients born on or before June 30, 1949, are subject to the old rule, which makes the 70½ year the first distribution year.

  3. “Stretch IRAs” as we now know them are disappearing. For decades, IRA and qualified retirement plan (QRP) beneficiaries were able to take death distributions over their life expectancies. For example, a 20-year-old grandchild could distribute a grandparent’s IRA balance over 63 years. But now this generous provision has been altered to require faster distributions (generally over a 10-year time frame), which is designed to increase federal revenue. Nonspouse beneficiaries of account owners who die on or after January 1, 2020, are subject to this new rule, unless they are
    • disabled individuals,
    • certain chronically ill individuals,
    • beneficiaries who are not more than 10 years younger than the decedent’s age,
    • minor children of the decedent (they must begin a 10-year payout period upon reaching the age of majority), or
    • recipients of certain annuitized payments begun before enactment of the SECURE Act.

    We expect that this change to the distribution rules will create considerable confusion for clients. They may be subject to two separate sets of beneficiary distribution rules, depending on the date of the account owner’s death. Some beneficiaries, such as spouses, will have the same options that we are familiar with; many others will face an accelerated payout. It may take time for the industry to sort through the many questions that will arise. And we may have to wait for definitive guidance from the IRS. But meanwhile, you can assure your clients that, while the beneficiary rules for both IRAs and QRPs have changed considerably, no immediate action is needed.

  4. The second group of changes involves employer-sponsored retirement plans and not IRAs specifically. Still, each of them could provide potential benefits to your clients.

  5. Employers may adopt a qualified retirement plan (QRP) up until their tax return due date, plus extensions. If you have clients that are also business owners, you have probably been asked at year end, “What can I do to reduce my tax burden?” For employers without a retirement plan, establishing such a plan can be a great idea. But QRPs were generally required to be adopted by the end of the employer’s tax year. (SEP and SIMPLE IRA plans have different deadlines.) Trying to quickly establish a new plan at year-end could cause unwanted stress and could lead to hasty decisions and compliance problems. Starting with 2020 tax years, employers may establish a QRP by their tax return due date, plus extensions. For example, unincorporated business owners could establish a plan for the 2020 tax year until October 15, 2021, if they have a filing extension.

    This new rule aligns the deadline for QRP establishment with the current SEP IRA plan adoption deadline. And though we still expect that some of your client employers will wait until the last minute to act, at least this new provision gives them more flexibility and options. Keep in mind, however, that salary deferrals must be made prospectively. So establishing a 401(k)-type “cash or deferred arrangement” will not allow plan participants to defer salary or wages that they have previously earned.

  6. Safe harbor 401(k) plans now have more contribution flexibility. Businesses with employees sometimes struggle to pass certain 401(k) testing requirements. Simply stated, plans are generally not allowed to provide highly compensated employees (including owners) with benefits that disproportionately favor them over the nonhighly compensated employees. One such test compares the salary deferrals of these two groups. To pass this test, owners (especially) often end up with much smaller deferrals than they would like. Fortunately, a “safe harbor” 401(k) provision deems this test to be passed, but only if the plan guarantees a healthy matching or nonelective contribution for rank-and-file employees. Unfortunately, detailed notification and timing requirements made these safe harbor provisions less than user friendly. For example, under one scenario, an employer could have made a three percent nonelective contribution in order to pass the nondiscrimination test—but only if the employer had notified employees, before the plan year started, that she might make this contribution to pass the test. In addition, the employer would have had to amend the plan before 30 days of the plan year end in order to take advantage of the testing relief. Now, employers can get the same testing relief, without a “pre-notice” and with substantially more time to amend the plan: instead of amending before the end of the current plan year, employers can amend their plan up until the end of the following plan year end if they make a four percent contribution to all eligible employees rather than a three percent contribution.

    All of this is to say that employers now can enjoy much more flexibility when they adopt a safe harbor 401(k) plan. By some credible estimates, 30-40% of 401(k) plans that cover employees (in addition to owners) use this safe harbor feature. Making compliance easier for these plans—and for yet-to-be-adopted plans—is a great benefit. And learning more details about this provision will help you better serve your clients.

  7. Tax credits for small employers may help jump-start retirement plans. The SECURE Act provides two tax credits for small employers: one provision gives a $500/year startup credit for new 401(k) or SIMPLE IRA plans that include an automatic enrollment provision; another provision increases a startup credit (up to $5,000) for any small employer that adopts a qualified plan, SEP, or SIMPLE plan. Both credits are available to employers for three tax years, beginning with the start-up year. While these incentives may not—in and of themselves—convince an employer to adopt a retirement plan, they may take some of the financial sting out of the decision and prove that Congress is serious about increasing retirement plan coverage in America. Letting your clients know about these helpful tax credits can solidify your value in their eyes.

These six new provisions are likely to get a fair amount of coverage in the mainstream media and in the retirement industry. This Retirement Spotlight should help you discuss these changes more effectively with your clients. But keep in mind that the SECURE Act contains the most significant retirement plan changes in 15 years. There are many other provisions that affect IRAs and QRPs—and there are many questions that have already arisen about specific provisions and how certain changes should be implemented. As federal guidance is released, Ascensus will continue to share thoughtful analysis and practical insights.


Click here for a printable version of this issue of the Retirement Spotlight

IRS Updates Determination Letter and VCP Submission Information

The IRS has issued Revenue Procedure (Rev. Proc.) 2020-4, which updates 2019 guidance on determination letter and Voluntary Correction Program (VCP) submission procedures. Changes from the prior year Rev. Proc. 2019-4 include the following.

Section 3.04 is revised to state that a determination letter issued regarding the qualified status of a retirement plan will include a determination on the exempt status of any related trust or custodial accounts (does not include an adopting employer of a pre-approved plan).

Section 3.06(2) is revised to change an “Appeals Office” reference in Rev. Proc. 2019-4 to now read “Internal Revenue Service Office of Appeals (Independent Office of Appeals),” with corresponding changes made throughout Rev. Proc. 2020-4.

Section 6.02 is revised to provide a list of applicable documents that should be submitted to enable the Service to more efficiently process determination letter requests.

Section 8.02 notes that determination letter requests for certain hybrid (defined contribution and defined benefit) plans will be accepted through August 31, 2020, and certain individually designed merged plans on an ongoing basis.

Section 9.07 removes a former cautionary statement that a favorable determination for a plan executing a de-risking of its pension obligations by lump sum distribution does not constitute a determination of federal tax consequences.

Sections 30.07 and 31.03 are revised to note that user fees under VCP must be paid electronically using, and that the Service no longer accepts paper VCP submissions.

Section 31 is revised to update mailing addresses.

President Trump Signs SECURE Act Into Law

Late Friday, December 20, President Trump signed into law two spending packages passed by Congress, which avert a government shutdown. One of the packages, the Further Consolidated Appropriations Act, 2020 (FCAA), is comprised of multiple bills—including the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which contains several major retirement savings-related provisions. Ascensus’ latest Washington Pulse, released on Friday, discusses these provisions in detail.

IRS Proposes No Change for 2020 Retirement Plan Periodic Payment Withholding

The IRS has issued Notice 2020-3, guidance in which the Service is proposing no change for 2020 in a procedure for determining tax withholding on periodic distributions from pensions, annuities, and “certain other deferred income.”

Withholding on nonperiodic or on-demand distributions is generally applied at a 10 percent rate (other than retirement plan-eligible rollover distributions subject to mandatory 20 percent withholding), and can also be waived. Periodic—generally annuitized—payments have withholding applied according to IRS wage withholding tables, with recipients electing the number of withholding allowances or waiving withholding. However, when a withholding election is not made (on IRS Form W-4P), the current default assumption for the 2019 tax year is for the payor to apply withholding as if the recipient is married and has claimed three (3) withholding allowances.

The IRS is proposing in this guidance to retain this assumption for the 2020 tax year for those who make no withholding election for such periodic distributions, but is receiving public comments on this proposal through February 17, 2020.

Senate Approves Appropriations Bill with SECURE Act and Healthcare Provisions; President’s Signature Expected

The U.S. Senate today voted its approval of the Consolidated Appropriations Act of 2020, as passed by the House of Representatives, with provisions that will fund government operations for the coming fiscal year. Included are provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, as well as healthcare-related changes.

The process is still unfinished, with President Trump’s signature needed to enact the legislation. But given the fact that Trump administration officials were deeply involved in negotiating the bill’s provisions, it is generally considered a formality.

Key elements of the legislation can be found in Tuesday’s Latest News announcement.

Last Minute Funding Action by Congress Sets the Stage for Major Savings and Health Changes

In these final days of the 2019 congressional session, as lawmakers negotiated to avert a shutdown of federal government functions and to authorize spending for the coming fiscal year, a number of tax-advantaged savings and health care-related changes found their way into the legislative mix. The majority are provisions found in legislation passed earlier in 2019 by the House of Representatives, in the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is legislation that was not taken up by the Senate.

The process is still unfinished. The House of Representatives and Senate must approve the appropriations package, and President Trump must sign it into law.  But indications are that leaders of both parties in both houses of Congress, as well as the Trump administration, are in support of the proposals. Following are key elements of the legislation.


Retirement Plans and Individual Savings

  • Enhances options for multiple employer plans (MEPs), including unrelated employers participating in pooled employer plans (PEPs)
  • Expands provisions for automatic enrollment and automatic contribution increases in 401(k)-type plans
  • Increases the retirement plan start-up tax credit to a maximum of $5,000 per year
  • Provides a new automatic enrollment tax credit
  • Delays required minimum distributions (RMDs) from IRAs and retirement plans to age 72
  • Requires most nonspouse IRA and retirement plan beneficiaries to deplete inherited accounts—and be taxed—within 10 years
  • Permits Traditional IRA contributions at any age
  • Treats certain graduate student taxable stipend and fellowship payments—and certain difficulty-of-care payments, as eligible compensation for IRA contribution purposes
  • Allows earlier entry into employer-sponsored retirement plans by some long-term, less-than-fulltime employees
  • Requires certain retirement plans to provide annual lifetime income estimates
  • Provides a new exemption from the IRA and retirement plan early distribution 10% percent excise tax for births and adoptions
  • Allows lifetime income investments to be rolled over to an IRA or another retirement plan if a current plan option is eliminated
  • Provides a longer period in which an employer may elect to establish a tax-qualified retirement plan
  • Enhances the ability of an employer to adopt a safe harbor plan design for its 401(k) plan
  • Provides an annuity selection safe harbor for those employer retirement plans that offer this investment option
  • Provides nondiscrimination relief for certain defined benefit pension plans closed to new participants
  • Permits in-service distributions at age 59½ to participants in governmental 457(b) plans and certain pension plans
  • Extends to those affected by a qualifying federally-declared disaster the special disaster-related rules for access to and use of retirement funds
  • Broadens the definition of eligible expenses in 529 plans
  • Several other miscellaneous provisions


Health and Welfare

Several tax provisions intended to help fund elements of the Affordable Care Act (ACA)—often referred to as Obamacare—would be repealed. They include the following.

  • Repeals the 40% excise tax (“Cadillac tax”) on certain high-cost employer-provided health insurance plans
  • Repeals the 2.3% excise tax on certain medical devices, which applied to manufacturers, producers, and importers (but not individuals)
  • Repeals an annual fee assessed to health insurance providers based on their market share (suspended for 2019), a fee typically passed on to consumers in the form of higher health insurance premiums


Effective Dates and Required Amending

Complicating the picture is the fact that the effective dates of some changes are mere days away—January 1, 2020—these dates having been retained from the legislation as passed by the House of Representatives in May, 2019. However, wisely included in the legislation is a delayed amendment deadline for employer-sponsored retirement plans. This will allow implementation of changes immediately, with amending for the changes generally by the end of the 2022 plan year (2024 for governmental and collectively-bargained plans).


Monitoring and More Analysis to Come

Watch this News for updates and further analysis as it becomes available.

IRS Extends Final Hardship Regulations Amending Deadline for Pre-Approved Plans

The IRS has issued Revenue Procedure 2020-09, guidance that extends the deadline for pre-approved retirement plans to amend for final IRS hardship regulations published in September 2019. The amending deadline for these plans is extended to December 31, 2021.

Significant changes to hardship distribution requirements were enacted in the Bipartisan Budget Act of 2018 (BBA). Changes contained in the legislation and reflected in the final regulations—applying to 401(k) and 403) plans—included the following.

  • Eliminates the six-month suspension of deferrals and employee after-tax contributions following a hardship distribution.
  • Eliminates the need for available plan loans to be taken before receiving a hardship distribution.
  • Broadens available plan sources from which hardship distributions may be taken, to include (in addition to elective deferrals) earnings on elective deferrals, as well as qualified non-elective contributions (QNECs), qualified matching contributions (QMACs), ADP and QACA safe harbor contributions—and the earnings thereon (certain restrictions on hardship-available sources apply to 403(b) plans).
  • A general standard may be used to determine if a hardship distribution is needed to satisfy a financial need.
  • Other provisions apply to casualty losses and to certain federally declared disasters.

BBA and final regulations provisions must be effective for hardship distributions on or after January 1, 2020, although certain changes could be applied for 2018 and 2019 plan years.

Bill Would Allow Tax- and Penalty-Free Retirement Savings Withdrawals for Student Loan and Education Payments

Sen. Rand Paul (R-KY) has introduced legislation that would permit tax-free, penalty-free withdrawals from IRAs and employer-sponsored retirement plans for qualified education expenses or student loan repayment. According to a summary released by Sen. Paul’s office, the Higher Education Loan Payment and Enhanced Retirement (HELPER) Act would do the following.

  • Permit up to $5,250 per year to be distributed from an IRA or employer-sponsored retirement plan, tax-free and exempt from the 10 percent early distribution penalty tax, if used for eligible education expenses or eligible student loan repayments
  • Additionally, permit such tax- and penalty-free distributions for qualifying education expenses of a spouse or dependent
  • Allow employers to make student loan payments of up to $5,250 per year on behalf of an employee, as a tax-free employee benefit
  • Permit employees to elect Roth treatment for employer-made contributions to their retirement plan accounts—contributions that would generate potentially-tax-free earnings (currently, all employer contributions are pretax)
  • Repeal the current-law cap and phase-out of the student loan interest income tax deduction

The bill has been referred to the Senate Finance Committee.