SECURE Act

Last updated
Setting Every Community Up for Retirement Enhancement Act of 2019
Great Seal of the United States (obverse).svg
Long titleMaking further consolidated appropriations for the fiscal year ending September 30, 2020, and for other purposes
Acronyms (colloquial)SECURE Act
NicknamesSECURE Act
Announced inthe 116th United States Congress
Number of co-sponsors304
Codification
Acts affected Internal Revenue Code of 1986; Employee Retirement Income Security Act of 1974
Agencies affected Internal Revenue Service; United States Department of Labor; United States Department of the Treasury
Legislative history

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Pub. L. Tooltip Public Law (United States)  116–94 (text) (PDF), was signed into law by President Donald Trump on December 20, 2019 as part of the Further Consolidated Appropriations Act, 2020 (2020 United States federal budget). [1]

Contents

The SECURE Act changed the most popular retirement plans used in the United States and was the first major retirement-related legislation enacted since the 2006 Pension Protection Act. [2] [3] Major elements of the bill include: raising the minimum age for required minimum distributions from 70.5 years of age to 72 years of age; allowing workers to contribute to traditional IRAs after turning 70.5 years of age; allowing individuals to use 529 plan money to repay student loans; eliminating the so-called stretch IRA by requiring non-spouse beneficiaries of inherited IRAs to withdraw and pay taxes on all distributions from inherited accounts within 10 years; and making it easier for 401(k) plan administrators to offer annuities. [3] [4]

Legislative history

Richard Neal, the U.S. representative for Massachusetts's 1st congressional district and chairman of the House Ways and Means Committee, introduced the SECURE Act as H.R. 1994 on March 29, 2019. [5] The bipartisan bill was co-introduced by Ranking Member Kevin Brady (R-TX) as well as Reps. Ron Kind (D-WI) and Mike Kelly (R-PA). It passed the House Ways and Means Committee on April 2, 2019 [6] and passed the full House on May 23, 2019 by a vote of 417–3. [7] [2]

In the Senate, a companion bill called the Retirement Enhancement and Savings Act (RESA, S. 972) was introduced by Senator Chuck Grassley (R-Iowa), chairman of the Senate Finance Committee. This bill, co-sponsored by Ranking Member Ron Wyden (D-OR), failed to advance in committee. [2]

Elements of both bills were incorporated into the fiscal year 2020 spending bill (H.R. 1865). [3] [5] The SECURE Act, as part of the spending bill, was passed by the House on December 17, 2019 by a vote of 297–120 and by the Senate on December 19, 2019 by a vote of 71–23. [5] It was signed into law by President Donald Trump on December 20, 2019. [5] [3]

Provisions

The SECURE Act was drafted to assist in saving and investing for retirement. To that end, it contains a number of provisions to incentivize retirement planning, diversify the options available to savers, and increase access to tax-advantaged savings programs. [8] [9]

Defined-contribution plan changes

For employers

The SECURE Act incentivizes employers to create 401(k) plans and to expand access to their existing plans to more workers. One provision allows unrelated small employers to join together to establish a shared 401(k) plan known as a Multiple Employer Plan (MEP). This allows small businesses to pool resources and mitigate the administrative expenses of establishing a plan. MEPs existed prior to the SECURE Act, but under the previous law they were required to be related in some way (e.g. through geography or through membership in a common industry or trade association). The SECURE Act waived this requirement for MEPs.

The law also shields employers who join a Multiple Employer Plan from liability for potential misconduct perpetrated by other employers who are in the same plan. [9] In addition, the federal tax credit for defraying plan startup costs is increased from $500 to up to $5,000, and provides an additional $500 tax credit for plans that automatically enroll new hires. [10] Another provision requires employers to cover long-term, part-time workers starting in 2021. [9] "Long-term, part-time" workers are defined as workers at least 21 years of age who have completed at least 500 hours of service each year for 3 consecutive years. [10]

Employers who offer annuities as part of their defined-contribution retirement plans are shielded from liability under a new safe-harbor provision even if the insurance company selling the annuity commits fraud or collapses, as long as they meet specific regulatory requirements. [10] [9]

The law also provides a maximum tax credit of $500 per year to small employers who create a 401(k) or SIMPLE IRA plan with automatic enrollment. [11] [12] If a multiple employer plan is set up with automatic enrollment, each eligible employer participating in the plan may claim a separate tax credit. [11] For this tax credit, an employer is eligible if it had no more than 100 employees who received at least $5,000 of compensation from the employer in the preceding year. [13] [14]

For employees

Participants in 401(k) and other defined-contribution plans (including traditional IRAs) can delay taking required minimum distributions until they reach the age of 72, an increase from the current age of 70.5. [10] [8] Participants are also permitted to continue contributing to traditional IRAs even after turning 70.5, which was previously prohibited. [3] The SECURE Act also permits graduate students to treat stipends and non-tuition fellowship payments as compensation for the purposes of contributing to IRAs. [15]

Under the SECURE Act, parents can withdraw up to $5,000 from their individual 401(k) or similar workplace retirement savings plans for each new child within one year of the birth or adoption of the child, without incurring the 10% additional penalty tax for taking an early distribution. [9]

Employees who purchase an annuity in their 401(k) can move their annuity to another 401(k) plan at a different employer or to an IRA without paying surrender charges or other penalty fees. [10]

529 plan changes

The SECURE Act allows people saving money in a tax-advantaged 529 plan to use up to $10,000 to pay off student loans. [9] [8]

529 plans can now also be used to pay for the fees, books, supplies, and equipment for apprenticeship programs. [10] In order to be eligible, the apprenticeship program must be registered with and certified by the U.S. Department of Labor under section 1 of the National Apprenticeship Act. [16] [17]

Tax changes

The SECURE Act partly revises the 2017 Tax Cuts and Jobs Act (TCJA), repealing certain "kiddie tax" provisions that increased taxes on the benefits received by family members of deceased United States military veterans and graduate students. [8]

Funding

The SECURE Act is estimated to cost $15.7 billion. It is primarily funded through a change to "stretch" IRAs. In the past, non-spouse beneficiaries who inherit IRAs could spread disbursements from the IRA over their lifetime. Under the SECURE Act, disbursements must be collected and taxed within 10 years of the original account holder's death. [8] This provision shortens the time period in which tax-advantaged accounts can grow and will increase the taxable income of beneficiaries during that ten-year period, generating tax revenue to fund the cost of the law. [3] [10]

Analysis and reaction

Support

The SECURE Act received support from a variety of special interest and consumer advocacy groups, including the Society for Human Resource Management [18] and the AARP. [19] The CEO of AARP, Jo Ann Jenkins, praised the bill, citing provisions that she claimed would reduce poverty risk among retirees and improve the nation's financial security. [19]

It also received support from financial advisory firms such as Northwestern Mutual and T. Rowe Price, who praised the bill for expanding options for retirement saving and for making it easier for workers to participate in employer savings plans. [20]

Though the proposal to limit "stretch IRAs" was controversial, it has received support from some commentators who argue that it is a good source of revenue and will help reduce intergenerational inequality by ensuring that IRAs are used for their intended purpose of saving for retirement. [21]

Criticism

Some critics have expressed concern about the provision making it easier for 401(k) plan administrators to offer annuities, [3] describing it as a "cave-in to the insurance lobby". [22] David Moon, a columnist with the Knoxville News Sentinel, criticized the provision because it prohibited employees from suing employers if the 401k provider went out of business or defrauded the employees, and stated that it improperly exposed the least sophisticated investors to the most expensive and complex financial products. [22] He also criticized a requirement in the SECURE Act which required 401k plan administrators to send annual income disclosures to plan participants, showing the amount of monthly income they would receive if their plan funds were converted into an annuity, something that he characterized as an "annuity advertisement". [22]

Advocates of the so-called stretch IRAs have also criticized the provision that required beneficiaries of inherited IRAs to draw down (and pay taxes on) those inherited IRAs within 10 years. [22] [23] Jon Ham, an adviser at the New England Investment and Retirement Group, argued that this provision undermines the purpose of the SECURE Act by requiring people to draw down retirement accounts over 10 years rather than over the course of their lifetime, hurting their long-term financial planning. [23]

Ed Slott, a leading financial planner and IRA specialist, wrote that the provision would not generate as much revenue as Congress hoped. He argued that the provision would discourage Americans from performing Roth conversions, which generate revenues. [22] He also argued that eliminating stretch IRAs would encourage people to withdraw money from IRAs and into more lucrative tax-free investment vehicles such as life insurance. [22] Others such as Denise Appleby and Bruce Steiner contend that the SECURE Act will encourage more IRA owners to do Roth conversions now that many beneficiaries will be in higher tax brackets as a result of bunching the distributions into fewer years. [24]

The Joint Congressional Committee on Taxation released a report suggesting that the SECURE Act's impact on retirement savings would be relatively modest. [25] Aron Szapiro, a policy research director at Morningstar, argued that the types of tax incentives used by the SECURE Act to encourage retirement savings would not motivate major changes in savings rate. [25] An analyst from the Brookings Institution noted as well that the provisions for multiple-employer plans, while significant, would not have a major impact on small employers. [25]

Related Research Articles

In the United States, a 401(k) plan is an employer-sponsored, defined-contribution, personal pension (savings) account, as defined in subsection 401(k) of the U.S. Internal Revenue Code. Periodic employee contributions come directly out of their paychecks, and may be matched by the employer. This legal option is what makes 401(k) plans attractive to employees, and many employers offer this option to their (full-time) workers. 401(k) payable is a general ledger account that contains the amount of 401(k) plan pension payments that an employer has an obligation to remit to a pension plan administrator. This account is classified as a payroll liability, since the amount owed should be paid within one year.

<span class="mw-page-title-main">Pension</span> Retirement fund

A pension is a fund into which amounts are paid regularly during the individual's working career, and from which periodic payments are made to support the person's retirement from work. A pension may be:

An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's earned income for the taxpayer's eventual benefit in old age. An individual retirement account is a type of individual retirement arrangement as described in IRS Publication 590, Individual Retirement Arrangements (IRAs). Other arrangements include employer-established benefit trusts and individual retirement annuities, by which a taxpayer purchases an annuity contract or an endowment contract from a life insurance company.

A Roth IRA is an individual retirement account (IRA) under United States law that is generally not taxed upon distribution, provided certain conditions are met. The principal difference between Roth IRAs and most other tax-advantaged retirement plans is that rather than granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free.

A 529 plan, also called a Qualified Tuition Program, is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary. In 2017, K–12 public, private, and religious school tuition were included as qualified expenses for 529 plans along with post-secondary education costs after passage of the Tax Cuts and Jobs Act.

<span class="mw-page-title-main">Economic Growth and Tax Relief Reconciliation Act of 2001</span> The "EGTRRA"

The Economic Growth and Tax Relief Reconciliation Act of 2001 was a major piece of tax legislation passed by the 107th United States Congress and signed by President George W. Bush. It is also known by its abbreviation EGTRRA, and is often referred to as one of the two "Bush tax cuts".

In the United States, a 403(b) plan is a U.S. tax-advantaged retirement savings plan available for public education organizations, some non-profit employers (only Internal Revenue Code 501(c)(3) organizations), cooperative hospital service organizations, and self-employed ministers in the United States. It has tax treatment similar to a 401(k) plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001. Both plans also require that distributions start at age 72 (according to the rules updated in 2020), known as Required Minimum Distributions (RMDs). Distributions are typically taxed as ordinary income.

<span class="mw-page-title-main">Employee Retirement Income Security Act of 1974</span> U.S. tax and labor law

The Employee Retirement Income Security Act of 1974 (ERISA) is a U.S. federal tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:

Tax advantage refers to the economic bonus which applies to certain accounts or investments that are, by statute, tax-reduced, tax-deferred, or tax-free. Examples of tax-advantaged accounts and investments include retirement plans, education savings accounts, medical savings accounts, and government bonds. Governments establish tax advantages to encourage private individuals to contribute money when it is considered to be in the public interest.

<span class="mw-page-title-main">Retirement plans in the United States</span>

A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).

A Savings Incentive Match Plan for Employees Individual Retirement Account, commonly known by the abbreviation "SIMPLE IRA", is a type of tax-deferred employer-provided retirement plan in the United States that allows employees to set aside money and invest it to grow for retirement. Specifically, it is a type of Individual Retirement Account (IRA) that is set up as an employer-provided plan. It is an employer sponsored plan, like better-known plans such as the 401(k) and 403(b), but offers simpler and less costly administration rules, as it is subject to ERISA and its associated regulations. Like a 401(k) plan, the SIMPLE IRA can be funded with pre-tax salary contributions, but those contributions are still subject to Social Security, Medicare, and Federal Unemployment Tax Act taxes. Contribution limits for SIMPLE plans are lower than for most other types of employer-provided retirement plans as compared to conventional defined contribution plans like Section 402(g), 401(k), 401(a), and 403(b) plans.

A traditional IRA is an individual retirement arrangement (IRA), established in the United States by the Employee Retirement Income Security Act of 1974 (ERISA). Normal IRAs also existed before ERISA.

The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code (USC). It is organized topically, into subtitles and sections, covering income tax in the United States, payroll taxes, estate taxes, gift taxes, and excise taxes; as well as procedure and administration. The Code's implementing federal agency is the Internal Revenue Service.

The Roth 401(k) is a type of retirement savings plan. It was authorized by the United States Congress under the Internal Revenue Code, section 402A, and represents a unique combination of features of the Roth IRA and a traditional 401(k) plan. Since January 1, 2006, U.S. employers have been allowed to amend their 401(k) plan document to allow employees to elect Roth IRA type tax treatment for a portion or all of their retirement plan contributions. The same change in law allowed Roth IRA type contributions to 403(b) retirement plans. The Roth retirement plan provision was enacted as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001).

<span class="mw-page-title-main">Defined contribution plan</span> Type of retirement plan

A defined contribution (DC) plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis. Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts plus any investment earnings on the money in the account. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings to an individual account, all or part of which is matched by the employer.

<span class="mw-page-title-main">Pensions in the United States</span> Overview of pensions in the United States of America

Pensions in the United States consist of the Social Security system, public employees retirement systems, as well as various private pension plans offered by employers, insurance companies, and unions.

<span class="mw-page-title-main">Pension Protection Act of 2006</span>

The Pension Protection Act of 2006, 120 Stat. 780, was signed into law by U.S. President George W. Bush on August 17, 2006.

Required minimum distributions (RMDs) are minimum amounts that U.S. tax law requires one to withdraw annually from traditional IRAs and employer-sponsored retirement plans. In the Internal Revenue Code itself, the precise term is "minimum required distribution". Retirement planners, tax practitioners, and publications of the Internal Revenue Service (IRS) often use the phrase "required minimum distribution".

In the United States, an employer matching program is an employer's potential payment to their 401(k) plan that depends on participating employees' contribution to the plan.

A Solo 401(k) (also known as a Self Employed 401(k) or Individual 401(k)) is a 401(k) qualified retirement plan for Americans that was designed specifically for employers with no full-time employees other than the business owner(s) and their spouse(s). The general 401(k) plan gives employees an incentive to save for retirement by allowing them to designate funds as 401(k) funds and thus not have to pay taxes on them until the employee reaches retirement age. In this plan, both the employee and his/her employer may make contributions to the plan. The Solo 401(k) is unique because it only covers the business owner(s) and their spouse(s), thus, not subjecting the 401(k) plan to the complex ERISA (Employee Retirement Income Security Act of 1974) rules, which sets minimum standards for employer pension plans with non-owner employees. Self-employed workers who qualify for the Solo 401(k) can receive the same tax benefits as in a general 401(k) plan, but without the employer being subject to the complexities of ERISA.

References

  1. ↑ Mercado, Darla (2019-12-27). "You might get a tax surprise if you use this account to repay student loans". CNBC. Retrieved 2019-12-30.
  2. 1 2 3 Cancian, Dan (2019-05-24). "What Is the Secure Act? Major Retirement System Changes Passed by House Explained". Newsweek. Retrieved 2019-12-30.
  3. 1 2 3 4 5 6 7 O'Brien, Elizabeth (2019-12-19). "Congress Just Passed the Biggest Retirement Bill in More Than a Decade. Here's What You Need to Know". Money.com. Retrieved 2019-12-29.
  4. ↑ LaBrecque, Leon (2019-12-21). "The SECURE Act And Your 401(k) & IRA: 5 Things You Need To Know Right Now". Forbes Sites. Retrieved 2019-12-29.
  5. 1 2 3 4 "H.R. 1994: Setting Every Community Up for Retirement Enhancement Act of 2019". GovTrack.us. 2019-12-30. Retrieved 2019-12-30.
  6. ↑ "Ways & Means Committee Passes Landmark Retirement Legislation". House.gov. 2019-04-02. Retrieved 2019-12-30.
  7. ↑ Mui, Ylan (2019-04-02). "House committee passes bill to upgrade 401(k) plans amid 'retirement income crisis'". CNBC. Retrieved 2019-12-30.
  8. 1 2 3 4 5 Sonzogni, Christopher (2019-12-23). "Setting Every Community Up for Retirement Enhancement (SECURE) Act". Investopedia. Retrieved 2019-12-30.
  9. 1 2 3 4 5 6 Singletary, Michelle (2019-12-23). "A new law is bringing big changes for retirement savers, especially parents". The Washington Post. Retrieved 2019-12-30.
  10. 1 2 3 4 5 6 7 Miller, Stephen (2019-12-20). "SECURE Act Alters 401(k) Compliance Landscape". SHRM. Retrieved 2019-12-30.
  11. 1 2 Miller, Stephen (September 18, 2020). "IRS Guidance Clarifies Employers' SECURE Act Obligations". Society for Human Resource Management .
  12. ↑ 26 U.S.C.   § 45T
  13. ↑ 26 U.S.C.   § 45T(c)
  14. ↑ 26 U.S.C.   § 408(p)(2)(C)(i)
  15. ↑ Steiner, Jenna (2020-01-06). "SECURE Act". The National Law Review. Retrieved 2020-01-06.
  16. ↑ 29 U.S.C.   § 529(c)(8)
  17. ↑ 29 U.S.C.   § 50
  18. ↑ Miller, Stephen (2019-05-23). "House Passes SECURE Act to Ease 401(k) Compliance, Promote Savings". SHRM. Retrieved 2019-12-30.
  19. 1 2 Terrell, Kenneth (2019-05-24). "House Passes Bill to Expand Access to Retirement Savings Options". AARP. Retrieved 2019-12-30.
  20. ↑ "Your 401(k) could soon include new types of investments". CBS News. 2019-12-20. Retrieved 2020-01-03.
  21. ↑ "The Secure Act is exposing the ugly truth about people's hatred of paying taxes". The Washington post. 2020-01-13. Retrieved 2020-01-13.
  22. 1 2 3 4 5 6 Anderson, Brian (2019-06-03). "Concerns over SECURE Act annuity, stretch IRA provisions". 401K Specialist Magazine. Retrieved 2019-12-30.
  23. 1 2 Schoeff Jr., Mark (2019-08-02). "Advisers resist SECURE Act provision to limit inherited IRAs". InvestmentNews.com. Retrieved 2019-12-30.
  24. ↑ Appleby and Steiner, Denise and Bruce (June 2021). "The SECURE Act -- One Year Later" (PDF). Retrieved March 28, 2022.
  25. 1 2 3 Iacurci, Greg (2019-12-23). "Here's how the new retirement legislation could fall short". CNBC. Retrieved 2019-12-30.
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