Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) passed the Senate on December 19, 2019 as a rider on the Appropriations Bill, and the President is expected to sign it.
A version of the legislation has been proposed since 2012. It is described as a significant overhaul of retirement systems, and includes the following highlights:
- encourages 401(k) plans to include “lifetime benefit plans”; i.e. annuities, to simulate the pensions that used to be common with employers. The legislation also protects employers from being sued if the selected insurance company later fails to pay.
- allows small employers to join together to offer 401(k) plans, without having to administer the costs in house
- removes the age cap for being able to contribute to traditional IRAs, currently 70 ½, for individuals with W-2 income.
- allows people to delay taking Required Minimum Distributions from tax-deferred accounts until age 72, up from the current 70 ½.
- allows employers who use automatic enrollment in 401(k) plans to increase employees’ savings to 15% of annual earnings, up from the current 10% savings rate.
As Forbes Magazine described it, tucked away on page 114 of the 130-page bill is the “money grab”; “Modification of Required Distribution Rules for Designated Beneficiaries”. This section contains the provisions that effectively end the stretch IRA for most beneficiaries of retirement plan holders who die after December 31, 2019. Basically, any “designated beneficiary”, defined as an individual named as a beneficiary of a retirement plan, will be able to stretch the IRA no more than ten years. Currently, designated beneficiaries generally can use their own lifetimes, and if there are assets left in the retirement plan at a beneficiary’s death, they can be left to additional beneficiaries for their lifetime.
Exception to the ten-year rule applies to “eligible designated beneficiaries”, defined as
- a surviving spouse,
- a minor,
- a beneficiary who is disabled or chronically ill, or
- a beneficiary who is no more than ten years younger than the deceased retirement plan owner.
A minor must liquidate the inherited retirement plan no later than ten years after reaching 18, while the other eligible beneficiaries can stretch out their distributions for their lifetimes. Any retirement plan assets that remain at the death of those eligible beneficiaries must be distributed no later than ten years after the death of the eligible beneficiary.
The provisions of the SECURE Act pertaining to inherited retirement plans are generally effective for plan holders who die after December 31, 2019. There are some notable exceptions:
- Collective Bargaining Exception which delays the effective date for retirement plans negotiated between unions and employers to the expiration of the collective bargaining agreement or December 31, 2021;
- Governmental Plan Exception delays application to a multitude of government retirement plans to December 21, 2021.
- Certain existing annuity contracts that have a specified period of payout, based on payments to the contract holder and perhaps a second beneficiary are exempted from the ten-year rule.
Among estate planners, there has been an expectation that retirement plans inherited through a trust would be excluded from the ten-year rule. However, the legislation carefully defined the application of the ten-year rule pegged to the identity of the beneficiary, not the means of transferring the benefit. The House version of the SECURE Act allowed a stretch out for the first $450,000 of an inherited retirement plan; the Senate version did not.