On December 20, 2019, President Trump signed “The Further Consolidated Appropriations Act of 2020,” which includes provisions of the SECURE Act (Setting Every Community Up for Retirement Enhancement). It is the most sweeping retirement plan legislation that we have seen in recent years. The new law contains many bipartisan reforms with the intent of increasing access to workplace retirement plans and expanding taxpayer options for retirement savings. Many of the provisions go into effect in 2020, which means now is the time to consider how these new rules may affect your tax and retirement-planning situation.

There are many provisions in the law that offer enhanced opportunities for individuals and business owners. There is also one notable drawback for individuals with significant assets in traditional IRAs and retirement plans. These individuals will likely want to revisit their estate-planning strategies to prevent their heirs from potentially facing unexpectedly high tax bills. 

We have provided highlights including the most impactful provisions below:

Elimination of the "Stretch IRA"

Perhaps the change requiring the most urgent attention is the elimination of long standing provisions allowing non-spouse beneficiaries who inherit IRAs and retirement plan assets to spread distributions (and therefore the tax obligations associated with them) over their lifetimes. This ability to spread out taxable distributions after was often referred to as the “stretch IRA” rule. The new law generally requires beneficiaries to withdraw the funds within 10 years of the account owner’s death unless the beneficiary is a spouse, a disabled or chronically ill individual, or a minor child. This shorter maximum distribution period could result in unanticipated tax bills for beneficiaries who stand to inherit high value traditional IRAs. This is also true for IRA trust beneficiaries, which may affect estate plans that intended to use trusts to manage inherited IRA assets.

IRA owners may want to revisit their overall planning strategies around IRAs. Those who inherited an IRA prior to 2020 may continue to use their current distribution schedule.

Benefits to Individuals

On the plus side, the SECURE Act includes several provisions for the benefit of individuals:

• Individuals will be able to contribute to traditional IRAs beyond age 70½ as long as they continue to work. Previous laws prevented such contributions.
• Retirees will no longer have to take required minimum distributions (RMDs) from their retirement accounts by April 1 following the year in which they turn 70½. The new law generally requires RMDs to begin by April 1 following the year in which they turn age 72.
• Long-term, part-time employees can participate in retirement savings. The Act defines these individuals as “employees who work at least 500 hours in 3 consecutive 12-month periods and have reached age 21.” The previous requirement was 1,000 hours and one year of service. The new rule applies to plan years beginning on or after January 1, 2021.
• Participants will receive statements at least once annually from their employers estimating how much their retirement plan assets are worth, expressed as monthly income received over a lifetime. This should allow workers to be able to gage progress toward meeting their retirement income goals.
• Individuals can now take penalty free early withdrawals of up to $5,000 from their qualified plans and IRAs due to the birth or adoption of a child.
• Historically, qualified higher education expenses under Section 529 has included tuition, fees, books, supplies, equipment and in some cases, room & board. This has been expanded to include educational expenses required for participation in certain apprenticeship programs. In addition, a taxpayer may take tax free distributions of up to $10,000 to pay the principal or interest on qualified student loans.

Benefits to Employers

The SECURE Act also provides changes to make it easier and less costly for employers striving to provide quality retirement savings opportunities to their workers. Among the changes are the following:

• The automatic enrollment default for safe harbor plans increases from 10% to 15%.
• The tax credit for Small Employer Pension Plan Start Up Costs has increased. The new rule allows employers to take a credit equal to the greater of (1) $500 or (2) the lesser of (a) $250 times the number of non-highly compensated eligible employees or (b) $5,000. The credit applies for up to three years.
• A new tax credit of up to $500 is available for employers that launch a SIMPLE IRA or 401(k) plan with automatic enrollment. The credit applies for three years.
• Employers now have easier access to join multiple employer plans (MEPs) regardless of industry, geographic location, or affiliation. (Previously, groups of small businesses had to be affiliated somehow in order to join a MEP.) In addition, the failure of one employer in a MEP to meet plan requirements will not cause others to fail, and the plan assets in the failed plan will be transferred to another. (This rule is effective for plan years beginning on or after January 1, 2021.)

This is a high-level overview of the Act and its provisions. To read a full summary of the SECURE Act go to https://www.congress.gov/bill/116th-congress/housebill/1994 or to read the Act in its entirety visit this link: https://www.congress.gov/bill/116th-congress/house-bill/1994/text.

These new provisions should be reviewed and considered in retirement and tax planning. The application of these rules can be complex. As always, contact Shannon & Associates to help!

In April 2019, the IRS issued Revenue Procedure 2019-19, an update to and reinstatement of EPCRS. It makes it easier for plan sponsors to correct certain plan document and operational issues and provides participant loan correction relief.

Currently there are three types of correction methods:

• Self-Correction Program (SCP) - correct certain plan failures without contacting the IRS or paying a user fee.
• Voluntary Correction Program (VCP) - correct failures not eligible for self-correction or get the IRS’s written agreement that specified failures were properly corrected.
• Audit Closing Agreement Program (Audit CAP) - used to resolve failures discovered during an IRS audit that can’t be self-corrected.

Revenue Procedure 2019-19 expands the types of failures including loan issues that can be corrected through SCP without having to file through VCP and pay user fees.

Summary of the Key Changes

Plan Document Failures Plan sponsors of 401(k), 403(b) and other
qualifying plans may correct certain plan document failures (except those that include an initial IRC 401(a) plan document or a failure to adopt an initial 403(b) plan document) within the two-year correction period as long as the plan has a favorable determination or an opinion letter from the IRS. Generally, a significant “Plan Document Failure” involves an incorrect or missing provision that violates the requirements of Code Section 401(a) or 403(a).

A non-amended failure, a failure to adopt a good faith amendment, and a failure to adopt an interim amendment are all considered “plan document failures” and can be self-corrected. The late adoption of discretionary amendments, however, is not considered a “plan document failure” and cannot be self-corrected.

Plan Loan Failures Several plan loan failures now may be eligible for correction through self-correction. Defaulted loans can be corrected by either a single-sum repayment, a re-amortization of the outstanding loan balance, or a combination of the two. In addition, plan loan failures that can be corrected include failure to repay loans according to plan terms, failure to manage the number of outstanding participant loans, participant loans in default, and the failure to obtain spousal consent when a participant takes a plan loan.

Under the new Revenue Procedure, a deemed taxable distribution may be avoided as long as the defaulted loan is corrected by re-amortizing the outstanding loan balance over the remaining period of the loan or by the end of the maximum period, or by making a single corrective “catch-up” payment or a combination of these correction methods.

Retroactive Plan Amendments Also expanded are the type of plan document and operational failures that may be corrected through the issuance of retroactive plan amendments. To do so, three conditions must be satisfied:

• The corrective amendment must result in an increase of the participant’s benefit, right or feature.
• The increase in the benefit, right, or feature must be provided to all eligible employees.
• The increase must be permitted under the IRC and satisfy the correction principles of EPCRS.

The IRS provides examples of self-correction opportunities and significant failures on their website. See https://www.irs.gov/retirement-plans/retirement-plan-errors-eligible-for-self-correction

Additional Any submissions to the Voluntary Correction Program are now required to be completed electronically using the pay.gov website.

For more information, visit the IRS’ website (www.irs.gov/pub/irs-drop/rp-19-19), or contact us.

IRS Form W-4 (Employee’s Withholding Certificate) is used to determine how much federal income tax is withheld from your paycheck each pay period. Recently, the IRS revised the form due to tax law changes that went into effect in 2018. The old form, which asked you to report a number of withholding allowances, has been replaced by a more complicated form that requests additional information regarding your income and deductions.

The good news is that the IRS isn’t requiring all employees to complete the new form for 2020. Employers may ask you to fill out a new form, but you’re not required to do so if you were hired prior to 2020. However, if you get a new job in 2020, you will be required to use the revised form. Also, if you want to change your withholding in 2020, you must do so on the new form.

Even if you’re not required to complete a Form W-4 for 2020, it might be a good idea to perform a “paycheck checkup” to make sure the right amount of income tax is being withheld. If you’re significantly underwithheld, you risk being hit with interest and penalties. If you’re significantly overwithheld, you’re basically making an interest-free loan to the government when you could be putting that money to good use. Neither situation is good for you. Therefore, we suggest you check out the IRS’s “Tax Withholding Estimator” at www.irs.gov/W4App to see if your current withholding is sufficient. Make sure you have a copy of your recent pay stub and tax return. Of course, if you want more precise results, we would be happy to put together a tax projection for you.

If you decide to change your current withholding, you will need to fill out the 2020 Form W-4. Although your employer can answer general questions about the form, it can’t give you tax advice. That’s where we can help. We can guide you through each step to make sure the right amount of tax is being withheld throughout the year. If you have any questions, or would like more information on the tax law changes that led to the form’s makeover, please don’t hesitate to contact us.

The IRS has announced that some retirement benefit plan limitations will be adjusted for 2020. Look at the image above for selected limitation amounts.