As if we haven’t gone through enough legislative change due to the Tax Cuts and Jobs Act (TCJA) tax law overhaul, the President recently signed into law a bill called the SECURE Act, which is the first major overhaul of retirement legislation in more than a decade. The SECURE Act stands for the hokey (yet descriptive) acronym of “Setting Every Community Up for Retirement Enhancement.”
In essence, the SECURE Act is intended to make planning for retirement more accessible, affordable and simple for American workers. This is a hefty, but important, feat considering Americans are not saving nearly enough for the future, are facing ever lengthening average lifespans and are generally footing more of the bill for increasing medical expenses. The legislation consists of changes to several small issues cobbled together to address the larger picture. In this article we will discuss a few of the issues contained in the SECURE Act that will affect individuals and businesses.
Effective for 2020, two tax credits are available for small businesses seeking to implement employer retirement plans. The first credit is available for small employers with retirement plan startup costs. Small businesses that adopt a new qualified retirement plan, SIMPLE IRA plan or simplified employee pension plan (SEP), which covers at least one non-highly compensated employee, are eligible for this nonrefundable tax credit of either $500 per year or $250 per eligible employee up to $5,000 per year for three years. The second new credit is the small employer automatic enrollment credit. This credit applies to employers that have 100 or less employees that begin offering automatic enrollment in workplace retirement plans providing coverage to at least one non-highly compensated employee. For plan years beginning in 2020, employers that offer automatic enrollment in a qualified retirement plan are eligible for up to $500 per year for three years of general business tax credit. Qualified employers may also take this credit if they incur costs for converting an existing plan to include automatic enrollment.
Roughly half of US private sector workers don’t have access to a retirement plan through their employer. Several subsections of the SECURE Act are aimed at alleviating this burden. One area in particular simplifies the formation of a unified Multiple Employer Plan (or MEP). The legislation changes previous rules which required employers to generally share a common characteristic to participate in a MEP. Beginning in 2021, the rules now allow unrelated small businesses to rely upon pooled service providers to form a unified retirement plan thereby both allowing more pervasive availability of retirement plan participation while reducing administrative burdens on small employers.
For taxable years beginning in 2020, a new provision allows for small businesses to elect to treat a qualified retirement plan adopted before the due date (including extensions) of the tax return as if it had been in place by the last day of the previous tax year. This change allows additional time for businesses that are considering adopting a plan to make decisions regarding the type of and funding amount of a retirement plan. This is a major tax planning tool that could generate generous tax savings for a prior period depending on the type of plan implemented.
Another provision of the new law requires employers with long-term, part-time employees to participate in employer retirement plans beginning in 2021. This new group of qualified employees is defined as those working more than 1,000 hours in a year or greater than 500 hours over three consecutive years. It should be noted that employers are not required to provide matching contributions to the participants in this category.
For individuals, the SECURE Act raised the age account holders are required to begin withdrawing funds — known as a required minimum distribution (RMD) — from qualified retirement accounts from 70 to 72 years old. The delay in taking a distribution will allow for additional time for tax-free growth of the retirement plan.
A corollary change relates to the repeal of the maximum age for which a taxpayer can contribute to qualified retirement plans, which has in the past stood at 70 years of age. As of Jan. 1, 2020, an individual can continue to contribute additional funds to a retirement plan as long as they have compensation in the form of income from wages or self-employment as a mechanism to kick the “taxation can” down the road a bit.
The SECURE Act made notable changes to the allowable tax-free distributions from qualified 529 plans. As a refresher, a plan holder can distribute funds from the plan without taxes or penalties as long as the distributions are made for qualified educational expenses. Qualified educational expenses are defined as distributions made for tuition, fees, books, supplies, and equipment needed for education costs as long as the student is attending post-secondary education at least part time. In 2018, the definition of qualified distributions was expanded to also include tuition for private elementary and high school. The SECURE Act, retroactively applied to 2019 and moving forward, further expands education expenses to include amounts used to pay qualified education loan amounts up to $10,000. There continues to be the opportunity to front-load 529 plans by funding up to five times the annual gift-tax limit during the first year, which would allow for this amount to grow for a longer period in a tax-free environment.
The new law serves also to change a couple of regulations related to children. The first change overturns a change in the kiddie tax brought about by the TCJA whereby kids with unearned income, such as interest, dividends and capital gains, are taxed at the higher trusts and estate rates. The kiddie tax now reverts to before the TCJA where unearned income of a child is taxed at the parent’s tax rate if the parent’s rate is higher than that of the child. The second change allows individuals experiencing a birth or adoption of a child in 2020 to make penalty-free withdrawals from a qualified IRA to cover related expenses incurred up to $5,000 in total.
The recent influx of sweeping retirement legislative changes makes it clear that even the best-laid plans can be at the mercy of policy changes. If you need help navigating the new legislative changes to re-evaluate your retirement plans, feel free to contact our firm for more specific guidance.
Kim Briones, CPA, is a Senior Tax Associate with Sol Schwartz & Associates P.C. Briones enjoys helping individuals, corporations, partnerships, trusts and nonprofit organizations with tax compliance and planning issues. She earned a Master of Healthcare Administration degree from Texas Woman’s University as well as a Master of Accountancy degree from The University of Texas at San Antonio. For more information, please call 210-384-8000 or visit ssacpa.com.