Many Americans face challenges securing their retirement within the vast complexities of retirement plans, like 401(k) or 403(b) plans and individual savings plans such as IRAs.  Congress has proposed several bills over the past few years to address some of the legislative hurdles contributing to such issues. Those conversations have now resumed. 

On April 2, 2019, the House Ways and Means Committee unanimously voted (on a bipartisan basis) to approve the Setting Every Community up for Retirement Enhancement, or SECURE Act. A similar piece of legislation, the Retirement Enhancement and Savings Act of 2019 (RESA), was introduced in the Senate Finance Committee this week. 

The proposed changes aim at improving retirement savings access through workplace plans by incentivizing employers - especially smaller employers - to establish retirement plans by reducing costs and administrative burdens. Examples of such are as follows:

  • Expansion of Multiple Employer Plans (MEPs):  The Senate’s bill provides increased opportunities for small employers to create leverage by joining together as a group to eliminate some barriers that exist today. 
  • Simplification of Safe Harbor 401(k) Rules:  Both the House and Senate legislation propose changes to nonelective 401(k) safe harbor contributions to provide greater flexibility and facilitate plan adoption.
  • New or Expanded Credits for Plan Sponsors:
    • Increased Credit for Small Employer Pension Plan Start-Up Costs:  There is an expanded tax credit to make starting a plan more affordable for small businesses and is found in both the House and Senate versions.
    • Small Employer Automatic Enrollment Credit:  There is a new tax credit for plans to provide automatic enrollment, which has been shown to increase employee participation and result in higher retirement savings. 

There are also some significant changes for individuals, both in their retirement plans and in their IRAs, that remove some obstacles and account for additional emergency needs.  Points of interest for individuals include:

  • Access for Part-Time Employees:  The House version proposes modified eligibility requirements for employer-sponsored plans, allowing long-term part-time workers to participate if they work for an employer at least 500 hours for three consecutive years. 
  • Birth or Adoption Distributions:  The House legislation provides for penalty-free withdrawals from retirement plans for qualified birth or adoption distributions. 
  • Changes for IRAs:
    • Removing the Age Limit for Traditional IRA Contributions:  As Americans live longer, an increasing number continue employment beyond traditional retirement age.  Both proposals would allow traditional IRA contributions at any age, rather than prohibiting them after age 70 ½ (with certain exceptions) as is the case under current law. This change would obviously allow for additional savings opportunities.
    • Increase in Age for Required Minimum Distributions (RMDs):  With the increase in life expectancy, the House version proposes raising the required beginning date for RMDs from 70 ½ to 72. If passed, this provision will provide a benefit to retirees, who can take distributions at their leisure before age 72 now instead of age 70 ½.  If passed, it will likely trigger a new look when preparing plans.
    • Limitations on Inherited ‘Stretch’ IRAs:  Both the House and Senate proposals target eliminating the option for most non-spousal beneficiaries to stretch distributions from inherited IRAs and instead require distribution within 5 or 10 years of the IRA owner’s death. This will have a significant effect on estate and income tax planning for IRA distributions for non-spouse beneficiaries.

While changes to the proposed legislation are likely, there is potential for action given bipartisan support.  Sequoia is here to assist you in determining the impact that these changes can have on your personal retirement savings and financial plan.

 

For more information on this topic, contact Heather Welsh, CFP®, AEP®, MSFS, Vice President, Wealth Planning

330.255.2124 | hwelsh@sequoia-financial.com

 

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