August 2019
Will the SECURE Bill Become Law?
On May 23, 2019, the House of Representatives
passed H.R. 1994 by a vote
of 417-3. This bill has the title, “Setting
Every Community Up For Retirement
Enhancement Act of 2019.” It was
received by the Senate on June 3, 2019.
This article discusses the proposed
law changes impacting IRAs; it does
not address the proposed changes for
401(k), 403(b) plans and other employer
sponsored plans.
The SECURE Act contains a radical
IRA law change. Under existing law the
beneficiary of an IRA owner who dies
before his or her required beginning
date is deemed to have elected to use
the life distribution rule unless he or she
elects to use the 5-year rule. The
SECURE Act would require use of a
10-year rule rather than the 5-year rule
for when an IRA owner dies before his
or her required beginning date. The life
distribution rule would no longer be
available to such a beneficiary. Under
the proposed 10-year rule, the inherited
IRA must be closed within 10 years of
the date of death of the IRA owner. The
IRS will need to decide if it will allow
the inherited IRA to be closed by
December 31 of the year containing the
10th anniversary of the IRA owner’s
death.
The current rules (i.e. the life distribution
rule) would continue to apply if the
IRA owner dies on or after his or her
required beginning date.
The purpose of this law change is to
increase tax revenues. No longer would
certain beneficiaries be able to stretch
out distributions over their life expectancy.
Forcing earlier distributions by
beneficiaries means tax revenues will
be collected earlier than otherwise
would have occurred.
Also, the new rules do not apply to beneficiaries of an IRA owner who died before January 1, 2020. The existing RMD rules continue to apply. These existing beneficiaries or subsequent beneficiaries are treated as an eligible designated beneficiary (EDB) as discussed below.
The new rules do not apply to the following
who are eligible designated beneficiaries
(EDB) when an IRA owner dies
after December 31, 2019:
1. a surviving spouse;
2. a child of the IRA owner who has
not reached the age of majority;
3. a beneficiary who is disabled,;
4. a beneficiary who is chronically ill;
and
5. a beneficiary who is not described
in 1-4 and who is not more than 10
years younger than the deceased
IRA owner.
That is, the existing RMD rules continue
to apply to an EDB.
The exception applying to a beneficiary
who is a minor is limited. Once the
child attains the age of majority she or he will have 10 years in which to close the IRA. In most
states this is age 18.
Once an eligible designated beneficiary dies, any
subsequent beneficiary would not be an eligible designated
beneficiary. Any remaining balance in the inherited
IRA must be distributed within 10 years after the
death of the EDB.
There are four proposed changes impacting the making
of annual IRA contributions.
1. Repealed would be the law which prevents a person
age 70 1/2 and older from making a traditional IRA
contribution. Any person with qualifying compensation
would be eligible to make a traditional IRA contribution
regardless of age. Example, Jane Doe age 76 is still
practicing medicine and she would be able to make a
traditional IRA contribution if she so desired.
This change would be effective for contributions for
tax year 2020 and subsequent tax years.
2. The definition of compensation for purposes of
being eligible to make an annual IRA contribution is
being clarified to make clear that compensation
includes any amount included in a person’s income and
paid to such person to aid the person in pursuit of graduate
or postdoctoral study.
3. The definition of compensation for purposes of
being eligible to make an annual IRA contribution is
being clarified to make clear that compensation
includes certain “difficulty of care payments.” The general
rule, in order to make an IRA contribution regardless
if deductible or non-deductible, a person must have
“taxable” income to support such contribution.
There would be a special rule for a person who excludes from gross income under code section 131 certain. The person will be eligible to make a traditional IRA contribution. Such a person would be eligible to make a non-deductible contribution to the extent of the lesser of the amount excluded or the maximum IRA contribution amount as reduced by the amount of compensation which is includible in income.
For example, Jane Doe, age 39, receives compensation of $11,000 from certain “difficulty of care payments.” Jane is able to exclude $9,000 under section 131 and she includes $2,000 in her taxable income. She is eligible to make a non-deductible contribution of $4,000 (the lesser of $9000 or $6,000 less $2,000).
This change would be effective for tax years commencing
after December 31, 2019.
4. There would be special rules for a person who takes an IRA distribution to assist with the birth of a child or
an adoption of a child.
A. The 10% pre-age 59 1/2 tax would not apply to a
person who takes an IRA distribution which qualifies as
a “qualified birth or adoption distribution.”
There is a $5,000 aggregate limit. The actual language is, “The aggregate amount which may be treated as qualified birth or adoption distributions by any individual with respect to any birth or adoption shall not exceed $5,000.” We construe this limit as being a per person lifetime limit. Because this language is not totally clear we believe, the IRS or Congress should clarify.
Presumably, the individual will need to claim this
exemption by completing and filing Form 5329.
B. A qualified birth or adoption distribution means
any distribution from an IRA or other applicable retirement
plan to an individual as long as the distribution is
made during the 1-year period beginning on the date a
child of the individual is born or on the date the legal
adoption of an eligible adoptee child is finalized. An
eligible adoptee is any person who has not attained age
18 or any person who is physically or mentally incapable
of self-support. A child of a taxpayer’s spouse is
ineligible to be an eligible adoptee.
C. A taxpayer who has taken a qualified birth or adoption
distribution may repay such distribution. This part
of the law will also need to be clarified as the law does
not define the repayment period. Presumably it is three
years as it is for natural disaster distributions. A qualified
repayment of a qualified birth or adoption distribution
means the distribution is not taxable.
The change would apply to distributions occurring
after December 31, 2019.
An individual’s required beginning date would be
changed to April 1 of the year following the year he or
she attains age 72 rather than the year the individual
attains age 70 1/2. This change would apply to distributions
required to be made after December 31, 2019, for
those individuals who attain age 70 1/2 after December
31, 2019.
Those individuals who are already subject to the RMD
rules would remain subject to the old rules. That is, they
will need to take RMDs for 2019 and subsequent years.
An RMD would apply for 2021 for any person attaining
age 72 in 2021. It appears those individuals attaining
age 71 in 2020 would not have any RMD for 2020.
Although the main provision to increase tax revenues
is to shorten the time period during which the inherited
IRA must be closed, there are other revenue increasing
provisions.
There would be an increase in the penalty amount for
failing to file a required tax return. The amount would
change from $205 as indexed to $400 as indexed.
There would be an increase in the penalty amounts
for failing to file certain retirement plan returns as set
forth in Code section 6652(d), (e) and (h).
Code section 6652(h) sets forth penalties for failing to
furnish the proper withholding notice form. This is IRS
Form W-4P or a qualifying substitute form.An IRA custodian
has the duty to comply with the IRA withholding
notice rules and the withholding rules.
The current penalty is $10 for each failure to furnish
an IRA owner or beneficiary with the proper withholding
notice, but the total amount imposed on the person
for all such failures is $5,000. The penalty amounts
would increase to $100 for each failure to furnish the
proper notice, but the total amount imposed on the person
during any calendar year for all such failures is
$50,000.
Code section 6652(e) sets forth penalties for failing to
file certain returns required by code sections 6047 and
6058. The current penalty is $25 for each day during
which such failure continues but the total amount with
respect to any return is limited to $15,000. The penalty
amounts would be increased to $105 for each day during
which such failure continues but the total amount
with respect to any return is limited to $50,000.
Code section 6652(d) sets forth penalties for failing to
file certain returns required by code sections (a). This
section requires a sponsor of a retirement plan where
there are terminated participants with deferred vested
benefits to file Form 8855 and provide certain information
regarding such terminated participants. The administrator
has a duty to file an initial form and then has the
duty to file a revised form if there is a change in the person's
status.
With respect to filing the initial form, the current
penalty is $1 for each participant with respect to whom
there is a failure to file, multiplied by the number of
days which such failure continues, but the total amount
with respect to any return is limited to $5,000. The
penalty amounts would be increased to $2 for each participant
with respect to whom there is a failure to file,
multiplied by the number of days which such failure
continues, but the total amount with respect to any
return is limited to $10,000.
With respect to filing the notice of change of status
form, the current penalty is $1 for each participant with
respect to whom there is a failure to file, multiplied by
the number of days which such failure continues, but
the total amount with respect to any return is limited to
$1,000. The penalty amounts would be increased to $2
for each participant with respect to whom there is a failure
to file, multiplied by the number of days which such
failure continues, but the total amount with respect to
any return is limited to $5,000.
Substantial Increase in the Tax Credit for An Employer
Establishing a New Retirement Plan.
Under existing law an employer may qualify for a
$500 tax credit.
The credit is authorized when an employer establishes
a new SEP or a SIMPLE-IRA plan or a 401(k) plan or
other employer sponsored plan.
Current law would be changed so the credit would
apply to the year the plan is established and the subsequent
two years rather than just one year.
The credit for each year is the greater of $500 or the
lesser of $5,000 or $250 for each employee who is not
a highly compensated employee and who is eligible to
participate in such plan. For example, an employer with
5 non-owner employees would a $1,250 credit fore tax
years if it would set up a SEP or SIMPLE IRA plan. We
expect this credit would induce many small business
owners to do so.
This change would be effective for tax years commencing
after December 31, 2019.