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;
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
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.