RESA & SECURE to Help Save for Retirement | Rodgers & Associates
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RESA & SECURE Act Aim to Help Save for Retirement

Surveys consis­tently report that about half of all American house­holds are not saving enough for retirement. Lawmakers are acting to address this issue. The Retirement Enhancement and Savings Act (RESA) has been intro­duced in the Senate. On the House side, the Setting Every Community up for Retirement Enhancement (SECURE) Act has passed the Ways and Means committee. Both bills claim to be a step towards helping Americans fund their retirement.

Advocates call the proposed legis­lation the most compre­hensive retirement reform since the Pension Protection Act of 2006. The Insured Retirement Institute says the bills are based on common-sense measures that will help average Americans by expanding oppor­tu­nities to save for retirement in a tax-advantaged way.

What the 2019 RESA Legislation Includes

RESA failed to pass Congress last year, despite bipar­tisan appeal. The 2019 version of the legis­lation includes some signif­icant modifi­ca­tions. A detailed overview breaks out the sections of the Employee Retirement Income Security Act and the Internal Revenue Code, which would impact RESA. The full text of the legis­lation is nearly 140 pages, but here are some of the important highlights:

Sections 101 and 102

This section increases retirement plan access for workers in small companies by autho­rizing broader use of multiple employer plans (MEPs). MEPs would become more attractive by elimi­nating compliance barriers and improving the quality of MEP service providers.

Section 104

Simplifies safe harbor 401(k) plan rules. The bill permits amend­ments if it provides:

  1. a nonelective contri­bution of at least 4% of compen­sation (rather than at least 3%) for all eligible employees for that plan year, and
  2. the plan is amended no later than by the close of following plan year.

Section 106

Creates a new tax credit of up to $500 per year to employers to defray startup costs for new section 401(k) plans and SIMPLE individual retirement account (IRA) plans that include automatic enrollment.

Section 108

Repeals the prohi­bition on contri­bu­tions to a tradi­tional IRA by an individual who has reached age 70 ½.

Section 109

Permits an IRA to hold shares in an S corpo­ration that qualifies as a bank and revises the prohibited trans­action rules to permit such holdings.

Section 111

Permits qualified defined contri­bution plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income invest­ments or distri­b­u­tions of a lifetime income investment in the form of a qualified plan distri­b­ution annuity. The change permits partic­i­pants to preserve their lifetime income invest­ments and avoid surrender charges and fees.

Section 201

Allows a qualified retirement plan adopted before the due date (including exten­sions) of the tax return for the business’ taxable year to be treated as having been adopted as of the last day of the taxable year.

Section 204

Creates a new fiduciary safe harbor for selection of lifetime income providers. Fiduciaries are protected from liability for any losses that may result to the partic­ipant or benefi­ciary due to an insurer’s inability in the future to satisfy its financial oblig­a­tions under the terms of the contract.

Section 501

Modifies required minimum distri­b­ution rules with respect to defined contri­bution plans and IRA account balances upon the death of the account owner. The account balance will be required to be distributed and included in income by the benefi­ciary by the end of the fifth calendar year following the year of the employee’s or IRA owner’s death. The requirement does not apply to distri­b­u­tions to the surviving spouse of the employee (or IRA owner).

Some lawmakers would like to see the country return to widespread pension coverage. Both RESA and SECURE encourage employers to include annuities as an option their employees can buy with their payroll retirement contri­bu­tions. Retirees essen­tially purchase their own pensions from an annuity provider and receive that money back as a regular stream of income throughout their retirement. A retiree today could buy an annuity; however, lawmakers are concerned the fees may be high, and employees may feel they lack the knowledge to choose a good product.

Employers can offer annuities as part of their 401(k) offerings today and negotiate for a group rate that would lower fees; however, many employers don’t offer this option out of concern that offering annuities exposes them to consid­erable risk. They are worried that they will be on the hook for annuity payments if the annuity provider they selected for their workers goes broke. RESA and SECURE address this concern by offering a protection from this liability.

Passage of any legis­lation is always uncertain. Many of the provi­sions in these bills have been intro­duced in some version in earlier legis­lation that didn’t pass. RESA itself stalled last year despite wide support. This year could be different.

Rick’s Tips:

  • The new legis­lation would allow contri­bu­tions to an IRA after a worker turns age 70 ½.
  • RESA provides some protection for employers who offer an annuity option to partic­i­pants in the company’s retirement plan.
  • The new bill would eliminate the stretch IRA, forcing benefi­ciaries to empty an inherited IRA by the end of the fifth calendar year following the year of the owner’s death.