There are potentially impactful changes to the laws regarding employer’s qualified plans and family savings plans in the works right now in Congress. These changes, if enacted into law, would require amending retirement plans to reflect mandatory and elective changes. The U.S. House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act by a large margin. The Senate is considering a similar bill called the Retirement Enhancement and Savings Act (RESA). It appears that some compromise bill between the two will be completed soon. If passed, the bill would provide the most significant changes to qualified retirement plans in this country since the Pension Protection Act of 2006.
There are quite a few changes in the works. Here are the most significant and impactful. The first regards the law currently requiring that once a person attains the age of 70 ½, they begin to take RMDs (Required Minimum Distributions) from their plan by April 1 of the same calendar year. The SECURE Act, taking into account that people are living and working longer, would raise that minimum age requirement to 72 before taking any RMD. This would enable people working longer to save for an additional two years for retirement.
Another of the changes being considered is the ability, under current law, for employers to exclude part-time employees from their 401k plans. The SECURE Act would require employers to include those part-time employees who meet certain criteria regarding hours worked in a given year.
One rather controversial provision of the proposed ACT is in regards to annuities. The SECURE Act would allow annuity products to be offered for certain retirement plans. There are concerns about allowing these products into a plan due to their generally higher costs and the ability of the employer, or their fiduciary, to ensure ongoing monitoring of these costs associated annuities and the financial soundness of the provider. There would also be potential liability for the employer in selecting a particular annuity provider.
While most of the provisions of the new law are meant to impact employer retirement plans, there are a few provisions that will have a more direct effect on families. The bill, in its current form, would allow for up to $10,000 to be withdrawn from a 529 Plan to pay down student debt. Additionally the bill would allow a new parent to withdraw up to $5000 from an IRA or 401K to assist with costs of birth or adoption expenses, without penalty.
One additional proposed change that would affect families is in regards to Inherited IRAs or Inherited Roth IRAs. Under current law these IRAs, when inherited by a non-spouse, can be stretched to the lifetime of the beneficiary. Proposed by the new law, would be a provision requiring an inherited IRA to fully distribute within ten years of the death of the originator. This would eliminate this stretch feature and accelerate taxes collected by the government on these retirement funds.
At the current time, it appears that Congress is moving toward sending some form of these two bills to the President for his signature. There are many provisions included in each bill and some of the key potential changes have been described here. Most of the potential changes are directed to alter the provisions in employer retirement plans, but a few would directly affect and some would benefit a typical family saving for the costs of raising a family and sending them to college.