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Congress on Track to Pass Retirement Reform Bills

Posted by Russell E. Towers JD, CLU, ChFC on 11 Jun 2019
Russell E. Towers JD, CLU, ChFC

The U.S. House of Representatives easily passed the SECURE Act of 2019 (H.R. 1994) 417-3 on May 23, 2019.  The U.S. Senate currently has its version of retirement reform under consideration – the Retirement Enhancement and Savings Act (RESA) of 2019 (S. 972).  Both acts have many retirement reform provisions involving expanding and preserving retirement savings, administrative improvements, and revenue provisions.

Congress

Senator Grassley (R-IA), Chairman of the Senate Finance Committee, has stated that there is a very good likelihood that the Senate will pass its version of the bill.  Since H.R. 1994 and S.972 are not exactly similar, upon passage of S. 972 by the Senate, there would need to be a House-Senate Conference Committee to merge the two bills into one.  This final merged bill would need to be voted on again by the House and Senate.  Upon final passage, the bill would be sent to President Trump to sign the bill into law.  When signed into law, it is scheduled to go into effect on 1/1/2020.

Listed below are some sections of both H.R. 1994 and S. 972 that may be important to financial service professionals.  These sections will affect retirement planning of both employer-provided defined contribution qualified plans (i.e. 401(k) plans), IRAs, and Roth IRAs.

  • R. 1994 Section 107 and S. 972 Section 108 are similar. Both bills repeal the prohibition on contributions to a traditional IRA by an individual who has attained       age 70 ½.
  • R. 1994 Section 109 and S. 972 Section 111 are similar. These sections encourage Defined Contribution Plans (i.e. 401(k) plans) to offer qualified annuity products (deferred annuities and immediate annuities) as an asset choice within the plan.  These products are classified as “lifetime income investments” that offer a “lifetime income feature”.
  • R. 1994 Section 114. Increases age for Required Beginning Date (RBD) from the age of 70 ½ to the age of 72 for Required Minimum Distributions (RMD).  There is no equivalent section found in S. 972
  • R. 1994 Section 203 and S. 972 Section 203 are similar. These sections require annual benefits statements to be provided to Defined Contribution Plan participants which must include a lifetime income disclosure.  The disclosure would illustrate the payments a participant would receive if the total account balance were used to provide lifetime income streams, including a single life annuity and a joint survivor annuity for a participant and spouse.
  • R. 1994 Section 204 and S. 972 Section 204 are similar. These sections provide a fiduciary “safe harbor” for selection of lifetime income providers by qualified defined contribution plans.  Under the bills, fiduciaries are afforded a “safe harbor” to satisfy the ERISA prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract.  Fiduciaries are protected from liability for any losses that may result to the participant or beneficiary.  Removing ambiguity about the applicable ERISA fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a defined contribution plan.
  • There is a major difference between H.R. 1994 Section 401 and S. 972 Section 501 regarding post-death “inherited” distributions to beneficiaries.
    • H.R. 1994 states that only “eligible designated beneficiaries” will have the option to stretch an inherited distribution over their life expectancy. With minor exceptions, a surviving spouse is an “eligible designated beneficiary”. Non-spouse beneficiaries (i.e. adult children) are NOT considered to be an “eligible designated beneficiary”.  This means that the “inherited” IRA concept for non-spouses would be limited to only 10 years under H.R. 1994.  So, the lifetime “inherited IRA” option for an adult child that has been available for over 30 years would be eliminated.

    • S. 972 states that the account balance must be totally distributed to non-spouse beneficiaries (i.e. adult children) by the end of the 5th calendar year after the participant’s death. An exception to this 5-year rule is provided for each non-spouse beneficiary to the extent that the balance each receives does not exceed $400,000.  It appears this $400,000 amount could still be paid over the life expectancy of the adult child if desired.

Certain alternative planning options may be available if these House-Senate retirement acts are finally passed into law. One option may be to take after-tax distributions from a large balance IRA and use the cash as annual premiums for a no-lapse UL or SUL life insurance policy.  The leveraged death benefit is income tax free and may be estate tax free if owned by an Irrevocable Life Insurance Trust (ILIT).  This tax-free insurance can make up for and offset the loss of the lifetime inherited IRA distribution option for a non-spouse beneficiary.

Another planning option may be to increase after-tax purchases of non-qualified annuity products which are not affected by H.R. 1994 or S. 972.  Death distributions under IRC Section 72(s)(2) may still be paid over the life expectancy of an individual non-spouse beneficiary if distributions are started within one year of death.  Since non-qualified annuities have a cost basis and there is no stepped-up basis at death, part of post-death inherited distributions will be taxable to the beneficiary and part will be tax free. 

BSMG will keep you informed of the final result of Congressional retirement reform efforts as the legislative process unfolds through the remainder of 2019.

Russell E. Towers JD, CLU, ChFC
Vice President – Business & Estate Planning
Brokers’ Service Marketing Group
russ@bsmg.net

Topics: Retirement, Retirement Reform

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