SECURE ACT CHANGES CERTAIN RETIREMENT ACCOUNT RULES

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Author: Megan (Neal) Knox of McDonald & Kanyuk, PLLC

On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (H.R. 1865) into law, which contains the “Setting Every Community Up for Retirement Enhancement” (“SECURE”) Act of 2019.  The SECURE Act makes several changes to the rules pertaining to retirement savings and employee benefit accounts, which generally became effective January 1, 2020.  The SECURE Act increases opportunities for individuals to increase their retirement savings but also eliminates the ability to spread distributions of inherited retirement benefits over the life expectancy of most (but not all) beneficiaries.  Highlighted below are the provisions of the SECURE Act that may be of most interest to estate planners. 

A.     Changes to Lifetime Rules.

  1. Elimination on Age Limit for Contributions to Traditional IRAs. Prior to the SECURE Act, individuals could not contribute to a traditional IRA in, or after, the year in which such individual reached age 70 ½.  With the enactment of the SECURE Act, there is no longer an age cap on contributions to a traditional IRA.  Therefore, beginning in 2020, working individuals can continue to contribute to a traditional IRA without any age limit. 

  2. Starting Age for Required Minimum Distributions (“RMDs”) Extended. The SECURE Act raised the required beginning date (“RBD”) for RMDs from age 70 ½ to 72.  These rules apply to 401(a), 401(k), 403(b) and governmental 457(b) plans and traditional IRAs.  Individuals who reached their RBD prior to January 1, 2020 are currently in pay status and must continue to take RMDs.  The SECURE Act will not affect these individuals during their lifetimes.  For individuals who reach age 70 ½ after December 31, 2019, their RBD is April 1 of the year after the year in which they reach age 72.  With respect to certain plans, the RBD is April 1 of the year after the year in which the individual retires, if later. 

 

B.     Changes to Required Minimum Distribution (“RMD”) Rules After the Participant’s Death.

  1. Participants[1] Who Die After December 31, 2019. Generally, the following changes[2] apply to the post-death distribution rules for participants who die after December 31, 2019:

    a.     General Rule: 10-Year Payout Period. For more than 30 years, a so-called “Designated Beneficiary”[3] has been able to stretch RMDs from an inherited retirement account over such Beneficiary’s life expectancy, thereby maximizing the ability to defer income taxes.  The SECURE Act generally reduces this payout period rule to a maximum of 10 years after the year of the participant’s death.  Unlike the prior rule, distributions do not need to be made annually.  The retirement plan simply must be completely distributed out by the end of the 10-year period.

    b.     Exception for “Eligible Designated Beneficiaries.” A limited exception to the general 10-year rule is carved out for only five categories of Designated Beneficiaries: (1) the participant’s surviving spouse, (2) the participant’s minor child (but only until he or she reaches the age of majority), (3) a disabled person, (4) a chronically ill person, and (5) an individual who is not more than 10 years younger than the participant (collectively, the “Eligible Designated Beneficiaries”).   Eligible Designated Beneficiaries qualify for a modified version of the former life expectancy payout method, the modification being that after the Eligible Designated Beneficiary’s death, the remainder must be distributed within 10 years after the death of the Eligible Designated Beneficiary.  Additional noteworthy details regarding categories (2)–(4):

          i) Participant’s Minor Child. When a participant’s minor child reaches the age of majority,[4] the 10-year rule applies unless the child: (a) has not completed “a specified course of education” and is under the age of 26, or (b) is disabled when the child reaches the age of majority, so long as the child continues to be disabled.  Eligible Designated Beneficiary status does not apply to minor grandchildren or any other minor individuals.  If the participant’s child dies before reaching the age of majority, upon his or her death the 10-year rule applies.

         ii) Disabled and Chronically Ill Persons. An individual is considered “disabled” or “chronically ill” only if he or she meets the specific requirements defined under the Internal Revenue Code relating to these new rules.  The Designated Beneficiary’s status as disabled or chronically ill is determined as of the date of the participant’s death. 

    c.     Effect on Trusts for the Benefit of Eligible Designated Beneficiaries. If the participant designates a trust for the benefit of an Eligible Designated Beneficiary, that trust may or may not qualify for the life expectancy payout method.

         i) Conduit Trusts. A conduit trust is a trust under which all distributions from the retirement plan are required to be distributed immediately to the trust’s primary beneficiary.  Leaving benefits to a conduit trust for a single individual beneficiary are treated the same as if left outright to such beneficiary.  If the sole beneficiary is a Designated Beneficiary, the 10-year payout rule will apply.  If the sole beneficiary is an Eligible Designated Beneficiary, the life expectancy payout rule will apply. 

         ii) Accumulation Trusts. An accumulation trust is a trust under which the trustee may accumulate retirement plan distributions from the trust during the beneficiary or beneficiaries’ lifetime(s), with the remainder payable to another beneficiary upon a specified beneficiary’s death.  Unless new Treasury Regulations are issued, it is uncertain whether an accumulation trust with an Eligible Designated Beneficiary as a trust beneficiary will qualify for the lifetime expectancy payout rule because the exception to the 10-year rule does not apply if the Eligible Designated Beneficiary is not the sole  Even if the Eligible Designated Beneficiary is the sole lifetime beneficiary, he or she may not be considered the sole beneficiary of the trust since the trust assets will be distributed to the remainder beneficiary after his or her death.  It is also unknown whether an accumulation trust for the benefit of a participant’s children will qualify for the life expectancy payout if some are minors and some are adults at the time of the participant’s death.  However, the payout period for an accumulation trust for the benefit of a disabled or chronically ill beneficiary is certain.  It will qualify for the life expectancy payout even if the remainder will pass to another beneficiary upon the disabled beneficiary’s death, but only if the disabled beneficiary is the sole beneficiary during his or her life. 

  2. Participants Who Died Before 2020. The SECURE Act provides only a partial exemption for retirement accounts where the participant died prior to January 1, 2020.  If the participant died before January 1, 2020 and the original Designated Beneficiary dies after January 1, 2020, it is uncertain under the new rules whether the 10-year rule applies to the subsequent beneficiary or whether the payout period depends on whether the subsequent beneficiary is just a Designated Beneficiary (subject to the 10-year rule) or an Eligible Designated Beneficiary (eligible for the life expectancy payout).  If the original beneficiary is an accumulation trust, it is unclear whether a new distribution period begins when all the trust beneficiaries die or when any of the trust beneficiaries dies.  If both the participant and the original designated beneficiary died before January 1, 2020, the SECURE Act does not apply to the subsequent beneficiary.  The old rules will continue to apply, and the subsequent beneficiary would withdraw the remaining assets over what would have been left of the original beneficiary’s life expectancy had he or she continued to live. 

[1] The term “participant” used throughout this post means the individual who owned and contributed to a retirement account prior to his or her death.

[2] These changes apply only to certain defined contribution plans but not defined benefit plans, including certain annuity payouts in an IRA or other defined contribution plan that were locked in prior to the SECURE Act. 

[3] “Designated Beneficiary” is defined as: (a) an individual named as beneficiary by the participant or retirement plan, or (b) a trust that meets the IRS’ specific requirements.

[4] The age of majority differs among states but generally is either 18 years (as in Massachusetts) or 21 years.