The SECURE Act and the Retirement Enhancement and Savings Act Tax Proposals (H.R. 1994 and S. 972)

The SECURE Act and the Retirement Enhancement and Savings Act Tax Proposals (H.R. 1994 and S. 972)

Updated January 10, 2020
The SECURE Act and the Retirement Enhancement and
Savings Act Tax Proposals (H.R. 1994 and S. 972)
Both the House and the Senate have considered legislation
number of non-highly compensated employees, capped at
that addresses issues associated with tax-favored retirement
$5,000. It also increases the credit by $500 for small
plans. On May 23, the House passed the Setting Every
employers that establish automatic enrollment plans. Small
Community Up for Retirement Enhancement (SECURE)
employers have no more than 100 employees and the credit
Act of 2019, H.R. 1994. Chairman Grassley and Ranking
applies for up to three years.
Member Wyden of the Senate Finance Committee
introduced the Retirement Enhancement and Savings Act of
Several changes are made to individual retirement accounts,
2019, S. 972. The two bills have a number of similar
including allowing nontuition fellowships and stipends to
provisions. Many of the provisions were also included in
be counted as compensation (IRA contributions cannot
legislation passed by the House at the end of the 115th
exceed compensation) and repealing the prohibition on
Congress (H.R. 88). The Grassley-Wyden bill has also been
contributions to traditional IRAs by those aged 70½ and
introduced in past Congresses.
older.
The provisions of the SECURE Act were included in the
Other provisions impacting retirement plans include
House amendment to the Senate amendment to H.R. 1865,
prohibiting plans from making loans through credit cards
the Further Consolidated Appropriations Act, 2020. This
and similar arrangements; allowing the transfer of lifetime
legislation was signed into law on December 20, 2019 (P.L.
income investments (annuities) between plans or as a
116-94).
distribution if no longer allowed as an investment option in
a plan; allowing custodial accounts on termination of
H.R. 1994
certain plans (Section 403(b) plans) to be converted into
The SECURE Act has four parts: provisions that expand
IRAs; clarifying which individuals can be covered by
benefits for retirement savings, administrative
church-controlled organization plans; requiring plans to
improvements, certain other benefits, and revenue
allow participation by long-term employees working more
provisions. Provisions apply both to employer plans (in
than 500 but less than 1,000 hours per year; allowing
which employers set up either defined benefit or defined
penalty-free withdrawals from retirement plans for birth of
contribution plans for their employees) and individual
a child or adoption; increasing the age for taking required
retirement accounts (IRAs). IRAs include traditional
distributions from retirement plans from 70½ to 72;
accounts in which contributions are deducted and
allowing an alternative minimum funding rule for
withdrawals taxed and Roth IRAs that simply exclude
community newspaper plans; and treating “difficulty of
earnings from taxation.
care” foster care payments as compensation for the purpose
of contribution limits to retirement plans.
Expanded Benefits for Retirement
The proposal liberalizes the treatment of multiple-employer
According to the Joint Committee on Taxation, these
retirement plans (generally plans provided by more than
provisions cost $14.6 billion over FY2020-FY2029, with
one employer in the same industry) by providing that
the largest cost ($8.9 billion) due to increasing the age for
failure of one employer to satisfy plan requirements will not
required minimum distributions to 72. The multiemployer
cause all plans to fail. The proposal also provides for the
plan proposals cost $3.4 billion and the withdrawals for
transfer of assets for that employer to another plan. It also
birth and adoption cost $1.2 billion.
establishes pooled employer plans that do not require a
common characteristic and can be administered by a single
Administrative Changes
entity, simplifying administrative costs.
The proposal also has some administrative changes. It
would allow due dates for establishment of employer plans
The proposal includes some provisions to further encourage
on the tax filing day rather than year-end; provide for
automatic enrollment in employer plans, including raising
combined annual reporting for all plans in a group; require
the cap on automatic contributions from 10% to 15% of
defined contribution plans to provide a lifetime income
employee compensation. It also increases flexibility in
discloser; provide a safe harbor to satisfy prudence
adopting certain safe harbor rules from antidiscrimination
requirements for fiduciaries who are trustees of plans;
issues via employer contributions.
modify the nondiscrimination rules so they are not triggered
by participation in the plan of older, longer-service
The proposal also provides for small employer pension
employees; and reduce the premiums of the Pension Benefit
startup costs. The credit is currently the lesser of $500 or
Guaranty Corporation (PBGC) for cooperative and small
50% of startup costs. The proposal changes the flat dollar
employer charity plans that are a subset of multiple-
amount to be the greater of (1) $500 or (2) $250 times the
employer plans. The proposal would also require plans to
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The SECURE Act and the Retirement Enhancement and Savings Act Tax Proposals (H.R. 1994 and S. 972)
use the same discount rate used for benefits to measure
According to the Joint Committee on Taxation, the gain
unfunded liabilities.
from the revenue provisions would largely offset the losses
over the FY2020-FY2029 period (with an overall loss of
According to the Joint Committee on Taxation, these
0.3 billion), although the proposal loses revenue during the
provisions cost $1.4 billion for FY2020-FY2029, with $1.3
FY2020-FY2024 period and gains it in the latter part of the
billion due to the PBGC revisions.
period.
Other Benefits
S. 972
There are also two provisions unrelated to retirement. One
S. 972 contains many of the same or similar provisions as
provision would reinstate for a year a provision that allows
H.R. 1994, but excludes some, adds additional ones, and
an exclusion from gross income of a reduction in property
has modifications of the major revenue-raising proposal.
taxes by volunteer firefighters and emergency medical
responders. The provision also increases the amount that
Expanded Benefits for Retirement
could be excluded from income taxes from $30 per month
S. 972 includes provisions providing additional benefits for
to $50 per month. The second provision would modify
retirement, including liberalizing treatment of multiple-
qualified tuition programs (529 plans) that involve
employer plans, removing the 10% cap on automatic
prepayment costs for a designated beneficiary. Distributions
contributions (H.R. 1994 would increase this cap),
from these plans used for tuition, fees, books, and supplies,
increasing the credit for small employer pension startup
as well as room and board, are exempt from tax. The
costs, changing IRAs (fellowships as compensation and
proposal would extend tax-free treatment to apprenticeship
repeal of maximum age for contributions), disallowing
programs, distribution (up to $10,000) for payment of
loans through credit cards and similar arrangements,
student loans (and can also extend to a sibling of the
allowing the transfer of lifetime income investments
beneficiary), and certain costs associated with elementary
(annuities) between plans or as a distribution if no longer
and secondary education. The cost of both provisions is
allowed as an investment option in a plan, allowing
$0.2 billion from FY2020 to 2029, primarily due to 529
custodial accounts on termination of certain plans (Section
plan modifications.
403(b) plans) to be converted into IRAs, and clarifying
which individuals will be covered by church-controlled
Revenue Provisions
plans. The proposal also includes a provision not in H.R.
The bill contains four revenue-raising proposals that
1994 to allow expanded IRA ownership of S corporation
increase revenues by $16.2 billion for FY2020-FY2029. Of
bank stock.
that revenue, almost all ($15.7 billion) would arise from
changes in the treatment of plans referred to as “stretch
Administrative Improvements
IRAs” in which assets are left to beneficiaries such as
S. 972 also includes the administrative improvements
children and grandchildren, who can include the income
offered in H.R. 1994. It includes the benefits for volunteer
over their lifetime. The proposal would shorten the
firefighters and emergency responders but not the changes
distribution period for a defined contribution plan for most
in 529 tuition plans.
beneficiaries from the lifetime of the beneficiary to 10 years
(with certain beneficiaries excepted, including spouses,
Treatment of U.S. Tax Court Judges
those disabled or chronically ill, minor children while still
S. 972 includes additional provisions that modify retirement
minors, and those no more than 10 years younger than the
and other benefits provided to U.S. Tax Court judges.
owner). Other provisions include increases in penalties for
failure to file income tax returns and failure to file
Revenue Provisions
retirement plan returns, and increased information sharing
S. 972 also contains the revenue provisions in H.R. 1994,
for the purpose of administering and collecting excise taxes
but in the case of the major revenue-raising proposal, it has
on heavy vehicles.
two important differences. It requires inclusion of amounts
for other than qualified beneficiaries over 5 years rather
Unearned Income of Certain Children
than 10 years. This 5-year requirement, however, applies
The bill would reverse a provision subjecting unearned
only to amounts in excess of the first $400,000.
income of children at the higher rates applicable to trusts
and estates and tax it at the parent’s rates, for a cost of $0.5
Jane G. Gravelle, Senior Specialist in Economic Policy
billion.
IF11174

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The SECURE Act and the Retirement Enhancement and Savings Act Tax Proposals (H.R. 1994 and S. 972)

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