2020 has been a big year for tax law changes. The SECURE Act is the most significant retirement reform law in at least a decade. The CARES Act provided tax breaks designed to help ease the economic burden of the Coronavirus and related shutdowns. These are just a few of the many changes affecting individuals this year:
- The SECURE Act raised the required minimum distribution requirement (RMD) for traditional IRAs from 70½ to 72 for anyone turning 72 in 2020 or later. Then, the CARES Act suspended RMDs for 2020 without penalty.
- Traditional IRA owners can now continue to make contributions past the age of 70½.
- If you were impacted financially by COVID you can take higher than normal distributions from your retirement account this year — up to $100,000 — without penalties. You have three years during which you can pay the income taxes on the distribution or repay the money to the plan. Plan loan repayments are also delayed for one year.
- Early withdrawal penalties on IRAs and 401(k) distributions of up to $5,000 are also waived for households with a new baby, including adoptions. Income tax is still due.
- Effective in 2020, non-spousal heirs can no longer stretch IRA distributions over their lifetimes. Instead, funds must be distributed within ten years of the original owners’ death. (Some exceptions apply.)
- The CARES Act suspended the limit on deductions for cash donations by people who itemize (gifts to donor-advised funds and private nonoperating foundations are excluded). A new “above-the-line” deduction for cash donations of up to $300 is available for nonitemizers.
As we head into the final quarter of 2020, now’s the time to schedule a year-end tax review. Some of these tax opportunities expire at year-end.
In last month’s ClientLine, we highlighted some of the Setting Every Community Up for Retirement Enhancement (SECURE) Act’s new headlines for business owners. This month, we share some of the details for you:
For the first time, small businesses can join a pooled employer retirement plan with two or more unrelated employers. Part-time employees will have more access, too: those who worked at least 500 hours in three consecutive years are newly eligible for qualified plan participation, but they don’t factor into existing top-heavy requirements.
Employers will see other reasons to start a plan. The startup tax credit for newly established plans increased significantly, from the former cap of $500 up to $5,000. Eligible 401(k), SIMPLE IRA and other qualified plans can take another $500 credit for three years for auto-enrolling new employees. The safe harbor for the automatic enrollment escalation cap rises from 10% to 15% of pay, while certain penalties for failing to file plan returns increase.
ANNUITY SAFE HARBOR
Plan sponsors will find more streamlined administrative and compliance requirements, while they also have a new annuity safe harbor, which will protect employers from liability if the annuity provider they choose meets certain standards involving state insurance licenses, audited financial statements and adequate reserves.
Employers should also be aware of a change that benefits individual participants: an increase in the age when required minimum distributions must begin, from 70 1/2 to 72. This change applies only to people who reach age 70 1/2 in 2020 or later. Employees older than age 72 may continue contributing to employer plans.
Talk to your tax professional to learn how these changes might affect your company’s tax situation.
The SECURE Act also creates big changes for companies offering qualified retirement plans. Here are a few of them:
More small businesses are eligible to start a qualified retirement plan for employees, as the new law allows two or more unrelated employers to join a pooled employer plan. More parttime workers are eligible to make elective deferrals, depending on their length of tenure, and plan sponsors have a new safe harbor when offering annuities.
Employers will also see higher tax credits for plan startup costs and up to a $500 credit for startup plans that include automatic enrollment in 401(k) plans and SIMPLE IRAs. The safe harbor for the automatic enrollment escalation cap rises from 10% to 15% of pay, while certain penalties for failing to file plan returns increase.
Talk to your tax and plan professionals to learn more.