Source: https://ncbarblog.com/the-secure-act-has-passed-how-does-it-affect-our-clients/
Timestamp: 2020-02-16 20:24:58
Document Index: 148312845

Matched Legal Cases: ['§401', '§401', '§401', '§408', '§401', '§401', '§7702', '§7702', '§7702', '§401', '§72', '§401']

The SECURE Act Has Passed: How Does It Affect Our Clients? – NCBarBlog
Distributions based on the life expectancy of the designated beneficiary (what we have commonly called “stretch distributions”) are now only allowed for a subset of beneficiaries called “eligible designated beneficiaries.” IRC §401(a)(9)(H)(ii). Under IRC §401(a)(9)(E) (amended under Section 401(a)(2) of the Act), an individual must fall into one of five categories to be an eligible designated beneficiary:
(1) surviving spouses,
(2) minor children,
(3) disabled individuals,
(4) chronically-ill individuals, or
(5) individuals who are not more than 10 years younger than the employee.
IRC §401(a)(9)(E)(ii).
Surviving Spouses: This Act continues to allow surviving spouses to distribute over their life expectancies. The Act also does not does not change any of the provisions of IRC §408(d)(3), which governs rollovers (including spousal rollovers) at the death of the employee spouse. While naming the surviving spouse outright as a beneficiary will permit stretch distributions, it is not clear from the Act whether a trust for the benefit of the surviving spouse and the children would permit the surviving spouse to qualify as an eligible designated beneficiary; and if the trustee has the power to distribute to the children during the surviving spouse’s lifetime, it seems likely that the ten-year rule would apply.
Minor Children: A minor child of the employee only receives eligibility status until reaching the age of majority; then the child has ten years to distribute the remaining funds. IRC §401(a)(9)(E)(iii). The ten-year requirement appears to allow distributions over any schedule without required minimums during that ten-year period. The agency will likely have to create regulations to clarify this, but multi-beneficiary trusts like common pot trusts seem unlikely to qualify for stretch distributions because of the problem of segregating funds to determine when the ten-year period starts unless the distribution requirements are based on the oldest beneficiary of the multi-beneficiary trust. (In effect, upon the oldest beneficiary’s reaching the age of majority, the IRA would have to be distributed within ten years even if there are still minor beneficiaries.) The agency may interpret the statute to allow safe harbors for multi-beneficiary trusts similar to the safe harbors for trusts for disabled individuals where the trust terms call for immediate separation of trust accounts or provide for distributions only to the minor child during the minor child’s lifetime. (See the summary of the requirements for multi-beneficiary trusts below.) The same could be true for trusts naming a surviving spouse as one of multiple beneficiaries.
Finally, because the Act does not remove the underlying Code provisions concerning designated beneficiaries but only limits the applicability to certain “eligible” designated beneficiaries, it appears that the requirements for creating see-through trusts to obtain deferrals will continue to apply, with the possible requirement that eligible designated beneficiaries be the only ones receiving distributions during their lifetimes.
Note that the statute only permits minor children of the employee to be eligible designated beneficiaries. Grandchildren, nieces, nephews, and unrelated or more distantly related minors are not eligible designated beneficiaries and must take distributions within ten years.
Chronically-Ill Individual: Under paragraph IRC §401(a)(9)(E)(ii)(IV), an individual is “chronically-ill” if the individual meets the definition in IRC §7702B(c)(2)(A) (governing deductibility of long-term care expenses). That section requires a licensed health care practitioner to certify one of three things:
IRC §7702B(c)(2)(A). In addition to the requirement that a licensed health care practitioner certify that the individual meets the 7702B requirements, the new legislation also requires the certification based on ADLs under IRC §7702B(c)(2)(A)(i) to say that the limitation is indefinite but expected to be lengthy in nature. IRC §401(a)(9)(E)(ii)(IV).
Grandfathering: These new RMD rules only apply to employees who die after December 31, 2019; plans of any individuals who die before 2020 are grandfathered. The new RMD rules do apply at the death of any designated beneficiary of an inherited IRA who dies after December 31, 2019. For instance, if the employee died in 2017 leaving a designated beneficiary, the designated beneficiary may take distributions over the designated beneficiary’s life expectancy; when the designated beneficiary dies after December 31, 2019, the beneficiary named by the designated beneficiary must take the distributions within ten years (even if the beneficiary is disabled, chronically-ill, or a minor). (As noted above, surviving spouses may still make spousal rollovers, and any eligible designated beneficiaries will have longer to take distributions.)
Additional Thoughts: This provision is designed to generate tax revenue for the government, and it will have that effect as it forces earlier withdrawals (in larger amounts each year) from inherited IRAs. If a beneficiary cannot be given control over assets, a trust restricting distributions may be better than allowing the beneficiary to receive the entire inherited IRA over the course of ten years. This is likely to result in significantly higher taxes than in the past, though, unless the beneficiary qualifies as disabled, chronically-ill, or a minor child. In the planning process, consider allocating IRA distributions to beneficiaries who do not require restricted distributions of trust assets.
Elder law attorneys should be back in front of their clients preparing them for this and being heroes in the process. Elder law attorneys also have an opportunity to provide guidance on options like making Roth conversions and educating clients on the current low tax environment and the costs and benefits of paying tax now if the client has a relatively low marginal tax rate rather than leaving the taxes to beneficiaries who may have higher rates and will be forced to take larger distributions. Another area of counseling could be in setting aside assets to pay taxes (such as life insurance proceeds) or leveraging charitable giving to minimize the tax consequences of the Act.
Section 107 of the Act repeals the maximum age for making tax-deductible contributions to Traditional IRAs. If an employee has taxable income, the employee may make contributions up to the annual limits. Section 107(b) appears to require that Qualified Charitable Distributions come from pre-70 ½ contributions—contributions after 70 ½ will reduce the amount you are allowed to distribute to charity as Qualified Charitable Distributions.
Section 113. Penalty-Free Withdrawals from Retirement Plans for Individuals in Case of Birth of Child or Adoption
Section 113 of the Act amends IRC §72(t)(2) to permit an employee to withdraw up to $5,000 from a qualified plan (not just IRAs) without penalty in year following a birth or adoption. The employee can later re-contribute this amount to an IRA.
Section 114 of the Act changes the required beginning date in IRC §401(a)(9)(C)(i)(I) from 70 ½ to 72. Employees who turn 70 ½ after December 31, 2019 will not be required to take required minimum distributions until April 1 of the year after the employee turns 72.
Section 302. Expansion of Section 529 Plans.
Effective January 1, 2019, a 529 account may be used to repay up to $10,000 of a beneficiary’s student loans as a qualified higher education expense. This is a lifetime number for a beneficiary, not an annual figure.
Select Provisions of Setting Every Community Up for Retirement Enhancement Act (SECURE Act)
In General.–Paragraph (1) of section 219(d) of the Internal Revenue Code of 1986 is repealed.
(b) Coordination With Qualified Charitable Distributions.–Add at the end of section 408(d)(8)(A) of such Code the following: “The amount of distributions not includible in gross income by reason of the preceding sentence for a taxable year (determined without regard to this sentence) shall be reduced (but not below zero) by an amount equal to the excess of–
“(i) the aggregate amount of deductions allowed to the taxpayer under section 219 for all taxable years ending on or after the date the taxpayer attains age 70\1/2\, over
(a) In General.–Section 72(t)(2) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:
“(H) Distributions from retirement plans in case of birth of child or adoption.–
“(i) In general.–Any qualified birth or adoption distribution.
“(ii) Limitation.–The aggregate amount which may be treated as qualified birth or adoption distributions by any individual with respect to any birth or adoption shall not exceed $5,000.
“(iii) Qualified birth or adoption distribution.–For purposes of this subparagraph–
“(I) In general.–The term `qualified birth or adoption distribution’ means any distribution from an applicable eligible retirement plan to an individual if made during the 1-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.
“(II) Eligible adoptee.–The term `eligible adoptee’ means any individual (other than a child of the taxpayer’s spouse) who has not attained age 18 or is physically or mentally incapable of self-support.
“(iv) Treatment of plan distributions.–
“(I) In general.–If a distribution to an individual would (without regard to clause (ii)) be a qualified birth or adoption distribution, a plan shall not be treated as failing to meet any requirement of this title merely because the plan treats the distribution as a qualified birth or adoption distribution, unless the aggregate amount of such distributions from all plans maintained by the employer (and any member of any controlled group which includes the employer) to such individual exceeds $5,000.
“(II) Controlled group.–For purposes of subclause (I), the term `controlled group’ means any group treated as a single employer under subsection (b), (c), (m), or (o) of section 414.
“(v) Amount distributed may be repaid.–
“(I) In general.–Any individual who receives a qualified birth or adoption distribution may make one or more contributions in an aggregate amount not to exceed the amount of such distribution to an applicable eligible retirement plan of which such individual is a beneficiary and to which a rollover contribution of such distribution could be made under section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or 457(e)(16), as the case may be.
“(II) Limitation on contributions to applicable eligible retirement plans other than IRAs.–The aggregate amount of contributions made by an individual under subclause (I) to any applicable eligible retirement plan which is not an individual retirement plan shall not exceed the aggregate amount of qualified birth or adoption distributions which are made from such plan to such individual. Subclause (I) shall not apply to contributions to any applicable eligible retirement plan which is not an individual retirement plan unless the individual is eligible to make contributions (other than those described in subclause (I)) to such applicable eligible retirement plan.
“(III) Treatment of repayments of distributions from applicable eligible retirement plans other than IRAs.–If a contribution is made under subclause (I) with respect to a qualified birth or adoption distribution from an applicable eligible retirement plan other than an individual retirement plan, then the taxpayer shall, to the extent of the amount of the contribution, be treated as having received such distribution in an eligible rollover distribution (as defined in section 402(c)(4)) and as having transferred the amount to the applicable eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.
“(IV) Treatment of repayments for distributions from IRAs.–If a contribution is made under subclause (I) with respect to a qualified birth or adoption distribution from an individual retirement plan, then, to the extent of the amount of the contribution, such distribution shall be treated as a distribution described in section 408(d)(3) and as having been transferred to the applicable eligible retirement plan in a direct trustee to trustee transfer within 60 days of the distribution.
“(vi) Definition and special rules.–For purposes of this subparagraph–
“(I) Applicable eligible retirement plan.–The term `applicable eligible retirement plan’ means an eligible retirement plan (as defined in section 402(c)(8)(B)) other than a defined benefit plan.
“(II) Exemption of distributions from trustee to trustee transfer and withholding rules.–For purposes of sections 401(a)(31), 402(f), and 3405, a qualified birth or adoption distribution shall not be treated as an eligible rollover distribution.
“(III) Taxpayer must include tin.–A distribution shall not be treated as a qualified birth or adoption distribution with respect to any child or eligible adoptee unless the taxpayer includes the name, age, and TIN of such child or eligible adoptee on the taxpayer’s return of tax for the taxable year.
“(IV) Distributions treated as meeting plan distribution requirements.–Any qualified birth or adoption distribution shall be treated as meeting the requirements of sections 401(k)(2)(B)(i), 403(b)(7)(A)(ii), 403(b)(11), and 457(d)(1)(A).”.
(b) Effective Date.–The amendments made by this section shall apply to distributions made after December 31, 2019.
(a) In General.–Section 401(a)(9)(C)(i)(I) of the Internal Revenue Code of 1986 is amended by striking age 70\1/2\'' and insertingage 72”.
(b) Spouse Beneficiaries; Special Rule for Owners.–Subparagraphs (B)(iv)(I) and (C)(ii)(I) of section 401(a)(9) of such Code are each amended by striking age 70\1/2\'' and insertingage 72”.
(c) Conforming Amendments.–The last sentence of section 408(b) of such Code is amended by striking age 70\1/2\'' and insertingage 72”.
(d) Effective Date.–The amendments made by this section shall apply to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70\1/2\ after such date.
(a) Distributions for Certain Expenses Associated With Registered Apprenticeship Programs.–Section 529(c) of the Internal Revenue Code of 1986 is amended by adding at the end the following new paragraph:
“(8) Treatment of certain expenses associated with registered apprenticeship programs.–Any reference in this subsection to the term `qualified higher education expense’ shall include a reference to expenses for fees, books, supplies, and equipment required for the participation of a designated beneficiary in an apprenticeship program registered and certified with the Secretary of Labor under section 1 of the National Apprenticeship Act (29 U.S.C. 50).”.
(b) Distributions for Qualified Education Loan Repayments.–
(1) In general.–Section 529(c) of such Code, as amended by subsection (a), is amended by adding at the end the following new paragraph:
“(9) Treatment of qualified education loan repayments.–
“(A) In general.–Any reference in this subsection to the term `qualified higher education expense’ shall include a reference to amounts paid as principal or interest on any qualified education loan (as defined in section 221(d)) of the designated beneficiary or a sibling of the designated beneficiary.
“(B) Limitation.–The amount of distributions treated as a qualified higher education expense under this paragraph with respect to the loans of any individual shall not exceed $10,000 (reduced by the amount of distributions so treated for all prior taxable years).
“(C) Special rules for siblings of the designated beneficiary.–
“(i) Separate accounting.–For purposes of subparagraph (B) and subsection (d), amounts treated as a qualified higher education expense with respect to the loans of a sibling of the designated beneficiary shall be taken into account with respect to such sibling and not with respect to such designated beneficiary.
“(ii) Sibling defined.–For purposes of this paragraph, the term `sibling’ means an individual who bears a relationship to the designated beneficiary which is described in section 152(d)(2)(B).”.
(2) Coordination with deduction for student loan interest.–
Section 221(e)(1) of such Code is amended by adding at the end the following: “The deduction otherwise allowable under subsection (a) (prior to the application of subsection (b)) to the taxpayer for any taxable year shall be reduced (but not below zero) by so much of the distributions treated as a qualified higher education expense under section 529(c)(9) with respect to loans of the taxpayer as would be includible in gross income under section 529(c)(3)(A) for such taxable year but for such treatment.”.
(c) Effective Date.–The amendments made by this section shall apply to distributions made after December 31, 2018.
(a) Modification of Rules Where Employee Dies Before Entire Distribution.–
(1) In general.–Section 401(a)(9) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:
“(H) Special rules for certain defined contribution plans.–In the case of a defined contribution plan, if an employee dies before the distribution of the employee’s entire interest–
“(i) In general.–Except in the case of a beneficiary who is not a designated beneficiary, subparagraph (B)(ii)–
“(I) shall be applied by substituting 10 years' for5 years’, and
“(ii) Exception for eligible designated beneficiaries.–Subparagraph (B)(iii) shall apply only in the case of an eligible designated beneficiary.
“(iii) Rules upon death of eligible designated beneficiary.–If an eligible designated beneficiary dies before the portion of the employee’s interest to which this subparagraph applies is entirely distributed, the exception under clause (ii) shall not apply to any beneficiary of such eligible designated beneficiary and the remainder of such portion shall be distributed within 10 years after the death of such eligible designated beneficiary.
“(iv) Special rule in case of certain trusts for disabled or chronically ill beneficiaries.–In the case of an applicable multi-beneficiary trust, if under the terms of the trust–
“(I) it is to be divided immediately upon the death of the employee into separate trusts for each beneficiary, or
“(II) no individual (other than a eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii)) has any right to the employee’s interest in the plan until the death of all such eligible designated beneficiaries with respect to the trust,
for purposes of a trust described in subclause (I), clause (ii) shall be applied separately with respect to the portion of the employee’s interest that is payable to any eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii); and, for purposes of a trust described in subclause (II), subparagraph (B)(iii) shall apply to the distribution of the employee’s interest and any beneficiary who is not such an eligible designated beneficiary shall be treated as a beneficiary of the eligible designated beneficiary upon the death of such eligible designated beneficiary.
“(v) Applicable multi-beneficiary trust.–For purposes of this subparagraph, the term `applicable multi-beneficiary trust’ means a trust–
“(I) which has more than one beneficiary,
“(II) all of the beneficiaries of which are treated as designated beneficiaries for purposes of determining the distribution period pursuant to this paragraph, and
“(III) at least one of the beneficiaries of which is an eligible designated beneficiary described in subclause (III) or (IV) of subparagraph (E)(ii).
“(vi) Application to certain eligible retirement plans.–For purposes of applying the provisions of this subparagraph in determining amounts required to be distributed pursuant to this paragraph, all eligible retirement plans (as defined in section 402(c)(8)(B), other than a defined benefit plan described in clause (iv) or (v) thereof or a qualified trust which is a part of a defined benefit plan) shall be treated as a defined contribution plan.”.
(2) Definition of eligible designated beneficiary.–Section 401(a)(9)(E) of such Code is amended to read as follows:
“(E) Definitions and rules relating to designated beneficiaries.–For purposes of this paragraph–
“(i) Designated beneficiary.–The term `designated beneficiary’ means any individual designated as a beneficiary by the employee.
“(ii) Eligible designated beneficiary.–The term `eligible designated beneficiary’ means, with respect to any employee, any designated beneficiary who is–
“(iii) Special rule for children.–Subject to subparagraph (F), an individual described in clause (ii)(II) shall cease to be an eligible designated beneficiary as of the date the individual reaches majority and any remainder of the portion of the individual’s interest to which subparagraph (H)(ii) applies shall be distributed within 10 years after such date.”.
(b) Effective Dates.–
(1) In general.–Except as provided in this subsection, the amendments made by this section shall apply to distributions with respect to employees who die after December 31, 2019.
(3) Governmental plans.—
(4) Exception for certain existing annuity contracts.[John’s note: irrevocable where joint lives of employee and designated beneficiary used]–
(5) Exception for certain beneficiaries.–
(B) Effective date.–For purposes of this paragraph, the term “effective date” means the first day of the first calendar year to which the amendments made by this section apply to a plan with respect to employees dying on or after such date.
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