Pension Tax Reform Coming

June 10, 2019
 

Richard Kaplan University of Illinois College of Law

University of Illinois College of Law

There is so much rancor in Washington these days that one could be forgiven for believing that nothing is getting done, but a major pension reform bill is actually taking shape. On May 23, the U.S. House of Representatives passed a bill that will affect virtually everyone who wants to save for retirement or has already done so. It has many path-breaking provisions, but today I will focus on just 3 of them. Probably the single biggest change will allow small companies that do not have retirement plans to band together with similar employers and create a plan for all of their employees, including part-timers.

The second change I want to mention affects those who have reached the magical age of 70 and one-half, which is when pension plan beneficiaries must begin taking money from their accounts or face a painful penalty of 50 percent of the amount they should have taken. These so-called “minimum required distributions” are intended to ensure that 401(k) plans, IRAs, and the like are used for their owners’ retirement and not as a tax-sheltered means of building up an estate. The problem is that the triggering age of 70 and one-half was put in the tax code in 1986, and people’s life expectancies have increased since that time. The new legislation will change the triggering age to 72, effective for anyone who attains age 70 and one-half after this calendar year.

The last major change I want to mention affects those who inherit a retirement account from someone who began taking withdrawals but then died before the account was emptied. Historically, the new owner was required to withdraw funds from these accounts over their own life expectancy, which could be 20 or 30 years or even longer. The new law changes the withdrawal period to no more than 10 years for an account who original owner dies after the end of this year. A spouse, however, is exempt from this change.In any case, the vote last month was 417-3, which suggests that enactment is just a matter of time. The bill’s title is SECURE, which stands for Setting Every Community Up for Retirement Enhancement.

So, some things are getting done these days in Washington.