BSB - New Spending Bill May Affect Taxes and Retirement Planning

Congress recently passed a sweeping full-government spending package, The Further Consolidated Appropriations Act, 2020 (The Act). The law is accompanied by substantial changes for taxes and retirement plan funding and distribution.  Not only does the new spending bill extend many tax breaks that expired in 2017, but it also includes the first significant retirement-related legislation since 2006, Setting Every Community Up for Retirement Enhancement (SECURE).

As a result of the Act, several popular tax breaks have been extended for individuals and businesses. Some of these extensions include:

  • Exclusion of qualified residence debt forgiveness from gross income
  • Deduction for mortgage insurance premiums
  • Deductions for tuition and education-related expenses
  • Reduction of Adjusted Gross Income (AGI) floor for medical expenses
  • Incentives for investments in Empowerment Zones
  • New Market Tax Credit
  • Employer tax credit for paid family and medical leave
  • Work Opportunity Tax Credit

The changes enacted though SECURE Act will also affect both individuals and businesses, but the implementation will directly impact the way workplace retirement accounts are established and maintained. Some of the retirement plan changes include:

  • IRA contribution age restriction changed
  • Age for Required Minimum Distributions (RMDs) raised from 70.5 to 72
  • New exemption from penalty for early retirement account withdrawals in specific qualifying situations
  • Access to open Multiple Employer Plans (MEPs) extended
  • Employers required to extend retirement plan participation to qualifying part-time employees

According to BDO USA, LLP the following regulations are immediately in effect for retirement plans to comply with the new standards:

  • Credit card loans are prohibited as of December 20, 2019 and will subsequently be considered as taxable distributions.
  • “Stretch” beneficiaries have been eliminated for defined contribution (DC) plans.
  • Fiduciary safe harbors are in effect for plans with annuity options.
  • Nondiscrimination testing relief is now available for closed DC plans.
  • Retirement plans can distribute special qualifying disaster relief payments that are not subject to penalties.

In addition to the changes above, SECURE also includes tax incentives for employers who offer automatic enrollment retirement plans.

What does this mean for individuals and businesses?

The effects of these laws will depend on specific tax and retirement situations. However, taxpayers who qualify for the extended tax breaks should consider filing amended 2018 tax returns. Individuals and businesses affected by changes in retirement savings need to adjust accordingly. Businesses who have been wanting to implement a retirement plan for employees might consider starting one now. Because of the potential complexity of these issues, we recommend consulting a professional trained to maximize benefits and effectively plan for the future.  The tax and estate planning professionals at BSB can answer your questions and offer guidance to incorporate current law.