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SECURE Act including FCAA

By Jason Watson, CPA

Posted Fri, January 3, 2020

The SECURE Act which stands for Setting Every Community Up for Retirement Enhancement of 2019 was signed December 20, 2019 as part of the FCAA Act of 2020. What the heck is the FCAA Act? That stands for Further Consolidated Appropriations Act… so FCAA Act is actually redundant like ABS Brakes or ATM Machine. You have to love the effort our government leaders put into these acronyms… SECURE is pretty good. FCAA… that’s a bit unimaginative. We’ll cut them some slack since FCAA also averted yet another government shutdown.

Further Consolidated Appropriations Act was approved by the House on December 17, 2019 by a vote of 297 to 120 and by the Senate on December 19, 2019 by a vote of 71-23.

What do these Acts impact? Retirement, especially Solo 401k plans, ROBS 401k plans, IRAs and kiddie taxes. It does some really cool things for small business owners, parents and those who work beyond 70. FCAA also addresses private mortgage insurance and health insurance expenses among other issues.

Let’s hit on the SECURE Act first. You can download a copy from the House Committee on Ways and Means here. Not all Sections are discussed here.

Section 103. Increase Credit Limitations for Plan Start Up Costs

The calculation is now the greater… read that again… the greater of $500 or $250 x the number of non-highly compensated employees (HCEs) for a maximum of $5,000. The credit applies for 3 years. Section 104 also provides for an additional $500 for automatic enrollment.

So, if you have 8 people working for you, and you start a 401k plan (here is our referrals for 401k plans) then your credit is the greater of $500 or $2,000. Nice!

Section 106. Repeal Maximum Age for Traditional IRA Contributions

At 70 ½ you could no longer contribute to an IRA. The SECURE Act repeals that entirely. They might put an age back on it, but for now it is wide-open. Frankly this makes sense… the IRS wanted you to start taking money out of your IRA so they could tax it, but at the same time people are living longer and working longer. The IRS will get their money eventually (see the end of the stretch IRA below).

This will also increase the attractiveness of backdoor Roth conversions (dump money into an IRA and then convert it).

secure actSection 111. Allowing Long-Term Part-Time Workers to Participate in 401k Plans

This is huge. Part-time workers are the backbone of a lot of industries. Tax accounting firms, for example, need part-time people to swell during busy times. United Parcel Service has used part-time employees to load and unload packages for just a few hours a day since that was “go time.” Great for college students who could get up at 4:00AM.

Statistically more women work part-time than men, and the old rules limited how woman could save for retirement. The SECURE Act fixes that. The eligibility is one year of 1,000 hours or three consecutive years of 500 hours, or more. Employers may also exclude part-time workers from plan testing in certain situations which is also helpful.

Section 113. Penalty-Free Withdrawals for Birth or Adoptions

This is cool. We have exceptions for higher education, medical exceptions and first-time home buyers… why not parents? The wording is weird since it reads “Retirement Plans” and IRAs are not technically retirement plans… they are arrangements (accounts). But, the language in the law mentions IRAs in the subtext so that’s good. The maximum amount is $5,000.

Section 114. Increase in Age for Required Beginning Date for Mandatory Distributions

As mentioned before, the IRS wants their money. The theory was people needed to take required minimum distributions (RMDs) which was generally a taxable event… this prevents (or at least limits) the transfer of wealth using IRAs for estate planning purposes. So the SECURE Act increases the age to 72.

This also affects solo 401k plans and ROBS 401k plans. What the heck is a ROBS 401k? It stands for Rollover as Business Startup… and it allows new business owners to use a previous employer 401k plan to fund the new business.

You can see other small business and self-employed retirement options here-

Section 201. Plans Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Year

This is huge! Super huge! Businesses may adopt plans such as 401k plans before the due date of the business entity tax return, including extensions, and the plan will be treated as in existence for the prior year. No more scrambling in December trying to get a bunch of solo 401k plans set up. And! Many business owners don’t necessarily know what amount cash they can safely separate with until well into the following year.

The only snag we see is employee deferrals. If it is March 15, 2020, and you want to defer $19,000 for 2019 you would need to amend your payroll filings such as W-2s for 2019 (unless the $19,000 is a Roth or post-tax contribution). This leaves only the employer side which is limited to 25% of W-2 compensation.

Schedule C taxpayers don’t appear to have this limit / snag since they do not process payroll and W-2s on themselves.

Section 302. Expansion of 529 Plans

529 plans expanded to include apprenticeships and homeschooling, and provisions to use 529 plan funds to pay for student loans.

Section 401. Modifications to Required Minimum Distribution Rules

No more stretch IRAs. Under this section, distributions from inherited IRAs to individuals other than spouses must be fully distributed in 10 years. There are some exceptions and other issues such as disabled individuals and minors, but that is the general gist.

So, this is the yang. We had the ying with RMDs starting at 72 and being able to contribute to an IRA past the age of 70 ½… those were great things. The 10-year, no more stretch IRA rule is the yang. Ah, life… the great equalizer.

Section 501. Modification of Taxation of Unearned Income of Children (kiddie tax)

The Tax Cuts and Jobs Act changed the taxation of unearned income for children to essentially be trust tax rates. The problem with trust tax rates is that they are very compressed, and you reach the highest tax rate of 37% very quickly (at $12,500 in income). According to savingforcollege.com, “This significantly increased the tax rates that apply to the taxable portion of college grants, scholarships and fellowships and to military survivor benefits of Gold Star families. It also caused low- and middle-income children to be taxed at much higher rates than their parents.” Yuck!

SECURE Act repeals the kiddie tax back to pre-TCJA, and it allows taxpayers for 2018 (yes, way retro) and 2019 to select the lower tax rate (the parent’s rate versus the TCJA rates). For 2018 tax returns, children will need to amend their tax returns to take advantage of this.

secure act

Further Consolidated Appropriations Act

The FCAA extended the following (which always seem to sunset and then get resurrected)-

  • Private Mortgage Insurance.
  • Exclusion of qualified mortgage debt relief.
  • Qualified tuition and related expenses deduction (above the line).
  • Construction of energy efficient homes.
  • Medical expenses returns to 7.5% (was 10% for a nano second for all taxpayers).

FCAA also repealed-

  • 2.3% excise tax on medical devices (starting January 1, 2020… so not retroactive).
  • Excise tax on high-cost employer-sponsored health plans, aka the Cadillac tax, is repealed starting January 1, 2020.

Disaster Penalty Relief

FCAA also allows individuals who had losses in qualified disaster areas to withdraw up to $100,000 from retirement plans without being subject to the 10% early withdrawal penalty. Wait! There’s more. You can pay it back during a three-year period, and you can also spread the income tax hit over three years. Remember, this is a penalty-free withdrawal, not an income tax-free withdrawal.

Jason Watson, CPA is the Managing Partner of WCG Inc., a business consultation and tax preparation CPA firm located in Colorado Springs, and is the author of Taxpayer’s Comprehensive Guide on LLC’s and S Corps which is available online and from average retailers.