In December 2019, as part of the Further Consolidated Appropriations Act, President Trump signed the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (the “Disaster Act”) and the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). The legislation included a handful of new tax provisions and extended many that were set to expire. Most notably, it made numerous changes to retirement plans facilitating the expansion of savings opportunities. The combination of these bills has created many important changes that individuals and businesses need to consider. To help you understand the changes and impact, Moore Colson has provided a summary of the key information below.
The Disaster Act
For disaster victims and their employers, the Disaster Act could not come soon enough. The bill provides tax relief for victims of natural disasters occurring in 2018, 2019 and January 2020 by allowing them to take penalty-free withdrawals from their retirement plans. Individuals are also permitted to make recontributions of amounts withdrawn for home purchases that were canceled due to eligible disasters. The law also makes casualty losses easier to claim. Taxpayers with losses occurring in a disaster area can now claim casualty losses even if they choose not to itemize their deductions, and the 10% of adjusted gross income threshold is eliminated.
Businesses also received tax relief with a new employee retention credit. Organizations whose operations were affected by a qualifying disaster occurring in 2018 and 2019 can receive a credit for 40% of wages (up to $6,000 per employee) paid to employees during that time. President Trump signed a similar retention credit into law after the record-breaking hurricane season of 2017 but had to approve a new one to help those affected by disaster in the years since.
The bill provided immense relief to nonprofits as well. Nonprofits have fought against the provision in the Tax Cuts and Jobs Act (TCJA) that required them to include parking and transportation fringe benefits provided to their employees in Unrelated Business Taxable Income (UBTI). The bill repealed this section of the law, alleviating many nonprofits’ concerns, administrative headaches and financial burdens.
Historically, at the end of each calendar year, Congress enacts a bill to extend incentives that were set to expire. Traditionally, these extensions are valid for one or two tax years, and this bill was no exception. The bill reinstated various incentives that expired or were set to expire at year-end and extended them through 2020.
- Energy Efficiency Tax Incentives: Tax incentives under Section 45L (benefitting homebuilders and contractors) and Section 179D (benefitting commercial building owners and tenants) were reinstated retroactive to 2018 and extended through 2020.
- Small Business Incentives: Business owners were given the following credit extensions through 2020: Section 45D new markets tax credit, Section 51 work opportunity tax credit, Section 45S tax credit for paid family and medical leave and Section 35 credit for health insurance expenses.
- Incentives for Individual Taxpayers: Also extended were the 7.5% AGI floor for medical deductions (lowered from 10%), the qualified tuition and expense deduction and the income exclusion for discharge of indebtedness from qualified principal residence debt. The bill also extended the benefit that allows lower-income taxpayers to deduct mortgage insurance premiums.
The SECURE Act
The SECURE Act, most of which became effective January 1, 2020, seeks to expand retirement plan access to individuals and make administrative simplifications. Before it was passed, many small and mid-sized businesses were mired in compliance burdens and fees that made opening a retirement plan unattractive. The law helps small and mid-size companies in many ways.
- It makes opening a plan more affordable by enhancing the amount of credit available to eligible small employers who adopt qualified retirement plans. This is accomplished by changing the calculation of the flat dollar amount on the credit to the greater of $500 or the lesser of: (1) $250 multiplied by the number of non-highly compensated employees eligible to participate or (2) $5,000.
- It permits plans to institute automatic enrollment provisions, which can boost participation and reduce average administrative costs. Employers that open a 401(k) or similar plan with automatic enrollment can receive a bonus credit of $500 to help offset start-up costs.
- It also makes it easier for small and mid-size businesses to participate in Multiple Employer Plans (MEPs). Companies no longer need to be affiliated with each other to open a MEP, and if one employer in the group fails to satisfy plan requirements, others will not be penalized.
The SECURE Act also created opportunities for individuals to increase their savings and participation in retirement savings.
- Plan owners were given permission to provide annuities as an investment option to participants. Many prefer a steady stream of income in retirement, which traditional investment earnings from mutual funds do not offer.
- Part-time employees have increased access to employer-sponsored retirement plans. Starting in 2021, employees who work more than 1,000 hours in a year or at least 500 hours over a three-year period can now participate.
- Individuals can now withdraw up to $5,000 penalty-free from their 401(k) or IRA accounts for a qualified birth or adoption of a child.
- Individuals can now defer the start of required minimum distributions from retirement accounts until April 1 following the calendar year in which they attain 72 years of age (compared to 70 ½). Requiring retirees to take distributions from their 401(k)’s or IRAs can frustrate those who do not need access to the retirement assets and would prefer to hold onto their investment.
- Individuals who are beneficiaries of inherited IRAs must withdraw the entire balance of the IRA within 10 years of the owner’s death. This new rule applies to those inheriting IRAs from someone who died after December 31, 2019, and certain beneficiaries are excluded from this requirement.
The Disaster and Secure Acts are expansive and likely to affect you or your business. If you have questions about the information outlined above or need assistance with a tax planning or compliance issue, Moore Colson can help. For additional information, call us at 770-989-0028 or click here to contact us.
Jonathan Levens is a Partner in Moore Colson’s Tax Services Practice. Jonathan’s primary focus is on tax compliance and consulting services for private equity-owned as well as closely-held businesses and their owners.